## _cr13161 ## Source details **Canonical URL:** [_cr13161](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13161.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13161.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13161.pdf.json) --- ### Executive summary — background and political context - Post-January 2011 recession: economy contracted by 2 percent in 2011; FDI and tourism receipts declined by more than 30 percent year-on-year. - Policy response in 2011: expansionary fiscal and monetary mix that contributed to a 20 percent loss in reserves in 2011 despite bilateral and multilateral budget support. - Political milestones and outlook: - National Constituent Assembly elections: October 2011. - Two coalition governments since, both led by Ennahda. - Draft constitution completed and expected to be approved in July (document context: May 24, 2013). - Agreement on a mixed parliamentary/presidential system and consensus emerging on holding elections before year-end. - Structural legacies: export-oriented, low-value added industry; inefficient banking sector; price and capital controls; directed lending; weak governance; rigid labor markets; youth unemployment averaged 30 percent in 2010. - Reform risks: resistance from vested interests, implementation delays, social tensions, political uncertainty, security concerns. ### Recent economic and financial developments (2012–early 2013) - Growth and labor market: - Tourism receipts up 34 percent y-o-y in 2012; FDI up 28 percent y-o-y in 2012. - 2012 real GDP growth: 3.6 percent. - Unemployment: improved from 18.9 percent at end-2011 to 16.7 percent at end-2012; youth unemployment remained 33 percent and female unemployment 24 percent at end-2012. - Inflation: - Headline CPI: 5.9 percent y-o-y at end-2012; 6.4 percent at end-April 2013. - Core inflation (ex food and energy): below 5 percent since September 2012. - Administered prices rose 4.3 percent y-o-y; non-administered prices rose 7.3 percent y-o-y; non-administered food prices rose 17 percent over two years. - External position and reserves: - Current account deficit: about 8.1 percent of GDP in 2012. - Gross official reserves: about $8.6 billion in 2012 (3.8 months of imports), 20 percent below 2010 levels. - Fiscal developments: - 2012 overall fiscal deficit: 5.4 percent of GDP. - Public debt: around 44 percent of GDP in 2012. - Monetary and banking: - CBT policy rate increased by 50 bps since August 2012 to 4 percent; implied real rate -2.4 percent. - CBT refinancing of banks rose 53 percent y-o-y in first 10 months of 2012; then reduced direct refinancing by 36 percent during Oct 2012–Apr 2013. - Banking vulnerabilities: end-2012 NPLs likely 17–18 percent of total loans (end-Sept data: 13.5 percent); capital adequacy ratio 12.3 percent; average provisioning about 57 percent. - Data limitations: lack of reliable, regularly reported banking-sector data. ### Overriding goals of the Fund-supported program - Dual objective: address short-term stabilization while laying foundations to support growth and protect the vulnerable. - Strategic elements: - Build fiscal and external buffers via: - (i) appropriate fiscal policy allowing one-off costs and investment while avoiding crowding out private credit; - (ii) prudent monetary policy to contain inflation; - (iii) greater exchange rate flexibility to preserve reserves. - Lay building blocks for growth by: - addressing banking sector vulnerabilities; - medium-term fiscal consolidation with better expenditure composition, including sustained public investments; - ambitious structural reforms to promote private-sector development and reduce state intervention. - Protect vulnerable groups by strengthening social assistance and assessing social impacts of reforms. ### Macroeconomic framework, projections, and risks - Key macro targets and assumptions: - Growth: 4 percent in 2013; pick up in 2014; output gap expected to close by 2016; medium-term potential output slightly above the 10-year pre-revolution average of 4.5 percent. - Inflation: headline to peak slightly above 6.5 percent by mid-2013 then decline to 5.3 percent by end-2013; core inflation around 4.5 percent; medium-term convergence to 4 percent. - Current account: narrow to about 7.5 percent of GDP in next year; stabilize around 5 percent of GDP in 2015. - Reserves: keep gross reserves above three-month import coverage; staff scenario boosts coverage above four months during program. - Quantitative projections (selected series preserved exactly): - Real GDP growth: 2009 3.1; 2010 2.8; 2011 -1.9; 2012 3.6; 2013 4.0; 2014 4.5; 2015 5.0. - CPI inflation (period average): 2009 3.5; 2010 4.4; 2011 3.5; 2012 5.6; 2013 6.0; 2014 4.7; 2015 4.7. - Current account (percent of GDP): 2009 -2.8; 2010 -4.8; 2011 -7.3; 2012 -8.1; 2013 -7.5; 2014 -6.0; 2015 -5.1. - Gross official reserves (US$ billions, eop): 2009 10.6; 2010 9.5; 2011 7.5; 2012 8.6; 2013 9.0; 2014 10.8; 2015 11.9. - Risks: - Downside: escalation of domestic tensions, political uncertainty ahead of elections, security concerns, stalled Euro area commitments, depressed world demand, delayed external financing. - Upside: clear political calendar, increased public investment, and Fund-supported program credibility restoring confidence. - Inflation risks balanced: further wage rises could raise headline inflation; normalization of distribution channels and neighbor stability could reduce inflation faster. ### Fiscal policy — short-term goals and measures - 2013 fiscal stance: - 2013 overall deficit near 7.3 percent of GDP (structural fiscal balance about 5 percent of GDP). - Banking recapitalization needs and arrears repayment amount to 1.5 percent of GDP in 2013; financed mostly through savings in unallocated budget expenditures, lower nonessential current spending, and higher-than-budgeted revenues. - Domestic bond issuance to be lower than budgeted; recapitalization bonds to be non-negotiable. - Selected fiscal indicators (percent of GDP) — preserved numbers as presented: - Revenue: 23.6, 23.1, 23.3, 23.8. - Tax revenue: 20.4, 21.1, 21.3, 21.8. - Expenditure: 31.5, 29.0, 30.4, 30.8. - Transfers and subsidies: 6.4, 6.9, 7.3, 7.2. - Central government deficit (excl. grants): -8.1, -5.4, -7.1, -7.3. - General government debt: 44.8, 44.0, 46.8, 45.3. - Medium-term anchor: - Target to bring central government deficit to around 2.5 percent of GDP by 2018 while maintaining debt-to-GDP at about 44 percent in the medium term. - Fiscal consolidation strategy: - Rely largely on subsidy reduction and containment of the wage bill. - Energy price increases and tariff adjustments already implemented: price increases generated estimated savings of about 0.5 percent of GDP in 2013; combined fuel and electricity price increases of around 14 percent between September 2012 and March 2013 generated 1 percent of GDP in annual savings. - Wage bill in 2013: 12.4 percent of GDP; agreed to keep wage bill and new recruitments at budgeted levels. ### Revenue, tax, and structural fiscal reform - Tax policy and administration: - Rationalize tax benefits/incentives in a revenue-neutral way; reform corporate income tax in parallel with new investment code. - Onshore corporate tax rate: 30 percent; offshore corporate tax rate: 0 percent — convergence planned beginning 2014 (structural benchmark). - Modernize tax administration: unify most tax functions within a large taxpayer unit (structural benchmark: merge LTU management, collection, and control by September 2013). - Capital expenditure effectiveness: - Study initiated on impact of public investments; simplification of procurement starting June 2013. ### Monetary policy, liquidity management, and exchange rate - Monetary policy objectives: - Contain inflationary pressures; broad money (M3) growth is intermediate target. - CBT policy rate deemed appropriate given negative output gap; stand ready to tighten if core inflation rises. - Liquidity and collateral reforms: - Gradual unwinding of liquidity injections; reduce banks’ dependence on direct CBT refinancing. - Collateral framework reforms: - Increase share of borrowings collateralized by government securities to minimum of 20 percent for each bank by end-2013 and 40 percent in 2014 (phasing specified across documents: 10 percent end-August; 20 percent end-year; 40 percent later). - Introduce a haircut system for loans eligible for CBT refinancing; announcement of haircut on all loans used as collateral to be made in July 2013 (structural benchmark). - Launch a lender of last resort facility charging penalty interest rates for solvent but illiquid banks. - Improve liquidity forecasts and coordination with Ministry of Finance via weekly committee meetings. - Exchange rate flexibility: - 2012 modification to interbank-based reference rate led to 5 percent depreciation of the dinar vis-à-vis the dollar in 2013 to date and reduced reserve losses. - Staff assesses the real exchange rate as modestly overvalued; authorities agreed it was moderately overvalued by March 2013; recent depreciation partially corrected it. - Reforms to FX market functioning: implement electronic bank interlinking platform and Market Makers Agreement; move towards weekly FX auctions by 2014 (structural benchmark: market interlinking platform and Market Makers Agreement by Oct-2013). ### Banking sector vulnerabilities and reform program - Objectives: remedy critical banking-sector vulnerabilities to restore intermediation and support recovery. - Key reforms already introduced/announced: - Collective provisioning; - Tighter credit concentration ratios; - Higher capital adequacy ratios over next two years (gradual increase from 8 percent to 9 percent end-2013 and to 10 percent end-2014 with Tier 1 targets of 6 percent and 7 percent); - New governance framework for banks. - Four critical components over next two years: - Address vulnerabilities of public banks: - Three public banks account for about 40 percent of banking assets. - Strategic and financial audit commissioned, expected to start June 2013; preliminary report will inform mid-September decision on business model. - Planned recapitalization estimate: 2.6 percent of GDP assuming private shareholders do not contribute; final amount to be revised based on strategy. - Resolve tourism sector NPLs; tourism sector loans are slightly less than 10 percent of total loan portfolio but account for about 25 percent of NPLs; tourism loans NPLs close to 40 percent of tourism loan portfolio after a 25 percent growth in NPLs over the past year. - Strengthen banking supervision: - Increase financial and human resources; full onsite inspection of a large bank by end-year and four credit risk inspections. - Study on impact of changing mandatory liquidity ratios to international standards to be prepared by end-December (structural benchmark). - Improve data quality and reporting: - New data reporting system covering accounting, financial and institutional aspects by August 2013. - Modernization of the Public Credit Registry; Deposit Insurance Scheme programming. - Establish a banking resolution mechanism with IMF TA within a year; current system lacks crisis contingency plans. - Tourism AMC: - Draft law for AMC to resolve tourism sector problem debts; AMC to buy bad assets in exchange for government-guaranteed bonds within guarantee ceiling; draft law expected by June 2013. ### Social safety nets, subsidy reform, and targeting - Social objectives: better composition of public expenditures, reduce regional disparities, and protect vulnerable households. - Existing cash transfer system (PNAFN): - Covers 9 percent of the population (about 235,000 households); leakage to non-poor ~60 percent (World Bank estimate using 2005 survey); transfers increased by 50 percent over past year. - Plans: - Create a unified registry and improved targeting; submit household compensation strategy by August 2013 (structural benchmark) and introduce in 2014 with price increases. - Compensatory measures to accompany energy subsidy reform; World Bank and Fund TA supporting welfare and social impact analysis. - Energy subsidies and reform: - Price subsidies on basic food, oil products, electricity, and transport approximate 5 percent of GDP. - Cost of energy subsidies rose from average 0.9 percent of GDP before 2010 to 2.8 percent in 2012. - Government increased fuel and electricity prices by around 14 percent between September 2012 and March 2013, generating 1 percent of GDP in annual savings. - Plan to revise and reinstate an automatic price setting mechanism by early 2014 (or when retail prices close to international prices). ### Program modalities, access, and financing - SBA specifics: - Duration: 24 months from June 2013 to June 2015. - Access: SDR 1.15 billion (400 percent of quota, about US$1.75 billion). - Disbursement schedule (selected exact values preserved in source table): - Board approval (June 7, 2013): 98.800 SDR / 34 percent of quota / 150.089 US$. - Total: 1146.000 SDR / 400 percent / 1,736.102 US$. - Phasing: eight program reviews and nine disbursements; disbursements planned as 200 percent of quota each year with specific tranche timing. - Financing needs and reserve strategy: - Gross financing needs over next 24 months: US$28 billion producing financing gap of approximately US$1.7 billion under staff baseline. - Reserve adequacy: aim to keep reserve coverage above three months of imports; Fund resources to build buffers closer to 4.5 months of imports and coverage above 120 percent with new risk-weighted metric. - Fund resources intended primarily for BOP support; use for fiscal support may be considered later. - Repayment capacity: - Fund credit outstanding would reach maximum of 6.3 percent of GDP and 14.5 percent of gross reserves in 2015. - Debt service to the Fund would remain below 2.4 percent of exports of goods and non-factor services. - Total public debt expected to remain below 50 percent of GDP; public external debt peaking at 34 percent of GDP in 2015. ### Program conditionality, monitoring, and structural benchmarks - Monitoring: - Quarterly reviews with test dates at quarter-ends starting June 2013; eight quarterly reviews initially. - Quantitative Performance Criteria include ceilings on the primary balance (excl. grants), ceiling on net domestic assets of the CBT, floor on net international reserves of the CBT. - Continuous PC: ceiling on accumulation of new external debt payment arrears by central government. - Indicative targets: floor on social spending; ceiling on accumulation of new domestic arrears. - Key structural benchmarks (selected and exact timing preserved): - Approval of corporate tax convergence for 2014 — July 2013. - Adoption of the Investment Code — July 2013. - Announcement of haircut on all loans used as collateral for refinancing operations at the central bank — July 2013. - Ensure proportions of refinancing volumes at the CBT are backed by government securities: 10 percent by end-August 2013; 20 percent by end-2013. - Adoption of new automatic fuel pricing formula — August 2013. - Submission of new targeted household support program — August 2013. - Approval of new banking reporting system — August 2013. - Adoption of strategic vision on government role in banks — mid-September 2013. - Merge LTU functions — September 2013. - Implement electronic bank interlinking platform and Market Makers Agreement — October 2013. - Conduct one general onsite bank inspection and four credit risk inspections — December 2013. - Present study on liquidity ratio changes to CBT Board — December 2013. - Finalize audits of STEG and STIR — December 2013. ### Debt sustainability, stress tests, and contingency scenarios - Public debt dynamics and scenarios: - Public debt: 2009 42.8 percent; 2010 40.4 percent; 2011 44.0 percent; 2012 44.0 percent. - Baseline: public debt expected to increase by 5 percentage points in short term and decline over medium term to about 44 percent by end-2018; increased recapitalization and wider deficit raise debt to 49 percent by 2015. - Adverse scenarios (explicit outcomes): - No medium-term fiscal consolidation → public debt would reach 60 percent of GDP by 2018. - Permanent negative shock to real growth (3.2 percent during 2013–18) → public debt about 55 percent of GDP by end-2018. - One-off 10 percent of GDP contingent liability shock → public debt about 60 percent of GDP then decline to about 53 percent by 2018. - One-time 30 percent depreciation → public debt-to-GDP rises to about 63 percent then declines to 56 percent by 2018. - External debt: - External debt (percent of GDP): 2008 45.9; 2009 49.4; 2010 48.3; 2011 47.8; 2012 51.6; 2013 51.1; 2014 54.5. - Sharp real depreciation (one-time 30 percent in 2013) would raise external debt ratio to almost 80 percent of GDP. ### Risks to program and mitigation - Key risks: - Deterioration of international economic environment, worsening security situation, political transition setbacks, delays in external financing, higher commodity prices, additional losses from public enterprises. - Mitigating elements: - Strong authorities’ commitment and inter-ministerial ownership, quarterly fiscal targets and reviews, early energy price increases, TA from Fund and donors, adjustment clauses and contingency financing stance in program design. *Source: EXECUTIVE SUMMARY and selected sections from IMF staff report _cr13161 (May 24, 2013).* ### EXECUTIVE SUMMARY ### _cr13161 - EXECUTIVE SUMMARY ### Background and political context - After the January 2011 revolution the Tunisian economy contracted by 2 percent in 2011, with foreign direct investment (FDI) and tourism receipts declining by more than 30 percent year-on-year. - Policy response in 2011 included an expansionary fiscal and monetary mix (higher wages and subsidies, lower policy rates and reserve requirements, and relaxed regulatory forbearance), which contributed to a 20 percent loss in reserves in 2011 despite bilateral and multilateral budget support. - Political developments: - First democratic elections for a National Constituent Assembly held in October 2011. - Two coalition governments since, both led by the once-banned Islamic Ennahda party. - Draft of the new constitution completed and expected to be approved by the Constituent Assembly in July (document date context: May 24, 2013). - Agreement appears to have been reached on a mixed parliamentary/presidential system and a consensus emerging on holding elections before the end of the year. - Structural challenges and legacy model: - Tunisia’s prior model produced the highest per capita real GDP growth among MENA oil importers but relied on extensive state intervention, an export-oriented low-value added industry intensive in unskilled labor, an inefficient banking sector, price and capital controls, directed lending, weak governance, and rigid labor markets. - Resulting problems include high structural unemployment (youth unemployment averaged 30 percent in 2010), unfair distribution of gains, and wide regional disparities. - Reform risks: - Comprehensive reforms are needed but likely to face resistance from vested interests, potential delays in implementation, and social tensions. - Additional risks include escalation of domestic tensions from political uncertainty, delayed electoral processes, or security concerns. ### Recent economic and financial developments (2012–early 2013) - Growth and labor market: - Tourism and FDI rebounded in 2012: tourism receipts up 34 percent y-o-y and FDI up 28 percent y-o-y. - 2012 overall real GDP growth: 3.6 percent. - Unemployment improved from 18.9 percent at end-2011 to 16.7 percent at end-2012; youth unemployment remained 33 percent and female unemployment 24 percent at end-2012. - Inflation: - Headline CPI reached 5.9 percent y-o-y at end-2012 and rose to 6.4 percent at end-April 2013. - Core inflation (excluding food and energy) remained stable and below 5 percent since September 2012. - Box analysis: administered prices rose 4.3 percent y-o-y while non-administered prices rose 7.3 percent y-o-y; non-administered food prices in Tunisia increased by 17 percent over two years despite international food prices rising by merely 1 percent and world agricultural raw materials declining by 10 percent. - Domestic drivers of food-price increases identified: returning migrants/refugees from Libya boosting demand; intensified informal trade with higher-price neighbors; breakdown in distribution control mechanisms. - External position and reserves: - Current account deficit worsened to about 8.1 percent of GDP in 2012, driven by falling demand from Europe and broad import increases (except food). - Reserves increased to about $8.6 billion in 2012 (3.8 months of imports) but remained 20 percent below 2010 levels. - Strengthened FDI inflows, sustained multilateral and bilateral loans, and access to capital markets (with U.S. Treasury and JBIC guarantees) supported reserves. - Fiscal developments: - Looser fiscal stance in 2012: higher current expenditures (mostly subsidies and wages) and lower non-tax revenues. - Overall fiscal deficit increased to 5.4 percent of GDP in 2012—2 percentage points higher than in 2011—but lower than planned in the supplementary budget. - Reasons for deviation from budget: stronger tax collection, arrears accumulation, and under-execution of capital spending. - Public debt around 44 percent of GDP in 2012. - Monetary and banking sector developments: - The Central Bank of Tunisia (CBT) remained accommodative given a large negative output gap and relatively stable core inflation, but tightened policy recently: - CBT increased its benchmark policy rate by 50 bps since August 2012 (to 4 percent), implying a negative real interest rate of -2.4 percent. - CBT modified interest corridor for 24-hour standing facilities to +75/-25 bps around the policy rate and allowed the interbank rate to increase to 70 bps above the policy rate. - CBT implemented tighter reserve requirements for consumer credit. - CBT refinancing of banks rose 53 percent y-o-y in the first 10 months of 2012; CBT then reduced direct refinancing of banks by 36 percent during October 2012–April 2013. - Banking sector vulnerabilities: - End-2012 nonperforming loans (NPLs) likely rose to 17–18 percent of total loans (end-September data indicated NPLs at 13.5 percent). - Capital adequacy ratio at 12.3 percent. - Average bank provisioning about 57 percent. - Deposit growth picked up recently: 4 percent q-o-q in the first quarter of 2013. - Intermediation margins under pressure from increased competition and tighter consumer lending regulation. - Data limitations: Lack of reliable and regularly reported banking-sector data limits full assessment. ### The SBA-supported program: objectives and modalities - Program priorities (as set in the post-revolution government’s medium-term economic agenda, developed with the World Bank and other partners): - Preserve macroeconomic stability while supporting growth and social cohesion. - Key elements of the strategy: - (i) Build up fiscal and external buffers with appropriate fiscal, monetary, and exchange rate policies. - (ii) Lay building blocks to support growth by addressing critical vulnerabilities in the banking sector and improving the investment climate through reforms of the tax and investment regimes. - (iii) Strengthen social safety nets to protect the vulnerable. - Staff and authorities reached consensus quickly on a two-year macroeconomic and financing framework; discussions focused on the pace of reforms and program modalities. - Focus shifted from a precautionary SBA to a disbursing SBA to allow more flexibility and prudence in external financing assumptions. ### SBA request, access, and risks - SBA Request: - Authorities requested a two-year Stand-By Arrangement in the amount of SDR 1.15 billion (400 percent of quota, about US$1.75 billion), with 34 percent of quota available upon Board’s approval. - The size and timing of disbursements intended to ensure the arrangement provides enough buffers in case external shocks materialize. - Risks to the program: - Substantial risks include deterioration of the international economic environment, worsening security situation, setbacks in the political transition, or delays in external financing. - Quarterly reviews proposed to allow for early remedial actions in case of slippages. ### Administrative and mission details - Document date: May 24, 2013. - Prepared by: the Middle East and Central Asia Department (in consultation with other departments). - Approved by: Daniela Gressani and Taline Koranchelian. - Mission team: Amine Mati (head), Giorgia Albertin, Karsten Junius, Lorraine Ocampos (all MCD); Jean Frederic Noah Ndela Ntsama (SPR), Khaled Abdelkader (COM), Joaquin Gutierrez Garcia (MCM); joined by Abdelali Jbili and Moez Ben Hassine (OED). - Mission engagement: Staff met during January 15–February 4 and April 8–15, 2013 with the Governor of the Central Bank, the Minister of Finance, the Minister of Development and International Cooperation, the Minister of Commerce, the Minister of Industry, the Minister of Labor, the Minister of Social Affairs, other senior officials, and representatives of workers’ unions, corporate and banking sectors, diplomatic and donor community, political parties, civil society, academia, media, and Parliament (including members of the opposition). *Source: EXECUTIVE SUMMARY, _cr13161 (May 24, 2013).* ### 6. The overriding goals of the Fund-supported program are to address short-term ### _cr13161 - 6. The overriding goals of the Fund-supported program are to address short-term ### Overarching program goals - Address short-term stabilization goals while laying foundations to support growth and protect the vulnerable. - Combine strong policy measures, structural reforms, and external financing support to reduce vulnerabilities from the international environment and the ongoing political transition, and to provide the foundation for a return of investor confidence. - Key strategic elements: - Strengthen fiscal and external buffers weakened by the global crisis and the post-revolutionary environment, via: - (i) an appropriate fiscal policy that creates space for one-off costs (such as banking recapitalization) and investment spending while avoiding crowding out private-sector credit; - (ii) a prudent monetary policy aimed at containing inflation; and - (iii) greater exchange rate flexibility to preserve reserves in the face of important exogenous shocks. - Lay building blocks for growth by: - addressing critical banking sector vulnerabilities from directed and insider lending, substandard norms, and weak banking supervision; - engaging in medium-term fiscal consolidation that allows better composition of expenditures—including sustained public investments; - implementing an ambitious structural reform agenda to promote private-sector development, lower regional disparities, and reduce pervasive state intervention. - Protect the most vulnerable by strengthening social assistance mechanisms and undertaking a systematic assessment of the social impact of the envisaged reforms; improved composition of public expenditures will contribute to reducing income disparities. ### A. Macroeconomic framework — staff and authorities' agreement - Framework objectives: - Robust and sustainable growth path. - Declining inflationary pressures. - Narrowing current account deficit. - Reserve buildup. - Key assumption: investor confidence will strengthen once elections are held and a more predictable political environment emerges after the election. - Growth projections and drivers: - For 2013, economic growth is boosted to 4 percent by a return of industrial production (especially mining) and recovery in tourism. - Private and public consumption (benefitting from strong wage increases and a decline in unemployment rates) and realization of public investment programs are major growth drivers. - By 2014, growth expected to pick up in line with a post-elections environment that should considerably lessen investor uncertainty. - Growth overshoots in 2015 as FDI and domestic demand pick up; output gap expected to close by 2016. - Structural reforms in financial sector and labor markets and an improved business environment would push potential output growth in the medium term to slightly above the average of 4.5 percent observed in the 10 years preceding the revolution. - Inflation outlook: - For 2013, headline inflation expected to remain elevated, peaking slightly above 6.5 percent by mid-year following increases in administered fuel prices, before declining to 5.3 percent by end-year. - Core inflation (CPI excluding food and energy) will remain around 4.5 percent. - In the medium term, CPI inflation is expected to gradually converge to 4 percent thanks to a prudent monetary policy. - External position and reserves: - Over the next year, current account deficit will narrow to about 7.5 percent of GDP, and will stabilize to around 5 percent of GDP in 2015. - In the medium term, current account deficit will contract further reflecting stronger exports, tourism, remittances, and lower commodity prices. - Private capital inflows and FDI expected to improve significantly over the program period, keeping gross reserves at above three-month import coverage. - Under staff’s scenario, Fund resources will keep the 2013 import coverage to 2012 levels, and will boost it above four months during the course of the program. - Risk assessment: - Growth and balance of payments risks are tilted to the downside (escalation of domestic social tensions, political uncertainty ahead of elections, domestic/regional security concerns, stalled Euro area commitments, depressed world demand). - Upside: clear political calendar, increased public investment, and credibility of a Fund-supported program could rapidly restore consumer and investor confidence. - Inflation risks are more balanced: further wage rises would boost headline inflation; normalization of distribution channels and neighboring countries’ political environment could reduce inflation more than expected. ### B. Short-term goals: restoring fiscal and external buffers — fiscal policy - Balance: strike right balance between supporting recovery and improving fiscal and external buffers. - 2013 fiscal stance and needs: - Important banking recapitalization needs and repayment of arrears require a wider fiscal deficit in 2013, while the underlying fiscal stance remains broadly constant. - The 2013 budget had planned a modest adjustment relative to 2012 and an improvement in the underlying fiscal balance, which is not materializing due to the lower-than-budgeted deficit in 2012. - Staff considers the fiscal stance underlying the 2013 budget appropriate because it accommodates high social spending and investment needs, taking into account financing constraints and debt sustainability. - Selected fiscal indicators (In percent of GDP) — Tunisia: Selected Fiscal Indicators (2012–2013) - Revenue: 23.6, 23.1, 23.3, 23.8 (table headings unclear across columns; preserved numbers as presented) - Of which: Tax revenue: 20.4, 21.1, 21.3, 21.8 - Expenditure: 31.5, 29.0, 30.4, 30.8 - Of which: Transfers and subsidies: 6.4, 6.9, 7.3, 7.2 - Repayment of arrears: 0.0, 0.0, 0.0, 0.9 - Capital expenditure: 8.8, 6.6, 6.7, 6.4 - Public banks' recapitalization: 0.0, 0.0, 0.1, 0.6 - Central government deficit (-) (excl. grants): -8.1, -5.4, -7.1, -7.3 - Structural fiscal balance: ... -4.7 ... -5.0 - General government debt: 44.8, 44.0, 46.8, 45.3 - Sources: Tunisian authorities; and IMF staff estimates. - Tunisia: Selected Economic Indicators, 2009–15 (Prel./Est./Proj.) - Real GDP growth (percent): 3.1, 2.8, -1.9, 3.6, 4.0, 4.5, 5.0 (years 2009–2015) - CPI inflation (period average, percent): 3.5, 4.4, 3.5, 5.6, 6.0, 4.7, 4.7 - Current account balance (percent of GDP): -2.8, -4.8, -7.3, -8.1, -7.5, -6.0, -5.1 - Gross official reserves (US$ billions, eop): 10.6, 9.5, 7.5, 8.6, 9.0, 10.8, 11.9 - Gross official reserves (in months of next year's imports): 5.2, 4.4, 3.4, 3.8, 3.8, 4.2, 4.5 - Sources: Tunisian Authorities; and IMF staff estimates. - 2013 overall deficit and measures: - At 7.3 percent of GDP, the 2013 overall deficit remains close to the budget target, with a structural fiscal balance at about 5 percent of GDP and a better spending composition. - In case of revenue shortfall, offsetting measures to attain the fiscal target will concentrate on nonessential current spending and revenue measures, while preserving capital and social expenditures (MEFP, ¶12). - Specific measures to maintain 2013 fiscal stance: - Banking recapitalization needs and arrears repayment: amount to 1.5 percent of GDP; mostly compensated through savings in unallocated budget expenditures, lower nonessential current spending and higher-than-budgeted revenues (wider tax base from increased tax revenue collection in 2012). - Financing: mostly met through deposit drawdown and external financing (international markets and multilateral loans). - Domestic bond issuance will be lower than budgeted to avoid crowding out private-sector credit growth. - Banking recapitalization needs will be financed through non-negotiable bonds. - Tunisia: Financing Needs, 2013 (In percent of GDP) — preserved table numbers - Budget/Est. Financing needs: 10.7, 11.1 - Financing breakdown (preserved numeric items as listed): - Privatization: 1.5, 1.9 - Grants: 0.5, 0.5 - DPL: 1.6, 1.6 - Project financing: 0.9, 0.9 - Samurai bonds and other market financing: 1.3, 0.8 - Sukuk: 0.8, 0.8 - Of which: Bond issuance: 2.3, 1.8 - Recapitalization bonds: 0.1, 0.6 - External financing / Domestic financing / Amortization on external debt / Amortization on domestic debt (categories preserved as presented). - Sources: Tunisian authorities; and IMF staff estimates. ### Monetary and exchange rate policy - Monetary policy objectives: - Continue to aim at containing inflationary pressures. - Authorities working on prerequisites to move towards an inflation-targeting framework. - Broad money growth remains the intermediate monetary target of the CBT. - Given low private-sector credit growth rates and the negative output gap, both staff and the authorities consider the CBT policy rate to be at an appropriate level. - Staff stresses CBT interventions in the interbank market should keep the money market rate in line with the policy rate and not consistently close to the upper limit of the corridor. - CBT should stand ready to tighten monetary policy to restrain stronger inflationary pressures and better anchor inflation expectations, particularly if wages and core inflation rise more rapidly than expected. - Setting up of a monetary policy committee last January is facilitating forward-looking assessment of inflationary pressures. - Liquidity injections and banking liquidity: - A gradual unwinding of liquidity injections has been initiated; banks’ financial situation is being carefully monitored. - Banking sector faced significant structural liquidity needs since the revolution: increased demand for cash, deteriorated asset quality, sizable deposit withdrawals. - Over past few months, the CBT reduced banks’ dependence on direct central bank refinancing, including outright purchase of government bonds in the secondary market to improve interbank transactions. - Demand for central bank refinancing reduced by increasing consumer deposits spurred by retirement of old dinar notes; ceilings on deposit rates have been eliminated (MEFP, ¶15). - Improvements in liquidity framework (policy measures): - Establish a sound collateral management framework to minimize risks to the CBT balance sheet and encourage banks to manage liquidity forward-looking: - Progressively increase the share of borrowings collateralized by government securities to a minimum of 20 percent for each bank by the end of 2013, and to 40 percent in 2014. - Introduce a haircut system for bank loans eligible for CBT refinancing. - Launch a lender of last resort facility charging penalty interest rates to accompany reforms and ensure illiquid but solvent banks still have access to CBT refinancing. - Improve liquidity forecasts: - CBT will successively increase the forecast period, analyze reasons for deviation, and strengthen coordination with the Ministry of Finance through weekly committee meetings. - Exchange rate flexibility and assessment: - More exchange rate flexibility is crucial for maintaining external buffers and reducing liquidity injections. - Modification in 2012 of CBT’s mode of intervention and setting of a reference exchange rate quoted in the interbank market instead of a fixed currency basket gave new flexibility. - Modification helped reduce reserve losses (US$2 billion in the first four months of 2012) and led to a 5 percent depreciation of the dinar vis-à-vis the dollar so far in 2013. - Exchange rate remained stable following CBT intervention after the February 2013 political crisis and rating downgrades; CBT argues interventions were necessary to smooth large FX fluctuations during large current account transaction needs. - Staff noted the real exchange rate is modestly overvalued according to latest CGER methodologies; authorities agreed it was moderately overvalued by March 2013 but recent depreciation helped correct part of the overvaluation. - Exchange rate assessment using CGER panel estimates (In percent) — preserved values as shown: - MB approach 2/: -5.1 -1.0 13.4 - ERER approach: ...... 5.3 - ES approach: -5.1 -3.2 6.1 - Overvaluation (+); undervaluation (-) - Note: 1/ In 2018 corrected from program adjustment. 2/ Based on an elasticity of the CA/GDP with respect to the REER of -0.30. ### Box 2 — Tunisia: Monetary Policy Framework: Collateral Policy and Lender of Last Resort - Current CBT instruments and issues: - Instruments: reserve requirements, interest rate corridor (standing lending and deposit facilities), weekly refinancing operations, outright OMOs. - Design/use issues: (i) undermine incentives for banks to manage risks; (ii) expose CBT balance sheet to credit, market, and liquidity risks; (iii) impede functioning of the money market. - Refinancing operations open to all banks with CBT accepting a wide range of collateral on equal terms, at face (not market) value and without a haircut. - CBT Law grants general authority for lending to meet credit distribution or monetary policy goals, but does not distinguish between these objectives nor explicitly mention liquidity support for temporarily illiquid banks. - Recent scale of operations and collateral composition: - End of April 2013: TND 2.7 billion extended to banks through direct refinancing (excluding OMOs of about TND 930 million), of which about 52 percent was covered by bank loans. - CBT accepts government securities and certain loan categories as eligible collateral; differentiates on sectoral basis (e.g., tourism loans accepted, housing mortgages not accepted). - Recommended reforms: - Introduce a haircut system for loans used as collateral in CBT refinancing operations, and require an increasing share of government securities used as collateral by each bank, to: - (i) protect CBT balance sheet; - (ii) encourage banks to better manage liquidity, market, and credit risks; - (iii) promote differentiated assets on the basis of credit risks. - Accompany the new collateral framework with a Lender of Last Resort Facility: - Should be for solvent but illiquid banks; - Structured so banks first seek funding from other sources; - Be more expensive than other CBT operations; - Care is needed to ensure arrangements do not push illiquid but solvent banks into insolvency. ### FX market functioning and other measures - Agreed reforms to strengthen FX market functioning: - Put in place a computer connecting platform among banks and a market maker agreement to allow a move towards a weekly foreign exchange auction system by 2014 (MEFP, ¶16). - CBT to limit interventions to smoothing excessive exchange rate fluctuations. - Phasing out of 2012 measures limiting current account deterioration: - 2012 measures included restrictions on consumer lending (e.g., a 50 percent reserve requirement on banks with higher consumer loans outstanding than at end-September 2012). - Authorities argue these measures slowed consumer loans; staff viewed them as accounting for only 10 percent of imports and not the main cause of current account deterioration. - Both staff and authorities agree these measures should be used primarily for financial stability reasons because they are distortionary and unlikely effective long term. - Authorities reduced the additional reserve requirement to 30 percent and announced a clear phase out criterion (linked to coverage ratio of consumer goods imports) to reassure private operators the measure is temporary. - Authorities confirmed they will only impose import surcharges if absolutely necessary and subject to a clear phase-out criterion. ### C. Laying the foundations for supporting growth — program aims - Address deep-rooted banking sector vulnerabilities to ensure proper financial intermediation. - Introduce building blocks for growth-supporting fiscal consolidation. - Facilitate restructuring of the economy and improve the business environment. - Implement financial sector reforms (section continues beyond provided content). *International Monetary Fund. _cr13161 - 6. The overriding goals of the Fund-supported program are to address short-term.* ### 15. Remedying the critical vulnerabilities of the banking sector is crucial to strengthen ### Remedying the critical vulnerabilities of the banking sector is crucial to strengthen ### Banking sector vulnerabilities and reform program - Remedying critical banking-sector vulnerabilities is crucial to strengthen banks’ capacity to support the recovery of the Tunisian economy. A vast reform agenda has been initiated to align banking practices with international norms. Measures already introduced or announced (MEFP, ¶18) include the introduction of: - collective provisioning, - tighter credit concentration ratios, - higher capital adequacy ratios for the next two years, - a new governance framework for all banks (supported by World Bank technical assistance). - Staff and the authorities agreed that reforms should aim at ensuring that the banking system plays its proper financial intermediation role, including efficient credit allocation and careful monitoring of credit, liquidity, and profitability risks. - Over the next two years, the authorities’ program in this area has four critical components: - Addressing vulnerabilities of public banks. - Tunisia’s three public banks represent about 40 percent of total banking system assets and have been hampered by weak lending practices, governance issues, and exposure to a tourism sector severely affected by the revolution after January 2011. - The authorities commissioned a strategic and financial audit of public banks expected to start in June 2013. The preliminary audit report will be used to decide by mid-September on the business model to be retained for these banks. - The authorities are ready to provide needed financial resources to meet any recapitalization needs. At this stage, the amount planned for the next two years represents the latest estimates for public banks (2.6 percent of GDP) detailed in the latest FSSA, assuming that private shareholders of public banks (about 49 percent) are not contributing. - The final recapitalization amount will be revised up or down depending on the strategy chosen. Staff encourages the authorities to consider all options when designing the strategy, including options to merge banks, keep as is and recapitalize, reduce state participation or bank resolution. - Higher recapitalization costs could arise as data quality improves and prudential norms move to international standards. - Resolving NPLs in the tourism sector, an issue of particular importance for one of the large public banks, is a priority (MEFP ¶19; Box 3). - Strengthening banking supervision. - The CBT has started rigorously applying sanctions on banks in breach of prudential norms and is substantially increasing financial and human resources allocated to banking supervision. - Resources will allow for a full onsite inspection of a large bank by end-year (the first since 2006) and four credit risk inspections, which, along with an updated stress test of the banking system, will update the financial situation of the banking system, last identified in last year’s FSSA. - The Central bank is working on improving compliance with existing liquidity prudential norms, which are expected to become even more stringent once international standards are applied. - A study on the impact on banks of changing mandatory liquidity ratios to international standards will be prepared by end-December (structural benchmark). - Fund technical assistance will help strengthen onsite and offsite inspections. - Improving poor data quality and provision. - A new data reporting system covering all accounting, financial and institutional aspects of banks will be designed by August 2013. Implementation is essential for accurate, regular, and prompt bank monitoring enabling the banking supervisor to take corrective actions. - Modernization of the Public Credit Registry has been initiated and implementation of a Deposit Insurance Scheme is being programmed by the CBT. - Setting up a banking resolution mechanism, with IMF technical assistance. - The Tunisian banking system has not had a systemic financial crisis and currently lacks crisis contingency plans at the CBT or the Ministry of Finance to deal with a banking failure. - Four (of which two are state-owned) out of 21 banks control 50 percent of the banking system assets; the failure of one bank could possibly affect depositors’ confidence in the system. - The program envisages putting in place such a mechanism in the forthcoming revision of the banking law, scheduled to be performed within a year. ### Tunisia: Key Indicators of the Banking Sector (September 2012) — selected metrics - Data source: Tunisian authorities. 1/ Data per end-December 2012. 2/ Data for public and private commercial banks. - Public Banks vs Private Banks: - Nonperforming loans (NPL) in percent of total loans: 17.8 / 10.6 - NPL net of provisions in percent of total loans: 9.1 / 4.3 - Provisions and reserves in percent of NPL: 53.4 / 62.4 - Liquid assets in percent of short-term liabilities 1/: 84.9 / 91.5 - Return on assets (ROA) 1/ 2/: 0.8 - Return on equity (ROE) 1/ 2/: 10.9 ### Tourism Debt and Asset Management Company (AMC) - Purpose and rationale: - Authorities are drafting a law to establish an Asset Management Company (AMC) to resolve problem debts of the tourism sector and restore its profitability. - An AMC approach was preferred to a creditor-led approach to have a strong entity with fast-track powers and a centralized mechanism. - Tourism sector role and pressures: - Tourism contributes 7 percent of GDP and employs about 400,000 people directly or indirectly (about 15% of total employment in Tunisia). - Revenues are still 35 percent below 2010, keeping the industry’s financial situation precarious. - Banks’ exposure to tourism: - Out of 21 commercial banks, 15 are exposed to the tourism sector; one main state-owned bank is by far the largest credit provider. - Loans to the tourism sector represent slightly less than 10 percent of the banking system’s total loan portfolio, but account for about 25 percent of the banking sector’s NPLs. - After growing by 25 percent over the past year, NPLs in the tourism sector make up close to 40 percent of the total tourism sector loan portfolio. These numbers will rise further when tourism loans that were rescheduled in 2011 are reclassified as nonperforming. - AMC modalities and governance: - The AMC will buy bad assets in exchange for government-guaranteed bonds, remaining within the guarantee ceiling included in the budget. - Initial capital, expected to be small, will come through direct capital injection to serve as working capital and to pay interest on the bonds issued. - A draft law on the AMC is under review by an inter-institutional committee (including Ministry of Finance and the CBT) with key legal and operational options based on World Bank expert advice. - Success of an AMC depends on good governance policies, transparency, purchase of loans at prices allowing swift resolution, and realizing losses in banks whenever the transfer price is below net book value. - Key legal/design features recommended: - Expand AMC powers to resolve judicial obstacles while controlling mechanisms mitigate abuse. - Grant special powers to appoint special administrators, foreclose on collateral, or bid its debts in auction. - Timeline and constraints: - The draft AMC law is expected to be completed by June 2013. - Design must consider the government strategy for public banks (e.g., recapitalization needs) and requires further discussion with the “hotel businessmen association,” which has expressed strong opposition. - No plans to extend the AMC to troubled loans in other sectors. ### Public expenditure composition and medium-term fiscal strategy - Program anchor and fiscal targets: - Program is anchored in the authorities’ objective of bringing the central government deficit to around 2.5 percent of GDP by 2018, thereby maintaining the debt-to-GDP ratio at 44 percent in the medium term while creating space for large banking recapitalization costs during the program period (up to 2.6 percent of GDP over 2013–14) and for priority spending. - Fiscal consolidation strategy: - Relies largely on subsidy reduction and containment of the wage bill. - Subsidy reduction: - Authorities agreed to gradually phase out highly regressive and budgetary-costly energy subsidies while putting in place well-targeted social safety nets and compensatory measures. - In March 2013, authorities increased prices of gasoline and diesel products, and electricity tariffs, by an average of 7–8 percent. This complements a 7 percent increase in September 2012 and is expected to generate the subsidy savings included in the 2013 Budget Law (savings of about 0.5 percent of GDP) (MEFP, ¶12). - Staff and authorities agreed on the need to keep subsidies at budgeted levels in 2013. These subsidies will be further reduced in 2014–15 through additional price adjustments and lower international commodity prices. - Control of the wage bill: - The wage bill rose significantly in recent years; at 12.4 percent of GDP in 2013 (or equivalent to more than 50 percent of tax revenues), authorities agreed that the wage bill and new recruitments need to remain at budgeted levels. - Over the medium term, keeping the wage bill sustainable requires maintaining wage increases within available fiscal space and in line with productivity increases. Civil service reform (transparent and merit-based contracting) is important. - Use of savings: - Savings from wage bill containment and subsidy reform will create space for higher investment and social spending. - The government plans to increase public investment above 7 percent of GDP by 2015 (a 0.6 percent of GDP increase). - Expansion of social safety nets and better-targeted cash transfer schemes are essential. - Expenditure management reforms: - Simplification of procurement and control procedures, starting in June 2013, will boost investment and support growth. - Need to improve cash management procedures, including greater coordination with the central bank. - Arrears accumulation needs close monitoring; an indicative target on no new domestic arrears is part of program monitoring. ### Revenue reform and tax administration - Revenue system reform objectives: - Reform to widen the tax base, improve equity, and strengthen transparency. - Tax system is relatively favorable in terms of GDP and compared to similar countries, but is highly complex and distortive, limiting private-sector development. - Tax policy measures: - New consumption taxes on alcoholic beverages and stamp duties came into effect earlier in the year. - Immediate priority is to rationalize tax benefits/incentives in a revenue-neutral way, in line with the World Bank’s work on the new investment code, to help level the playing field for onshore and offshore sectors (see ¶18 and Box 4). - Reform must address regressivity of the current income tax system and complexity of the indirect tax system (particularly excises). - Tax administration measures: - A modernization program will address a fragmented revenue collection process and complex procedures. - Near-term priorities include unifying most tax functions within a large taxpayer unit and strengthening valuation and control mechanisms in both tax and customs administration (MEFP, ¶13). ### Fiscal risks and public enterprises - Monitoring contingent liabilities: - Fiscal risks from contingent liabilities of public enterprises and pension funds need close monitoring. - Limited comprehensive information on liabilities and financial flows of the 104 public enterprises in the government portfolio. - These companies employ around 120,000 persons and are dominant in energy and telecommunications; characterized by limited transparency, weak state ownership, weak corporate governance, and poor service. - Government actions: - With World Bank assistance, the government is improving governance framework of public enterprises and initiating audits of the largest enterprises, starting with the electricity and oil refinery companies (end-December 2013 structural benchmark). - Government monitors the stock of government debt guarantees (about 8.5–10 percent of GDP over the past three years) and rising pension deficits, which could amount to 2 percent of GDP by 2018 (see Section III.D; MEFP ¶13). ### Reform of the Investment Code (Box 4) — objectives and steps - Problems with the current code: - Current investment code dates to 1994; it is complex, incomplete, opaque, and creates investor uncertainty. - Accompanied by an incentives system amended many times, increasing inefficiency and procedural complexity. - Key aims of the reform: - Clearer market access rules: move from a positive list to a negative list; migrate from authorization to declaration system; spell out State role and limit discretionary powers. - Affirm investors’ rights and guarantees within a single text, strengthening them in accordance with international standards. - Review tax and financial incentives: align with Tunisia’s priorities, simplify incentives, focus on incentives that encourage R&D or highly educated personnel; move tax provisions to the tax code; accompany incentives reform with corporate tax reform to converge onshore–offshore rates. - Evaluate institutional framework for investment: clarify functions and coordination among institutions to facilitate investment. - Implementation steps and timeline: - Create an inter-ministerial council to set the main aspects of the new code and key regulations (authorization procedures, foreign investment limits, hiring of foreign workers, real estate acquisition). - Coordinate with the CBT to revise and simplify procedures related to investment guarantees (dividends and capital repatriation). - Organize discussions on the draft code with government agencies and stakeholders; meetings planned in the next few weeks. - Working on corporate income tax regime and timeline for convergence of onshore and offshore regimes. - Planning for the Council of Ministers to adopt the investment code by July 2013; present it to Parliament by end-September 2013. ### Structural reforms to boost private-sector growth - Key constraints identified: - Dichotomy between offshore and onshore sectors, exacerbating regional disparities and privileging the coastal offshore sector with fiscal and regulatory incentives. - Zero-tax regime for offshore companies attracted mainly low-value-added assembly investments with limited transfer of knowhow, creating a mismatch between labor demand and an educated workforce. - Lack of transparency, cronyism, and complex regulatory procedures fostered rent-seeking and anticompetitive behavior, discouraging entrepreneurship and private investment. - Planned structural actions (MEFP, ¶13 and ¶20): - Reform the investment code and existing corporate income tax system (Box 4) to streamline fiscal and regulatory incentives and create a level playing field. Current corporate tax rates: onshore 30 percent; offshore 0 percent. Reform aims for convergence starting with 2014 (structural benchmark). - Simulation work on appropriate tax rates is ongoing with World Bank and IMF TA; a convergence calendar for corporate tax rates will be announced by end-2013. - Keeping reform revenue neutral will require offsetting measures, which could include taxing corporate dividends or increasing the rate of the minimum tax on turnover. - Review and streamline existing regulations. - Regulatory simplification in tax and customs recommended eliminating 8 percent of identified procedures and significantly simplifying an additional 85 percent. - Same approach applied (with World Bank Group TA) to business formalities in nine additional ministries. - Reform competition law. - Preliminary World Bank estimates indicate that an increase in competition intensity that translates into 5 percentage point lower markups in the manufacturing sector would increase labor productivity growth by nearly 6 percentage points. - Reducing discretionary application of business regulations and ensuring equal opportunities for private operators should be a key focus. *Source: IMF staff report content provided in the supplied PDF excerpt.* ### 22. Removing constraints to the efficient functioning of the labor market is part of the ### 22. Removing constraints to the efficient functioning of the labor market is part of the ### Labor market reform: objectives and process - Labor market rigidities and skill mismatches between labor demand and supply are key challenges to be addressed in the medium term. - Staff and the authorities agree to initiate a broad debate within civil society to design a comprehensive labor market strategy linked to reforms of the investment code, competition law, and corporate taxation to achieve more rapid job creation. - A national tripartite social contract, signed in January 2013 between the government, workers’ unions, and business representatives, was a starting point for dialogue. - The Fund-supported program could be enriched in the second year of the arrangement by specific measures in this area once a full diagnostic is completed and clear policy measures have been identified. ### Strengthening statistics - Authorities plan to improve statistical methods and, with World Bank TA, have started regularly and comprehensively publishing all survey data, including complete data from household budget and labor force surveys. - Fund TA will support efforts to strengthen national accounts, monetary, and balance of payment statistics. ### Protecting the most vulnerable: social safety nets and targeting - Social agenda objectives: better composition of public expenditures, reduction in regional disparities, and effective protection for the most vulnerable. - World Bank TA is helping assess the best way forward; continuous dialogue with stakeholders is necessary. - Authorities and staff agree on strengthening social assistance mechanisms for the poor and vulnerable. - Existing cash transfer system (PNAFN): - Provides cash transfers and free health cards to 9 percent of the population (an estimated 235,000 households). - Latest World Bank estimates (using the 2005 household survey) indicate leakage to non-poor of around 60 percent. - Transfers increased by 50 percent over the past year. - Government decision to improve PNAFN via the creation of a unified registry and improved targeting system. - A national dialogue on subsidy reform and social protection will be launched to define reform priorities. - Emphasis that any future ad-hoc increases in energy prices need compensating measures for the poor and vulnerable even if the new registry/targeting system is not yet in place. - Authorities—with World Bank and Fund TA—are analyzing welfare and social impacts of reforms for each energy product and designing a strategy to support households during subsidy reform (structural benchmark for August 2013). - Staff stressed the importance of a strong public communication plan to explain benefits of energy subsidy reform, necessary to create space for public investment spending (increasing to 7.1-7.5 percent of GDP over the medium term) and social spending. - A recent survey showed that, in case of subsidy reforms, most of the population would support using savings from the removal of diesel subsidies on programs for the poor or on healthcare and education programs (see Tunisia: Subsidy Survey, In percent). ### Box 5 — Energy subsidies: costs, incidence, and reform elements - Price subsidies on basic food, oil products, electricity, and transport approximate 5 percent of GDP. - Cost of energy subsidies tripled from an average of 0.9 percent of GDP before 2010 to 2.8 percent in 2012, reflecting incomplete pass-through of international oil prices to domestic retail prices. - LPG and heavy fuel have had the highest subsidy levels; gasoline and diesel the lowest. - Benefits of energy subsidies accrue mostly to high-income households; highest-income households benefit almost 40 times more than the lowest-income ones. - Example: combined cost of gas and gasoline subsidies to the richest quintile (10 percent of the population) is equivalent to the cash transfer program that benefits 133,000 poor families. - Government medium-term objective: replace generalized price subsidies with a well-targeted social safety net, starting with the most regressive energy subsidies. - Actions taken and planned: - Increased fuel and electricity prices by around 14 percent between September 2012 and March 2013, generating 1 percent of GDP in annual budgetary savings. - Plan to revise and reinstate an automatic price setting mechanism (at least for petroleum and diesel products) by early 2014 or when retail prices are close to international prices. - Household compensation (and targeting) strategy to be approved in August and introduced in 2014 along with needed price increases (while awaiting a more comprehensive registry). - Household compensation strategy elements (to include, with World Bank TA support): - Profile of target beneficiaries most likely affected by reforms. - Type and amount of cash transfers required to mitigate higher prices on household welfare. - Targeting mechanism options: - (i) categorical criteria using administered data (e.g., households not connected to natural gas and using LPG); - (ii) self-targeting enrollment/transfer designs precluding higher-income groups; - (iii) variations of means-tested or proxy-means-tested targeting using existing databases; - (iv) combinations of the above. - Payment delivery modes: existing wire transfers through postal service or debit/smart card system. - Monitoring and evaluation system for assessing impact and adjusting phases of reform. - Proper communication mechanism for consulting with and informing the public and target beneficiaries prior to and during reforms. - Tunisia: Subsidy Level for Energy Products, 2012 (selected table entries preserved as presented) - Gasoline: ProductsWeight of total consumption of energy products (in percent) 11 2 15 21 62 4; Total Subsidy (in MD) 2; Subsidy Level in Retail Price (in percent) 24 - Diesel (0,2%): ProductsWeight of total consumption of energy products (in percent) 29 7 31 31 22 40; Total Subsidy (in MD) 1 2; Subsidy Level in Retail Price (in percent) 2 40 - Heavy Fuel Oil: ProductsWeight of total consumption of energy products (in percent) 5 17 06 25 14 7; Total Subsidy (in MD) 0 5; Subsidy Level in Retail Price (in percent) 47 - LPG: ProductsWeight of total consumption of energy products (in percent) 13 46 47 01 42 23; Total Subsidy (in MD) 1 4; Subsidy Level in Retail Price (in percent) 23 - Kerosene: ProductsWeight of total consumption of energy products (in percent) 12 13 71 87; Total Subsidy (in MD) 1 2; Subsidy Level in Retail Price (in percent) 7 - Electricity: ProductsWeight of total consumption of energy products (in percent) n/a; Total Subsidy (in MD) 1,671; Subsidy Level in Retail Price (in percent) 27 / 50; Share of Total Compensation (in percent) 50; Price Increase Needed to Reach International Prices (in percent) n/a - Total: Total Subsidy (in MD) 633,354; Share of Total Compensation (in percent) n/a; Price Increase Needed to Reach International Prices (in percent) n/a - Source: World Bank, March 2013. ### Equity, fiscal, and regional considerations - Authorities plan to introduce equity considerations into reforms: - Newly launched tax reform process to correct regressive nature of existing taxes (e.g., personal income tax) while keeping revenue-neutral impact. - Plans to increase spending in poorer regions of the interior, building on assessment of effectiveness of investment programs in those regions. - Pension system: - Ministry of Social Affairs launched an actuarial study, supported by the World Bank, to review sustainability. - Short-term plan: assess different social security reform scenarios and their social and budgetary implications, then launch a national dialogue. - Food subsidy reform to be assessed at a later stage, potentially using lessons from energy subsidy reform to design compensatory measures. ### Program modalities: access, financing needs, and reserve strategy - Tunisia will face moderate balance of payments needs over the next 24 months. - Under staff’s baseline assumptions, gross financing needs of US$28 billion will produce a financing gap of approximately US$1.7 billion, owing to increasing food and energy imports and the need to strengthen reserve buffers (to at least 100 percent with the new risk-weighted metric). - For 2014–15, the gap will narrow following a more sustained recovery in exports, driven by improved competitiveness and global demand. - Reserve adequacy is modest; both Staff and the authorities estimate reserve coverage should remain above a minimum three months import cover, with Fund financing used to build reserve buffers closer to the 4.5 months of imports reserve figure (above 120 percent with the new risk weighted metric). - Multilateral and bilateral support expected to cover most financing needs; financing assurances provided by partners linked to reform progress. - From the Fund, access of 400 percent of quota (about $1.75 billion, SDR 1.15 billion) will be needed to help build reserve buffers. - Half of the Fund resources will be used for each year, with phasing adjusted according to BOP need. - Close to half of the first year’s disbursement is expected in the fourth quarter of 2013 to ensure reserve coverage remains above minimum even if markets cannot be tapped as planned. - Staff assesses that a 24-month SBA is appropriate. ### Reserve adequacy assessment (Box 6) - Composite reserve metric indicates 2013 reserve level would cover Tunisia’s “risk weighted liability stock”; without Fund financing, coverage would be at 82 percent of risk-weighted liability stock—below 100 percent recommended minimum. - Traditional metrics show reserves should provide full coverage against selected idiosyncratic shocks: short-term debt at remaining maturity and three months of next-year imports. - The new metric suggests coverage between 100 and 150 of the “risk-weighted liability stock” might be regarded as adequate; projected reserves level in 2013 would be at the low end, covering 102 percent of Tunisia’s risk-weighted liability stock. - Seasonal non-synchronization of current account receipts and payments presents reserve management challenges; remittance and tourism receipts are usually lower in Q1 and Q2 and peak in Q3, inducing drawdowns in the first half of the year. - Increasing exchange rate flexibility could mitigate risks from non-synchronized current account receipts and payments. - Definition: “risk weighted liability stock” computed as sum of a 10 percent drop in exports, a 30 percent reduction in short-term debt, a 15 percent reduction in other liabilities, and a 5 percent of broad money for capital flight. ### Program use of Fund resources and repayment capacity - At this stage, authorities anticipate Fund resources will be used solely for balance of payments support; use for fiscal support may be considered during the program. - A Memorandum of Understanding regarding responsibilities of the Ministry of Finance and of the CBT for servicing charges and obligations to the Fund has been finalized. - Tunisia’s capacity to repay the Fund is expected to be strong: - Fund credit outstanding would reach a maximum of 6.3 percent of GDP and 14.5 percent of gross reserves in 2015. - Debt service to the Fund would remain below 2.4 percent of exports of goods and non-factor services. - Total public debt is expected to remain below 50 percent of GDP. - Public external debt peaking at 34 percent of GDP in 2015. - Total external debt expected to peak at 55 percent of GDP in 2015, falling thereafter. ### Risks to the program and mitigation measures - Key risks: - Growth could fall short of projections if external environment deteriorates, impacting tourism, remittances, and exports. - Setbacks in political transition (e.g., delays in organizing elections) could reduce commitment to reforms and increase investor wait-and-see attitudes. - Renewed social unrest or security issues could impact confidence, discourage tourism, and reduce market access. - Higher commodity prices could pressure fiscal and external positions. - Additional losses from public enterprises. - Delays in officially pledged external financing or lack of market access could increase the financing gap. - Mitigating features of program: - Strong authorities’ commitment and inter-ministerial ownership of reform agenda; inter-ministerial committee at policy and technical levels to monitor progress. - Authorities committed to adjust policies as needed to achieve program targets. - Quarterly fiscal targets to detect deviations early; quarterly reviews to adjust framework and take remedial actions. - Early energy price increases implemented to mitigate budget risks. - TA from Fund and other donors to support reform implementation. *Source: INTERNATIONAL MONETARY FUND (excerpt).* ### 33. The SBA will run over 24 months from June 2013 to June 2015, with Fund resources ### 33. The SBA will run over 24 months from June 2013 to June 2015, with Fund resources ### Program design and modalities - Duration and access - Length: 24 months, starting June 2013. - Access: SDR 1,15 billion (400 percent of quota, equivalent to about US$1.75 billion). - Phasing: There are eight program reviews and nine disbursements. Disbursements will be 200 percent of quota for each year. - First-year disbursement schedule as stated: 34 percent of quota upon Board approval of the arrangement, followed by 34 percent in the first review, 80 percent the second review, and 51 percent in the third review. - Monitoring and reviews - Initially monitored through quarterly reviews. - Test dates for the quantitative targets are the last day of each quarter, starting June 2013. - Depending on evolving risks and first-year performance, semi-annual reviews could be considered during the second year. - Targets and conditionality - Quantitative Performance Criteria: - Ceiling on the primary balance of the central government, excluding grants - Ceiling on net domestic assets of the central bank - Floor on net international reserves of the central bank - Continuous Performance Criterion: - Ceiling on the accumulation of new external debt payment arrears by the central government - Quantitative Indicative Targets: - Floor on social spending - Ceiling on the accumulation of new domestic arrears - Structural Benchmarks focus: - Maintaining macroeconomic stability - Strengthening the monetary policy framework - Reducing banking system fragilities - Strengthening social safety nets ### Structural benchmarks (Box 7 timelines and items) - Key structural benchmarks and timing (as listed) - Approval by the Council of Ministers in a convergence of the corporate taxes for the year 2014, July 2013 - Adoption of the Investment Code, July 2013 - Announcement of a haircut on all loans used as collateral for refinancing operations at the central bank, July 2013 - Ensure proportions of refinancing volumes at the CBT are backed by government securities (10 percent for end-August; 20 percent for end-year) - Adoption of new automatic fuel pricing formula, August 2013 - Submission to the Council of Ministers of a new targeted household support program, August 2013 - Approval of a new reporting system covering bank-related accounting, financial, and institutional functions, August 2013 - Adoption of strategic vision on future government’s role in banks, mid-September 2013 - Merge at the level of the large taxpayer unit the management, collection, and control of large enterprises, September 2013 - Implementation of an electronic bank interlinking platform and launch of the Market Makers Agreement, October 2013 - Conduct one general onsite bank inspections and four credit risk inspections, December 2013 - Present to the CBT Board a study of the impact on banks of liquidity ratio changes along international standards, December 2013 - Finalize the audit of the electricity company (STEG) and the petroleum products distribution company (STIR), December 2013 ### Safeguards, central bank assessment, and financial risks - Safeguards assessment of the CBT - First-time safeguards assessment found an adequate control environment for day-to-day operations. - Oversight, autonomy, and transparency need strengthening. - The CBT publishes its audited financial statements, but disclosure information should be enhanced. - Action needed to mitigate risks to the CBT balance sheet from a significant increase in liquidity lending operations. - Development of the internal audit function requires capacity-building and oversight by the newly established Audit Committee. - The CBT confirmed commitment to implementing safeguards assessment recommendations; some recommendations—such as improvement of its collateral framework—are already part of its reform agenda. ### Macroeconomic assessment and outlook - Recent developments and vulnerabilities - Tunisia’s macroeconomic situation has recovered from the post-revolution trough, but fiscal and external buffers have been eroded. - Inflation has been rising, mostly reflecting increasing food prices, with core inflation remaining stable. - Falling demand from Europe has contributed to a worsening current account deficit financed by strengthened FDI inflows and sustained multilateral and bilateral loans that increased gross reserves above the 2011 trough. - Fiscal buffers accumulated through past prudent policies were eroded to meet pressing social and investment needs. - Outlook and risks - The economy is expected to continue recovering over the short term but is vulnerable to shocks. - Positive outlook underpinned by a clear political calendar; escalation of domestic social tensions, political uncertainty, security concerns, renewed turbulence in Europe, depressed world demand, or delays in official external financing could all weaken the outlook. - Delays in pledged external financing could increase the external financing gap and hinder reform progress. ### Structural and social challenges - Structural constraints - Widespread social and economic disparities and high youth unemployment. - Duality of the economy favoring an offshore sector with low-value added industries employing low-skilled workers. - Private-sector growth and high-value added job creation hampered by complicated regulatory procedures, inappropriate supervision, rent-seeking, and anticompetitive behavior, particularly in the banking sector. - Policy priorities and reform agenda - Short-term stabilization: appropriate mix of fiscal, monetary, and exchange rate policies to restore fiscal and external buffers and contain inflation. - Banking sector: address critical vulnerabilities—especially state-owned banks—via audits, recapitalization, stronger supervision, more frequent onsite and offsite inspections, better data reporting, and alignment of prudential norms with international standards. - Structural reforms: new investment code, corporate tax convergence, streamlined fiscal and regulatory incentives, unified tax administration, simplified procedures, reduced “red tape”, and labor market reform. - Social protection: preserve and strengthen social safety nets; subsidy reform and wage bill containment to create fiscal space for priority capital and social spending; design and implement targeted household support and revise cash transfer mechanisms without waiting for a comprehensive registry. ### Policy recommendations and staff appraisal - Fiscal policy and banking recapitalization - Maintain an appropriate fiscal stance while making space for critical spending priorities and repayments of arrears. - Move quickly to create fiscal space necessary to meet banking recapitalization needs to restore investor confidence and strengthen banks’ capacity to support recovery. - Contain energy subsidies and wage bills to budgeted levels. - Preserve social and investment spending if mitigating measures are needed for budgetary shortfalls. - Monitor fiscal risks from contingent liabilities closely. - Monetary and exchange rate policy - Continue prudent monetary management within a more flexible exchange rate regime to build external buffers. - Support for recent tightening of monetary policy stance and gradual unwinding of liquidity injections. - Continue improving monetary policy framework: better collateral framework, improved liquidity forecasts, effective monetary policy committee. - Move towards a weekly foreign exchange auction system to improve functioning of the foreign exchange market. - Banking sector reforms and asset quality - Conduct audits of public banks to design appropriate business models and assess recapitalization needs. - Assess banking system risks, strengthen supervision, and improve data reporting systems. - Ensure any asset management company (AMC) for NPLs conforms with best valuation, governance, and transparency practices. - Social safety nets and communication - Orient savings from subsidy reform toward a well-targeted social safety net for the poor and vulnerable. - Implement household compensation mechanisms to accompany future energy price increases without waiting for a perfect targeting system. - Prioritize proactive communication and social consensus building; ensure greater equity in reform design. - Data and monitoring - Strengthen statistical data: priority improvements in national accounts, monetary statistics, and the balance of payments. - Continued and careful program monitoring and ongoing policy dialogue with the Fund are essential to reduce risks. ### Risks and contingency - Significant risks identified - Prolonged political uncertainty, worsening security situation, deterioration of the international economic environment could delay recovery and reform progress and affect confidence. - The level of access under the program is intended to provide enough financial buffers to mitigate immediate exogenous shocks. - Continued program monitoring and policy dialogue with the Fund recommended to further reduce risks. *IMF staff appraisal and Box 7 details as presented in the source document.* ### 46. In view of Tunisia’s balance of payment needs and the strong policies proposed by the ### _cr13161 - 46. In view of Tunisia’s balance of payment needs and the strong policies proposed by the ### IMF support and financing arrangement - Staff supports the authorities' request for a 24-month SBA for the amount of SDR 1. 14600 billion (400 percent of quota). - Table of proposed purchases under the SBA (2013–15) — disbursements (Millions of SDRs / Percent of quota / Millions of US$): - June 7, 2013 Board approval of the SBA: 98.800 / 34 / 150.089 - First Review (Sept 15, 2013): 98.600 / 34 / 149.786 - Second Review (Dec 15, 2013): 230.520 / 80 / 350.188 - Third Review (Mar 15, 2014): 145.080 / 51 / 219.526 - Fourth Review (June 15, 2014): 143.250 / 50 / 216.757 - Fifth Review (Sept 15, 2014): 143.250 / 50 / 216.757 - Sixth Review (Dec 15, 2014): 143.250 / 50 / 216.757 - Seventh Review (Mar 15, 2015): 71.625 / 25 / 108.121 - Eighth Review (May 15, 2015): 71.625 / 25 / 108.121 - Total: 1146.000 / 400 / 1,736.102 - Quota reference: Quota is SDR 286.5 million. ### Recent economic developments (high-level findings) - Tourism and remittances receipts have improved despite high uncertainties. - Unemployment has started to subside but remains high particularly among university graduates. - Fiscal stance has been looser to counteract the weak economy and high unemployment, but debt levels remain stable. - Inflation rate has increased reflecting higher food prices. - After a severe recession in 2011, a moderate recovery started in 2012 despite adverse international and domestic environments. - Industrial production is slowly recovering led by the energy sector, while the mechanical and electrical sectors remain relatively flat. ### Key indicators and short-term data (selected exact figures) - Real GDP growth (Table 1, selected years and projections): - 2009: 3.1 - 2010: 2.8 - 2011: -1.9 - 2012: 3.6 - 2013: 4.0 - 2014: 4.5 - 2015: 5.0 - CPI, average and end of period (Table 1): - CPI, average 2013: 6.0 - CPI, average 2014: 4.7 - CPI, end of period 2013: 5.3 - CPI, end of period 2014: 5.0 - Gross national savings (percent of GDP): - 2009: 22.1 - 2010: 21.8 - 2011: 16.5 - 2012: 17.3 - 2013: 17.3 - 2014: 19.0 - 2015: 20.2 - Public debt (general government, percent of GDP): - 2009: 42.8 - 2010: 40.4 - 2011: 44.0 - 2012: 44.0 - 2013 (Prel.): 45.3 - 2014 (Proj.): 49.5 - 2015 (Proj.): 49.1 - External debt (US$ billions) and percent of GDP (Table 1): - External debt (US$ billions): 2009: 21.5; 2010: 21.4; 2011: 22.1; 2012: 23.3; 2013: 25.0; 2014: 27.6; 2015: 29.2 - External debt (percent of GDP): 2009: 49.4; 2010: 48.3; 2011: 47.8; 2012: 51.6; 2013: 51.1; 2014: 54.5; 2015: 54.8 - Gross official reserves (US$ billions, e.o.p): - 2009: 10.6 - 2010: 9.5 - 2011: 7.5 - 2012: 8.6 - 2013 (Prel.): 9.0 - 2014 (Proj.): 10.8 - 2015 (Proj.): 11.9 ### Balance of payments and external financing - Current account (Table 2, in millions of US$; quarterly 2013 and annual aggregates): - 2010: -1,234 - 2011: -2,105 - 2012: -3,402 - 2013 (Prel. Year): -3,671 - 2013 Q1–Q4: -867, -1,130, -815, -835 - 2014 (Proj.): -3,647 - 2015 (Proj.): -3,046 - 2016 (Proj.): -2,717 - Trade balance and components (2013 Q1–Q4 and annual in Table 2): - Exports (2013 Q1–Q4): 4,682; 4,790; 4,233; 4,281; Exports (2013 Year): 17,985 - Imports (2013 Q1–Q4): -5,821; -6,456; -5,727; -6,132; Imports (2013 Year): -24,136 - Trade balance (2013 Year): -6,151 - Tourism receipts (selected quarterly 2013): 339; 513; 703; 510 - Workers' remittances (2013 Q1–Q4): 474; 474; 768; 596 - Capital and financial account (Table 2): - Capital and financial account (2010–12): 2,465; 1,343; 1,309 - FDI (net) (2013 Year): 1,391 - External financing needs and amortization (Table 3): - Total financing requirements (2013): 9,970 - Amortizations (2013): 6,441 - Short-term debt (2013 amortization component): 4,880 - Total financing sources (2013): 9,320 - Disbursements (debt) (2013): 8,304 - Drawdown in gross reserves (2013): -391 (selected quarters: 1,126; 228; -164; -1,581) - Memorandum items (Table 3): - Gross international reserves (in millions of US$) series includes 9,509; 7,525; 8,645; 7,519; 7,291; 7,454; 9,036; 9,036; 10,795; 11,947 (selected years) ### Fiscal outcomes and central government operations - Central government financial operations (Table 4a, totals in millions of dinars): - Total revenue and grants (2013 Budget / Est. / Proj.): 18,655 (2013 Budget) ; 19,009 (2013 Proj.) - Total expenditure and net lending (2013 Budget / Est. / Proj.): 23,808 (2013 Budget) ; 24,348 (2013 Est.) ; 24,235 (2013 Proj.) - Central government deficit (excl. grants) (percent of GDP, Table 4b): - 2009: -2.7 - 2010: -0.6 - 2011: -3.5 - 2012: -5.4 - 2013 (Prel.): -7.1 - 2014 (Proj.): -7.3 - 2015 (Proj.): -6.4 - Central government deficit (incl. grants) (percent of GDP, Table 4b): - 2009: -2.4 - 2010: -0.5 - 2011: -3.2 - 2012: -4.5 - 2013 (Prel.): -6.6 - 2014 (Proj.): -6.8 - 2015 (Proj.): -5.9 - Revenue composition (Table 4c, 2013 values and series): - Revenue (a) (2013): 19,009 - Taxes (2013): 17,100 (Table shows taxes rising to 17,100 in 2013) - Taxes on income, profits and capital gains (2013): 7,095 - Taxes on goods and services (2013): 6,971 - Expenditure composition (Table 4c, 2013 values and series): - Current expenditure (2013): 18,529 - Wages and salaries (2013): 9,747 - Interest payments (2013): 1,360 (domestic 695; external 665) - Transfers and subsidies (2013): 5,699 - Capital expenditure (2013): 5,276 - Memorandum: General government debt (Table 4a / 4b, in millions and percent of GDP): - General government debt (millions of dinars) 2013: 36,658 (2013 Prel.) - General government debt (percent of GDP) 2013 (Table 4b): 45.3 ### Monetary and financial sector indicators - Monetary aggregates (Table 5, selected series in millions of dinars): - Net foreign assets (NFA) 2013 Q4: 9,141 - Money plus quasi-money (M2) 2013 Q4: 61,056 - Broad money (M3) 2013 Q4: 64,544 - Credit to the economy (2013 Q4): 65,885 - Interest rates and money market (Figure references and text): - Deposit rate, reference rate, lending rate series plotted (no single numeric time series list beyond chart). - Financial soundness indicators of the banking sector (Table 6, selected ratios): - Regulatory capital to risk-weighted assets (2012): 12.3 - Nonperforming Loans (NPLs) to total loans (2012, as of September): 13.5 - Specific provisions to NPLs (2012, as of September): 57.3 - Return on assets (ROA) 2012: 0.8 - Return on equity (ROE) 2012: 9.9 - FX-loans to total loans (2012): 4.8 - Credit to the private sector to total loans (2012): 67.7 ### Debt sustainability: public debt (Annex) - Historical public debt dynamics: - Debt-to-GDP fell to 40.4 percent in 2010, increased to 44 percent in 2011, and remained 44 percent by end-2012. - Baseline projections and scenarios (Annex summary): - Under the baseline, public debt is expected to increase by 5 percentage points of GDP in the short term and to progressively decline over the medium term to about 44 percent (by end-2018). - Increased backing of recapitalization costs and a wider deficit will contribute to increasing the debt-to-GDP ratio to 49 percent by 2015. - Baseline medium-term real growth assumption: 4.6 percent on average during 2013–18. - Vulnerabilities and stress scenarios (explicit outcomes presented): - If medium-term fiscal consolidation is not implemented (adverse scenario), public debt would reach 60 percent of GDP by 2018. - Permanent negative shock to real growth (3.2 percent during 2013–18, on average) → public debt reaches about 55 percent of GDP by end-2018. - One-off 10 percent of GDP shock to contingent liabilities (reflecting additional 3 percent of GDP bank recapitalization costs and realization of about 7 percent of GDP of government’s contingent liabilities) → public debt would reach about 60 percent of GDP and slightly decline to about 53 percent by 2018. - One-time 30 percent depreciation (given >60 percent of public debt is denominated in foreign currency) → public debt-to-GDP ratio rises to about 63 percent and then declines to 56 percent by 2018. - Public debt dynamics relatively resilient to an interest rate shock, staying at around 50 percent over the medium term. - Public Sector Debt Sustainability Framework (Table 1, selected entries): - Public sector debt (percent of GDP): 2009: 43.3; 2010: 42.8; 2011: 40.4; 2012: 44.0; 2013: 44.0; 2014: 45.3; 2015: 49.5; 2016: 49.1; 2017: 48.5; 2018: 46.7; Debt-stabilizing primary balance shown as -1.0 (table footer). - Identified debt-creating flows and contributions displayed in Table 1 (exact numeric series preserved in source). ### Debt sustainability: external debt (Annex) - Historical and baseline path: - External debt declined from >65 percent of GDP in 2002 to 48 percent at end-2011. - Under baseline projections, external debt is projected to increase to 55 percent of GDP in 2015 before declining to around 49.2 percent by end-2018. - Stress test outcomes and resilience: - External debt ratio remains below 58 percent of GDP throughout the projection period under all but one alternative scenario and all bound tests. - Permanent negative shock to growth or current account would raise the debt ratio to 55–58 percent of GDP. - A sharp real depreciation (one-time 30 percent in 2013 relative to baseline) would raise the external debt ratio to almost 80 percent of GDP. - External Debt Sustainability Framework (Table 2, selected entries): - External debt (percent of GDP): 2008: 45.9; 2009: 49.4; 2010: 48.3; 2011: 47.8; 2012: 51.6; 2013: 51.1; 2014: 54.5; 2015: 48.5; 2016: 51.7; 2017: 49.2; 2018: 49.2 (table shows series and projected values). - Gross external financing need (in billions of US$): series includes 7.1; 7.2; 8.6; 10.4; 10.9; 10.4; 10.1; 9.5; 9.5; 10.5; 10.9 (selected years). ### Indicators of Fund credit and stock (Table 9) - Stock of existing and prospective Fund credit (end of period, Millions of SDR, and percent metrics assuming new SBA of 400 percent of quota): - Stock (end of period) series: 0; 428; 1,003; 1,146; 1,109; 787; 278 (selected years) - Stock in percent of quota: 0.0; 149.4; 350.0; 400.0; 387.1; 274.7; 97.0 - Stock in percent of GDP: 0.0; 1.3; 3.0; 3.2; 3.0; 2.0; 0.7 - Stock in percent of exports of goods and services: 0.0; 2.8; 6.1; 6.3; 5.7; 3.8; 1.3 - Stock in percent of gross reserves: 0.0; 7.2; 14.1; 14.5; 12.8; 8.3; 2.6 - Obligations to the Fund from existing and prospective arrangements (percent of quota and GDP series presented in Table 9). *Source: Tunisian authorities; and IMF staff estimates and projections.* ### 1. Following the Revolution of January 14, 2011, Tunisia resolutely began its transition to ### Following the Revolution of January 14, 2011, Tunisia resolutely began its transition to ### Background and Program Request - Democratic election of a Constituent Assembly in October 2011; new government appointed in December 2011. - Government priorities: jump-start economic activity, create stability and trust, revitalize investment and private sector role, address high unemployment, reduce regional disparities. - Request to the IMF: Stand-by Arrangement backed by a two-year program in the amount of SDR 1.1460 billion (400 percent of quota). - Program monitoring: eight quarterly reviews with quantitative performance criteria and structural benchmarks; first, second, and third reviews to be concluded no later than September 30, 2013, December 31, 2013, and March 30, 2014, respectively. - Safeguards: a safeguards assessment of the Central Bank of Tunisia conducted; technical memorandum of understanding prepared between the Central Bank of Tunisia and the Ministry of Finance to clarify responsibilities related to financial obligations associated with IMF resources. ### Recent Economic and Financial Developments (2012–early 2013) Findings: - Real GDP growth: rose by 3.6 percent in 2012, helped by rebounding tourism and foreign direct investment flows. - Unemployment: 16.5 percent in March 2013; about 33 percent among graduates. - Inflation: overall CPI inflation rose from 4.2 percent at end-2011 to 6.4 percent in April 2013 (year-on-year); underlying inflation (excluding energy and food) remained relatively stable below 5 percent. - Current account deficit: widened from 7.4 percent of GDP in 2011 to approximately 8.1 percent in 2012. - Sectoral performance: tourism revenues grew by 30.4 percent and remittances by 23.7 percent; transport and energy equipment imports grew by 27 percent in 2012. - Exchange rate: real effective depreciation roughly 2.4 percent in 2012. - Foreign exchange reserves: increased to $8.6 billion in 2012 (equivalent to 3.8 months of imports). - Fiscal outturn 2012: fiscal deficit estimated at 5.3 percent of GDP (excluding grants, privatization receipts, and sales of confiscated assets); corresponds to 5 percent of GDP after including sales of confiscated assets as nontax revenues. Public debt reached 44 percent of GDP (same level as in 2011). - Budget execution 2012: investment budget execution rate of 75 percent; subsidy payments increased 30 percent year-on-year with accumulation of arrears about 1 percent of GDP on energy subsidies. - Monetary policy: policy rate raised to 4 percent (increase of 50 basis points during the past six months); refinancing of banks rose by 53 percent in the first ten months of 2012 then reduced by 35 percent; real interest rate still negative (-2.4 percent at end-April 2013); asymmetric interest corridor of 100 basis points (75 basis points above policy rate for lending facility and 25 basis points below for deposit facility); reserve requirement of 50 percent for increase of consumer loans above end-September 2012 level (reduced to 30 percent in April 2013). - Banking sector vulnerabilities: nonperforming loan ratio 13.5 percent of total loans at end-September 2012; initial estimates indicate this ratio could be 3 to 4 percentage points higher at end-December 2012 after reclassification of rescheduled loans. Average capital adequacy ratios about 12 percent at end-December 2012; average bank provisioning rate slightly below 57.3 percent in September 2012. Liquidity ratios fell and some banks failed to comply with liquidity prudential requirements in 2011/12. ### Key Components of the Economic Program Objectives and strategy: - Main focus: address critical vulnerabilities of the banking sector and strengthen fiscal and external buffers. - Measures to mitigate banks’ weaknesses accumulated during years of favoritism, inadequate standards, and weak banking supervision. - Generate additional fiscal space through modest fiscal loosening and better spending composition to meet possible recapitalization needs of public banks (depending on choice regarding government role in those banks). - Policy mix: rebalancing fiscal policy to support growth while progressively containing energy subsidies and putting in place a better targeted social safety net and growth-supporting public investments; prudent monetary policy to contain inflation and preserve banking sector stability; greater exchange rate flexibility and structural reforms to improve competitiveness and rebuild foreign exchange reserve buffers. - Structural reforms: promote private-sector development and reduce regional disparities to foster more inclusive growth. ### Macroeconomic Framework (program assumptions) - Growth: program objectives based on a growth rate of 4 percent in 2013; growth performance sustained by recovery of tourism, recovery of industrial activity (notably phosphates sector), and private consumption; increase in public and private investment expected to positively impact activity; net exports to recover slowly. Growth expected to pick up considerably in 2014, making it possible to close the output gap in 2016. - Inflation: headline inflation (year-on-year) could peak slightly above 6.5 percent in mid-2013, before slowing to 5.3 percent at the end of the year (year-on-year); inflation will converge to about 4 percent in the medium term. - Current account: in the coming year, current account deficit expected to remain high at approximately 7.2 percent of GDP; medium-term narrowing expected due to recovering exports and workers’ remittances. Private capital inflows expected to improve considerably during the program, contributing to maintaining gross reserves above three-months of import coverage. ### Fiscal Policy Overall stance and targets: - Fiscal policy to balance supporting recovery and medium-term fiscal consolidation. - Create fiscal space—including by reforming the tax system—to: (i) meet social and infrastructure financing needs; (ii) protect the most vulnerable; and (iii) address potential contingent liabilities from banking recapitalization needs and higher deficits of social security funds. - Medium-term debt sustainability anchors program: reduce overall fiscal deficit to 2.5 percent of GDP by 2018, keeping debt-to-GDP ratio below 42 percent of GDP even after accounting for bank recapitalization costs during the program period. 2013 budget and fiscal composition: - 2013 budget law initiated rebalancing toward consolidation while preserving priority spending. - Wage bill: 14 percent increase relative to 2012 included in 2013 budget appropriations. - Transfers and subsidy payments: 7.3 percent of GDP appropriated. - Investment increased in marginalized regions. - Revenue measures: higher stamp duties and excises on alcoholic beverages and a pick-up in economic activity expected to increase tax revenues to 21.8 percent of GDP. - Overall fiscal deficit: projected to reach 7.3 percent of GDP (excluding grants) and 5.8 percent when including sale of confiscated assets as nontax revenues; broadly in line with the budget target. - Structural deficit: broadly stable at 5.1 percent of GDP, after correcting for cycle and one-off operations (recapitalization of public banks or arrears repayment). - Financing: deficit mostly financed by multilateral and bilateral external loans; new measures (cuts in nonessential spending or new revenues) will be identified to meet deviations from fiscal targets while preserving capital and social spending. Key fiscal priorities and measures for 2013: - Banking recapitalization needs: - Financial System Stability Assessment (FSSA) estimates needs could reach as much as 2.6 percent of GDP in the next two years. - A first tranche included in the 2013 budget law; plan to allocate a second tranche reaching a maximum of 0.5 percent of GDP in the supplementary budget law to be introduced in the second half of 2013. - Actual recapitalization needs to be determined based on the strategic orientation chosen by mid-September 2013 (structural benchmark as part of the first program review), on the basis of preliminary results of the public bank audit examining all options. - Depending on the option chosen, the indicative amount may be revised upward or downward (or even eliminated). - Recapitalization needs this year will be financed by issuance of non-negotiable government securities. - Subsidy reform: - 2013 budget included TDN 400 million savings on energy subsidies. - Fuel prices (gasoline and diesel) and electricity tariffs raised to achieve anticipated savings. - Accompanying measures: implementation of social programs in the government budget (higher social spending on education and health and to promote employment) and increases in cash transfers to households in need during 2012 and 2013 (the amount for each household was raised by 40 percent and by 10 percent during 2013). - Strategy: progressively replace generalized subsidies with a better-targeted social safety compensation system. - New register of households in need decided in August 2012 to ensure effective targeting. - In-depth World Bank technical assistance study under way to assess impact of energy price increases on vulnerable households and productive sectors. - Government plans to adopt in August 2013 a household compensation strategy to accompany energy subsidy reform, accompanied by broad public consultation and communication campaign. - Designing a new automatic fuel pricing formula: ongoing assessment with a new formula to be adopted in 2013 and implemented in early 2014 (at least for gasoline, which will be relatively close to the international price). - Control of the wage bill: - Short-term: contain wage increases and new recruiting within limits announced in the 2013 budget law. - Medium-term: evaluating a multi-criteria system for personnel recruitment to better match needs and qualifications. _This summary is based solely on the provided IMF document content._ ### 13. A better composition of public expenditures will be needed to achieve a growth- ### _cr13161 - 13. A better composition of public expenditures will be needed to achieve a growth- ### Public expenditure composition, fiscal consolidation, and structural fiscal reforms - Objective: Achieve a growth-supporting medium term fiscal consolidation and restore fiscal space by replacing generalized subsidies with a better-targeted compensation system and containing the wage bill. - Wage bill / civil service: - Keeping wages at a sustainable level and controlling recruitment as part of a civil service reform will be key to reducing the weight of the wage bill in the government budget. - Subsidies and prices: - Additional increases in retail energy prices and the forecasted fall in international food and fuel prices will lead to subsidy savings in 2014 and over the medium term. - Tax revenue mobilization: comprehensive program to boost tax revenue and improve the equity, efficiency, and transparency of the tax system, including: - Tax policy: - Diagnostic: complex tax system, unequal distribution of the tax burden, significant distortions. - Structural reform of the tax system launched on May 13, 2013 in the context of an enlarged National Fiscal Council; national tax consultations organized in October 2013 to finalize working groups’ work. - Priority to rationalize tax benefits/incentives in a revenue-neutral way by reforming the corporate income tax in parallel with the new investment code (scheduled for July 2013). - Plan to review convergence of corporate income tax (CIT) rate in the onshore and offshore sectors and announce by end-December 2013 the convergence according to a clear calendar and gradually over the next few years. - A first step of this convergence, concerning the year 2014, will be announced in July 2013 (structural benchmark). - Options under study: revising favorable treatment of re-investment, introducing taxes on dividends and export activities; ensure convergence impact is revenue-neutral via simulation analysis. - Tax administration: - Preliminary diagnostic conducted with IMF technical mission support. - Program to modernize tax administration (including setting up a unified fiscal administration) and strengthen customs control and evaluation mechanisms. - Short-term: unify control and tax collection functions within a strengthened Large Taxpayer Unit (LTU) (end-September 2013 structural benchmark) and restructure fiscal activities of the LTU. - Reinforce selectivity of controls by establishing targeted criteria and objectives. - Capital expenditures effectiveness: - Study started to assess impact of public investments realized in 2012 on growth and welfare, particularly in marginalized areas; results expected in the next three months to allow review/reprioritization. - Diagnostic analysis of public investments launched with the World Bank; simplification of procurement procedures planned for June 2013. - Public enterprises: - Financial situation: accumulating losses close to 4 percent of GDP, constituting a major risk for government finances. - Program of governance reforms and audits of two large public enterprises—electricity company (STEG) and petroleum products refinery company (STIR)—to be finalized by December 2013 (study prepared with the World Bank in 2013). - Pension and health insurance systems: - Considered financially unsustainable in the long term; if not reformed, combined deficit could amount to 2 percent of GDP by 2018. - Government analyzing different reform scenarios; decision will require consultation to reach national consensus, to be initiated in 2013. ### Monetary policy and exchange rate framework - Monetary policy objective (2013–14): control inflation while preserving healthy private-sector credit growth. - Intermediate target pending inflation-targeting: rate of growth of M3. - For 2013: M3 growth will reach 12.7 percent (year-on-year) with overall inflation at 6 percent (annual average) and credit to the private sector growing at about 11 percent. - Monetary policy stance and institutions: - Central bank ready to further tighten monetary policy, including by raising the policy rate, if core inflation rises rapidly. - Establishment of a monetary policy committee (met for the first time in January 2013) to increase assessment and communication effectiveness. - Reforms planned to promote emergence of a reference yield curve to strengthen monetary policy transmission. - Liquidity management and central bank refinancing: - Gradual exit strategy from massive liquidity injections to reduce banks’ reliance on central bank refinancing. - Planned actions: - Reinforce liquidity forecasting framework by extending horizon and analyzing discrepancies with budget data; establish a coordination committee to meet weekly to discuss liquidity for the week and month ahead. - Establish a sound collateral management framework and haircut system for loans accepted as collateral in CBT’s refinancing operations (announcement will be made in July 2013, structural benchmark). - Transitional collateral requirement: CBT will require that 40 percent of the banking system refinancing be, in general, guaranteed with government securities, with at least 10 percent for each bank starting from end-August. The ceiling for each bank will be raised to 20 percent by end-December 2013 and will be progressively increased during the next two years. - Establish a lender of last-resort facility for solvent but illiquid banks; facility will charge significant penalties and require any bank using it to present a plan to strengthen its balance sheet within six months; creation requires amendment of the banking law and the CBT organic charter law. - Step up outright purchases of government bonds in the secondary market to reduce the structural liquidity deficit; increase open market operations in 2013 (currently amounting to about TDN 950 million, compared to TDN 450 at end-September 2012), notably by purchasing longer-term government bonds. - Ease existing interest rate ceilings with a view to eliminating them and improving the monetary transmission mechanism; ceilings on creditor interest rates eliminated in March 2013 (introduced in December 2011) for all maturities. - Exchange rate policy changes and further flexibility: - 2012 modification: CBT intervention mode based on fixing using interbank rates rather than a fixed basket reference rate, allowing a more flexible exchange rate policy. - Planned measures to increase exchange rate flexibility: - Adopt electronic bank interlinking platform and Market Makers Agreement; identified 12 candidate banks for market maker role; setting up of information and interconnection system expected by October 2013. These actions are prerequisites for introducing weekly auctions in the first months of 2014. - Improve cash flow forecasts as a prerequisite. - Limit CBT interventions in foreign exchange market to smoothing excessive exchange rate fluctuations; mode of intervention will continue to be in two currencies and will later be revised towards intervening in a single currency vis-à-vis the dinar. - Import measures and current account: - Measures to limit deterioration of current account reduced consumer lending but did not sufficiently reduce consumer goods imports. - Criteria for withdrawal of measures have been defined and announced to reassure the private sector that measures are temporary. - Development strategy remains based on openness and free trade; import surcharges to be imposed only if necessary and subject to clear phasing-out criteria in accordance with World Trade Organization rules. ### Financial sector policies and banking reforms - Reforms launched to maintain banking sector stability and reduce vulnerabilities; focus on aligning banking practices with international standards and strengthening supervision. Achievements include: - Introduction of collective provisioning to improve risk coverage. - Tightening of risk concentration ratios (take effect at end-2013). - Gradual increase in capital adequacy ratio from 8 percent to 9 percent at end-2013 and to 10 percent at end-2014, with a Tier 1 ratio of 6 percent at end-2013 and 7 percent at end-2014. - Preparation of a circulaire decree to improve governance of credit institutions. - Launch of an independent strategic audit of the three public banks (close to 40 percent of total banking sector assets). - Preparation of the annual report on bank supervision for publication in the next few weeks (first time in Tunisia’s history). - Continued reform agenda: four pillars - Improving banking data reporting: - With IMF technical assistance, design architecture of a new reporting system covering bank-related accounting, financial, and institutional functions by August 2013. - Tackling fragilities of public banks: - Audit of the three public banks to be completed by December 2013; interim report at end-August will inform government strategy by mid-September. - Possible options include: (i) recapitalize them to address weak loan quality and absorb future losses within existing banking mechanisms; (ii) merge them; or (iii) reduce State participation. - Mobilize necessary resources for possible recapitalization in the next two years, which, according to FSSA estimates, could reach 2.6 percent of GDP (amount may be reduced or increased depending on strategic orientation and final audit results). - Nonperforming loans of the tourism sector account for more than 20 percent of all nonperforming loans in the banking system and are especially significant for one public bank. - Establish an Asset Management Company (AMC) to remove tourism-related nonperforming loans; consult extensively and establish a clear and transparent legal framework by end-July 2013 to guarantee AMC’s operational autonomy. - Update by June 2013 the amount of financial resources necessary for AMC operations (will require a cash contribution from the government to meet working capital needs and government guarantees for AMC bonds). - Ensure public banks are subject to the same management rules as private banks; by September 2013 plan to exempt public banks from certain obligations imposed by the law on public enterprises to give them greater governance freedom. - Strengthening banking supervision and regulatory framework: - From January 2013, rigorously apply sanctions on banks in breach of regulatory and prudential standards. - Update by end-September 2013 the situation of banks based on 2012 end-year results; produce a report on banks’ performance and solvency, including an update of the last stress testing. - Move towards international prudential standards: finalize a study on haircut of guarantees by December 2013; revise liquidity ratio to include off-balance sheet transactions; adopt a more forward-looking approach and establish consolidated prudential rules. - Strengthen supervision capacity by significantly increasing dedicated human and financial resources; undertake an on-site general inspection of at least one large local bank (first since 2006) and at least four credit risk inspections in other banks; strengthen onsite and offsite inspection methodology. - Crisis management and bank resolution: - Develop a mechanism defining respective roles of the CBT and the Ministry of Finance in a financial crisis and create a special bank resolution regime. - Draft banking law currently being prepared will describe these new mechanisms in detail. ### Structural reforms, business climate, labor market, and regional development - Structural reform program focus: improve the business climate and promote a competitive private sector that generates inclusive growth and reduces unemployment and regional disparities. - Development model shift: - Modify existing development model to be more inclusive and balanced and less dependent on low-value added exports requiring unskilled labor. - Strengthen social safety nets and prioritize public investment in marginalized regions, accompanied by decentralization/deconcentration and objective criteria for selecting projects. - Business climate and competitiveness: - Adopt an investment code to ensure greater equity between onshore and offshore sectors and include a simplified and transparent incentive system; tax measures to be incorporated into the tax code in parallel with the investment code. - Reduce administrative constraints and authorization, limit discretionary decisions, and reduce monopolistic and oligopolistic behavior. - A revised competition law will be adopted in 2013. - Labor market reforms: - New social contract signed on January 14, 2013 with employers and trade unions to serve as a common social roadmap. - Organization of a permanent council for tripartite social dialogue in 2013 agreed; establishment of an insurance fund to cover loss of employment for economic reasons. - Broad consultation planned to discuss new employment strategy under preparation. - Medium-term priorities include reforming the labor code to promote greater flexibility and reduce structural asymmetry of skills prevailing on the market. *IMF staff report excerpt (content unit: _cr13161 - 13.)* ### 22. We are aware of the crucial role or reliable statistical information in the preparation, ### _cr13161 - 22. We are aware of the crucial role or reliable statistical information in the preparation, ### Statistical transparency and capacity strengthening - Commitments: - Continue to publish regularly the results of surveys on leading indicators and economic developments, employment and households. - Undertake, with EUROSTAT, a full diagnostic of the statistical system to evaluate and reinforce the capacity of the national statistical system. - With IMF technical assistance, plan to strengthen national accounts data (notably the demand-side) and the balance of payments. - Establish a mechanism for improving and strengthening training in the statistical area to buttress the statistical function in different ministries. ### Quantitative performance criteria and indicative targets (summary items as reported) - Quantitative Performance criteria (as shown in Table 1 header lines): - 1. Floor on the primary balance of the central government excluding grants /3-2,168-37-532-4,318 - 2. Ceiling on net domestic assets of the Banque Centrale de Tunisie (Stock)-1,332-829-196-1,084 - 3. Floor on net international reserves of the Banque Centrale de Tunisie (Stock) /47,9376,6676,7518,066 - Continuous Performance criteria: - 4. Ceiling on the accumulation of new external debt payment arrears by the central government...0.00.00.0 - Quantitative Indicative Targets: - 5. Social Spending 5/1,2517941,1911,588 - 6. Ceiling on the accumulation of new domestic arrears ...0.00.00.0 - Program assumptions on which adjusters are calculated in case of deviations: - Disbursement of public external Financing on a cumulative basis (in millions of US$)4105202,239 - Public Debt service (interest and amortization) on a cumulative basis (in millions of US$)9561,1691,387 - Bank recapitalization (in millions of TD)500 - Program exchange rate TD/ U.S. dollars 1.55235 ### Structural benchmarks (selected objectives and dates) - I. Financial sector - Adoption by the Council of Ministers of the strategic vision of the government's future role in banks, on the basis of the preliminary results from the audit of public banks. — Objective: Financial sector stability — Mid-September 2013 - Approval of the new reporting system architecture covering bank-related accounting, financial, and institutional functions. — Financial sector stability — Aug-13 - General on-site inspection of one major bank and inspection of the credit risks of four other banks. — Financial sector stability — Dec-13 - Presentation to the board of the CBT of a study concerning the impact on banks of liquidity ratio changes toward international standards. — Financial sector stability — Dec-13 - II. Fiscal policy - Approval by the Council of Ministers of the corporate tax reform announcing the convergence of the tax rates of onshore and offshore sectors for 2014 and identification of countervailing measures to ensure a neutral impact on revenues. — Minimization of distortions, and tax fairness and simplification — Jul-13 - Adoption of a Ministry of Industry decree approving a new automatic fuel pricing formula. — Lower energy subsidies — Aug-13 - Submission to the Council of Ministers of a new targeted household support program to accompany the reform of generalized energy subsidies. — Protection of society's most vulnerable segments — Aug-13 - Merge at the level of the large taxpayer unit the management, tax collection, and control of large enterprises. — Broadening of the tax base — Sep-13 - Finalize the audit of the electricity company (STEG) and of the petroleum refinery company (STIR). — Lower fiscal risks — Dec-13 - III. Monetary and exchange rate policy - Publication of a circulaire by the CBT that announces a haircut on all loans used as collateral for refinancing operations at the central bank. — Enhancement of the monetary transmission mechanism — Jul-13 - Ensure that the proportion of the refinancing volume at the CBT backed by government securities is at least 10 percent for each bank — Enhancement of the monetary transmission mechanism — Aug-13 - Implementation of an electronic bank interlinking platform and launch of the Market Makers Agreement. — Greater exchange rate flexibility — Oct-13 - Ensure that the proportion of the refinancing volume at the CBT that is backed by government securities is at least 20 percent for each bank — Enhancement of the monetary transmission mechanism — Dec-13 - IV. Structural reforms/private-sector development - Adoption of the Investment Code (tax measures will be referred to in the tax code). — Support for balanced growth driven by the private sector — Jul-13 ### Key definitions and measurement rules (Technical Memorandum of Understanding, Attachment II) - General: - Quantitative performance criteria and indicative benchmarks are defined in Table 1 of the MEFP attached to the Letter of Intent dated May 24, 2013. - For program purposes, all assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” with the exception of items affecting the government’s budgetary accounts, which will be measured at current exchange rates. - For the SDR, the program exchange rate is 1SDR = 2.38852 Tunisian dinars. - Monetary gold: - Monetary gold assets will be valued at the price of 0.6498 dinar per gram of gold as established in the decree No. 86-785 of August 18, 1986. - The stock of gold is 6.73 tons (6739902 grams) on December 31, 2012. - Net international reserves (NIR) of the CBT: - NIR defined as difference between the CBT’s reserve assets and its liabilities in foreign currency to nonresidents. - Reserve assets include gold, SDR assets, reserve position at the IMF, convertible foreign currencies, liquid balances held outside Tunisia, and negotiable foreign securities and bills purchased and discounted. - Liabilities include commitments to sell foreign currencies associated with financial derivative transactions, any portion of CBT’s assets used as collateral, IMF and Arab Monetary Fund (AMF) credits outstanding, and deposits at the CBT of international organizations, foreign governments, and foreign nonbank institutions. Government’s foreign currency deposits at the CBT are not included in liabilities; neither is any SDR allocation received after May 15, 2013. - All debt instruments issued in foreign currency by the CBT on behalf of the government before May 15, 2013 are excluded as liabilities of the CBT. Debt instruments issued after May 15, 2013 will be treated as CBT liabilities unless the prospectus and a protocol between the CBT and the Ministry of Finance specify otherwise. - Residents’ deposits in foreign currency at the CBT are treated via an adjustment principle to preserve accounting consistency; at end-December 2012 the value of the stock of deposits in foreign currencies of residents at the CBT was US$1,488.608 million at the program exchange rate. - On December 31, 2012, the value of the stock of net international reserves was US$7.937 billion, with the stock of reserve assets equal to US$8.645 billion and the stock of CBT liabilities in foreign currency equal to US$730.399 million (at program rates). - Net domestic assets (NDA) of the CBT: - NDA defined as the difference between the monetary base and the net foreign assets of the CBT. - Monetary base includes (i) fiduciary money (money in circulation outside the banks and cash balances of commercial banks); (ii) deposits of commercial banks at the central bank (including foreign currency and deposit facility); and (iii) deposits of all other sectors at the central bank. - Net foreign assets defined as the difference between the CBT’s gross foreign assets (including foreign assets not part of reserve assets) and all foreign liabilities of the CBT. Valued at the program exchange rate. - Primary balance of the central government (excluding grants) — floor: - Measured on a financing basis (cash basis). Primary fiscal balance (excluding grants) = negative sum of: (i) total net external financing; (ii) privatization receipts; (iii) net domestic bank financing; (iv) net domestic nonbank financing; plus (v) interest on domestic and external debt paid by the central government and less external budgetary grants received by the central government. - Definitions: - Total net external financing = new loan disbursements less repayments of principal (includes project and budgetary loans). - Privatization receipts = government receipts from sale of any government asset (only receipts in foreign currency included for the NIR adjustor). - Net domestic bank financing = change in net bank loans to the central government (in Tunisian dinars and foreign currency) and change in central government deposits at the CBT (detailed list of included accounts provided). - Net domestic nonbank financing = change in stock of government securities held by nonbanks and any other central government borrowing from nonbanks, less repayments; Treasury bills and other public debt instruments taken at nominal/face value shown on institutions’ balance sheets (excluding accrued interest). - Accumulation of external arrears (ceiling): - Arrears on external debt payment defined as late payments (principal and interest) on external debt or guarantees by the central government or the CBT after 90 days from the due date or the expiration of the applicable grace period. ### Program exchange rates (Program Exchange Rates, Tunisian Dinar per FX Currency, Accounting Exchange Rate of the CBT, December 31, 2012) - Currency — value as reported (exact text preserved): - Algerian dinar 100.19860 - Saudi riyal104.13930 - Canadian dollar11.56175 - Danish krone10027.44020 - USA dollar11.55235 - British pound sterling12.50510 - Japanese yen100018.02650 - Moroccan dirham101.83535 - Norwegian krone10027.73730 - Swedish krona102.37995 - Swiss franc1016.95450 - Kuwaiti dinar15.51955 - United Arab Emirates dirham104.22660 - Euro12.04725 - Libyan dinar11.23740 - Mauritanian ouguiya 1000.51230 - Bahraini dinar14.11770 - Qatari riyal104.26380 *Source: Excerpt from Attachment II. Technical Memorandum of Understanding, Tunisia program documentation.* ### 24. For program purposes, arrears on domestic debt payment are defined as amounts owed to ### 24. For program purposes, arrears on domestic debt payment are defined as amounts owed to ### Definition of domestic debt payment arrears - Arrears on domestic debt payment are defined as amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or as defined in the contractual grace period, if any). - If no maturity date is specified, arrears are defined as amounts owed to domestic creditors that remain unpaid 90 days or more after the date on which the contract was signed or upon receipt of the invoice. ### H. Indicative Floor on Social Expenditures - Social expenditures are defined as capital expenditures (development expenditures) on: - education, - health, - social transfers to needy families, - the AMEL employment training program (and university scholarships), - UTSS indemnities, - family allocation, - development expenditures of the Ministry of Women and Family Affairs, Youth and Sports and Social Affairs. - Exclusions: all current expenditures (“dépenses de gestion”) of the above-mentioned sectors and programs, as well as food and energy subsidies, are excluded. ### I. Adjustment Factors for the Program Performance Criteria - Net international reserves (NIR) targets are adjusted upward (downward) if the cumulative sum of the following is greater (lower) than the levels indicated: - net external financing of the central government (excluding project loans and any access to capital markets), - budgetary grants, - privatization receipts received in foreign currency, - increase (decrease) in residents’ foreign currency deposits at the CBT. - NIR targets are also adjusted upward (downward) if the total amount of cash payments on external debt service of the government is greater (lower) than the levels included in the table. - Table of Assumptions on Adjustment Factors of Quantitative Performance Criteria (Millions of US dollars) — values shown as in source: - 31-Dec-12 / 2013 Q1 / 2013 Q2 / 2013 Q3 / 2013 Q4 / Year - Government external financing: 100.1 / 309.8 / 109.8 / 1719.4 / 2239.1 - Project loans: 100.1 / 109.8 / 109.8 / 119.4 / 439.1 - Multilateral donors: 0.0 / 0.0 / 0.0 / 800.0 / 800.0 - AFDB: 300.0 / 300.0 - World Bank Group: 500.0 / 500.0 - Bilateral donors: 0.0 / 200.0 / 0.0 / 0.0 / 200.0 - Turkish loan: 200.0 / 200.0 - Financial Market Access: 0.0 / 0.0 / 0.0 / 799.9 / 799.9 - Sukuk 400.0 / 400.0 - Financial markets+additional Samurai bond issuance 399.9 / 399.9 - Budget grant: 21.1 / 0.0 / 0.0 / 227.1 / 248.1 - Privatization receipts: 0.0 / 50.0 / 50.0 / 100.0 / 200.0 - Government external debt service: 640.7 / 315.0 / 213.1 / 218.3 / 1387.2 - Amortization: 524.0 / 181.7 / 116.4 / 149.6 / 971.6 - Interest: 116.7 / 133.3 / 96.7 / 68.8 / 415.5 - Resident deposits at the BCT: 1,488.6 - Net domestic assets (NDA) targets adjustments: - NDA targets will be adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the cumulative sums (net external financing excluding project loans and market access; budgetary grants; privatization receipts in foreign currency; increase/decrease in residents’ foreign currency deposits at the CBT) are lower (greater) than the table levels. - NDA targets are also adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the total amount of cash payments on external debt service are greater (lower) than the table levels. - The NDA ceiling will be converted into Tunisian dinars at the program exchange rate. - Additional NDA adjustment: - Ceilings on the NDA of the CBT will be adjusted downward or upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement. - Primary balance adjustment: - The floor on the primary balance of the central government, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks. - The recapitalization amounts for 2013 are assumed to be 500 million dinars (Q4 2013). ### J. Monitoring and Reporting Requirements - Performance will be monitored using data supplied to the IMF by the Tunisian authorities; authorities will promptly transmit any data revisions. - Key reporting items, periodicity, and delay (as in source): - GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices. — q / 45 - Inflation: Including the underlying inflation of non-administered and administered prices. — m / 14 - Fiscal sector (periodicity / delay): - Tax and nontax revenue of the central government decomposed on the basis of main tax and nontax revenues items — m / 30 - Total expenditures: current and capital, transfers and subsidies. — m / 30 - Capital expenditure: by type of financing: domestic and external (differentiating loans and grants), and by main sectors and projects (agriculture, social, infrastructure). — m / 45 - Current expenditure: by type of expenditure: wages, goods and services, transfers. — m / 45 - Social expenditure — q / 45 - Debt and government accounts: - Stock of domestic and foreign debt: of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency (in dinars and foreign currency with the equivalent in domestic currency). — q / 30 - Disbursement of foreign loans: Breakdown into project loans and budgetary loans by principal donor and identifying the most important projects to be financed in the original currency and its equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction. — (periodicity not separately specified) - Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities. — m / 30 - Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency) — (periodicity not separately specified) - External and domestic debt service: amortization and interest. — m / 60 - External payment arrears: external debt contracted and guaranteed by the government. — q / 30 - Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors. — q / 45 - Consolidated accounts of the central government at the CBT: The stock of deposits will be broken down as follows: (i) Treasury current account; (ii) special account of the Tunisian government in foreign currency and its equivalent in dinars; (iii) miscellaneous dinar accounts; (iv) loan accounts; (v) grant accounts; (vi) FONAPRA-FOPRODI accounts; (vii) current accounts of the U.S. Treasury; and (viii) ordinary accounts and accounts pending adjustment (including in foreign currency pending allocation) with a breakdown between the amount in foreign currencies and its equivalent in domestic currency. — m / 30 - External sector (periodicity / delay): - Imports of Petroleum Products: average import price of main petroleum products. — m / 30 - Foreign trade: imports and exports of goods, including volumes and prices, by sector. — m / 30 - Deposits: Stock of foreign currency deposits, according to the residence of the holder. — m / 14 - External debt: Debt service (amortization and interest) of institutional agents by instrument and at type of currency (in foreign currency and its equivalent in dinars). — q / 30 - External debt: Stock of external debt of institutional agents by instrument and type of currency (in foreign currency and its equivalent in dinars) (in conformity with our obligations under SDDS). — m / 30 - Overall net external position of Tunisia (in conformity with our obligations under SDDS). — q / 90 - Balance of payments: Prepared by the CBT — q / 30 - Monetary and financial sector (periodicity / delay): - CBT accounts at the current exchange rate: detailed table including the monetary system. — m / 30 - CBT accounts at the program exchange rate: Including net international reserves. — m / 30 - Foreign exchange market operations: Interbank market, retail market and wire transfers for CBT purchases on the retail market, CBT sales and purchases on the foreign exchange market, foreign exchange operations and outright forward sales, stock of CBT foreign exchange operations, including foreign exchange operations and outright forward sales. The terms and conditions of any new transactions (including the extension or renewal of existing terms and conditions) will also be provided. — (periodicity not separately specified) - CBT foreign exchange reserves, breakdown by currency and by instrument, and the institutions where such reserves are held. — m / 30 - Banks’ financial soundness ratios: Indicators of financial soundness and regulatory capital adequacy ratios of the banking system, including the quality of assets and the profitability of banks. The indication of the different banks is optional. — m / 30 - Direct refinancing of commercial banks by the CBT: Breakdown by bank. — m / 14 - Interest rates: Deposit rates, interbank rates, and lending rates. — w / 14 - Other information to be reported: - 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. A copy of official notices of changes in gas and electricity rates and any other surcharge (automatic or structural), as well as the prices of petroleum products and levies/surcharges on gas and petroleum. — d / 3 ### Press Release: IMF Executive Board Approves a 24-month US$1.74 Billion Stand-By Arrangement with Tunisia (June 7, 2013) - Arrangement details: - 24-month Stand-By Arrangement for an amount equivalent to SDR 1.146 billion ( US$1.74 billion). - An amount equivalent to SDR 98.8 million (about US$150.2 million) is available for immediate disbursement; remaining amount phased over the program, subject to eight program reviews. - Regular access to IMF resources amounting to 400 percent of Tunisia’s quota. - Executive summary of IMF assessment and policy direction: - Tunisia embarked on a moderate economic recovery while facing a challenging international economic environment and pursuing a political transition. - Key challenges: a fragile banking sector, pressing social demands, widespread regional disparities, high unemployment, widening external and fiscal deficits. - Program aims: strengthen fiscal and external buffers, foster higher inclusive growth, protect the most vulnerable. - Measures already taken: tighter monetary policy, greater exchange rate flexibility, reduced subsidy cost. - Planned fiscal reforms: wage restraint, subsidy reform, strengthening social safety nets, comprehensive tax policy and revenue administration reform. - Banking sector priorities: audit of public banks, strengthening banking supervision, aligning prudential norms with international standards, improving data quality, developing a bank resolution mechanism. - Structural reforms: streamline fiscal incentives and regulatory barriers, a new investment code, corporate tax reform, reduction in red tape. ### Program Summary and Objectives - Overriding objective: stabilizing the economy while laying foundations to support growth and protect the vulnerable. - Key elements: - Strengthen fiscal and external buffers via an appropriate fiscal policy, prudent monetary policy, and greater exchange rate flexibility. - Lay building blocks for growth by addressing banking sector vulnerabilities, engaging in medium-term fiscal consolidation to improve expenditure composition, and implementing an ambitious structural reform agenda to promote private-sector development, lower regional disparities, and reduce state intervention. - Protect the most vulnerable by strengthening social assistance mechanisms and undertaking a systematic assessment of the social impact of envisaged reforms. ### Recent Developments and Selected Economic Indicators (as presented) - Recent developments: - Real GDP contracted by 2 percent in 2011; FDI and tourism declined by more than 30 percent year-on-year; unemployment rose to record levels. - Moderate recovery in 2012 with real GDP growth reaching 3.6 percent in 2012. - Deteriorating current account deficit financed by sustained donor financing, strengthened FDI and market access, which helped increase reserves (but to a level still below 2010). - Fiscal space reduced to meet social and investment needs; public debt remained at sustainable levels. - Key challenges reiterated: fragile banking sector, widespread social and economic disparities, high youth unemployment. - Tunisia: Selected Economic Indicators, 2009-14 (select figures preserved exactly as in source) - Population: 10.7 million (2012) - Per capita GDP: US$4232 (2012) - Quota: SDR 286.5 million - Poverty rate: 12 percent (2010) - Literacy rate: 78 percent (2011) - Real GDP: 2009 3.1 / 2010 2.8 / 2011 -1.9 / 2012 3.6 / 2013 4.0 / 2014 4.5 - GDP deflator: 2009 3.3 / 2010 4.7 / 2011 5.1 / 2012 5.3 / 2013 5.6 / 2014 4.4 - Gross national savings (percent of GDP): 2009 22.1 / 2010 21.8 / 2011 16.5 / 2012 17.3 / 2013 17.3 / 2014 19.0 - Gross investment (percent of GDP): 2009 24.9 / 2010 26.6 / 2011 24.1 / 2012 25.4 / 2013 24.7 / 2014 25.0 - Unemployment rate (end of period): 2009 13.3 / 2010 13.0 / 2011 18.9 / 2012 16.7 - CPI, average: 2009 3.5 / 2010 4.4 / 2011 3.5 / 2012 5.6 / 2013 6.0 / 2014 4.7 - CPI, end of period: 2009 4.0 / 2010 4.1 / 2011 4.2 / 2012 5.9 / 2013 5.3 / 2014 5.0 - Central government revenue (excl. grants) (percent of GDP): 2009 23.1 / 2010 23.3 / 2011 24.2 / 2012 23.1 / 2013 23.8 / 2014 24.0 - Expenditure and net lending (percent of GDP): 2009 25.8 / 2010 23.9 / 2011 27.7 / 2012 28.5 / 2013 31.1 / 2014 30.3 - Fiscal balance (excl. grants) (percent of GDP): 2009 -2.7 / 2010 -0.6 / 2011 -3.5 / 2012 -5.4 / 2013 -7.3 / 2014 -6.4 - Structural fiscal balance 1/: 2009 -2.3 / 2010 -1.1 / 2011 -2.9 / 2012 -4.7 / 2013 -5.0 / 2014 -3.8 - Total government debt (foreign and domestic) (percent of GDP): 2009 42.8 / 2010 40.4 / 2011 44.0 / 2012 44.0 / 2013 45.3 / 2014 49.5 - Broad money (M3 of the financial system): 2009 13.0 / 2010 12.1 / 2011 9.1 / 2012 8.4 / 2013 12.6 / 2014 12.0 - Credit to the economy: 2009 10.3 / 2010 19.6 / 2011 13.4 / 2012 8.7 / 2013 10.8 / 2014 11.7 - Money market rate (end of period) 2/: 2009 4.10 / 2010 4.12 / 2011 3.53 / 2012 3.30 - Current account balance (percent of GDP, excl. grants): 2009 -2.8 / 2010 -4.8 / 2011 -7.3 / 2012 -8.1 / 2013 -7.5 / 2014 -6.0 - Exports of goods, f.o.b. (in US$): 2009 -24.8 / 2010 14.0 / 2011 8.5 / 2012 -5.2 / 2013 6.5 / 2014 5.6 - Imports of goods, f.o.b. (in US$): 2009 -21.9 / 2010 15.9 / 2011 7.7 / 2012 1.5 / 2013 5.1 / 2014 3.7 - FDI (percent of GDP): 2009 3.3 / 2010 3.0 / 2011 0.9 / 2012 3.9 / 2013 2.1 / 2014 2.5 - Gross official reserves (US$ billions, end of period): 2009 10.6 / 2010 9.5 / 2011 7.5 / 2012 8.6 / 2013 9.0 / 2014 10.8 - Gross reserves (months of imports) 3/: 2009 5.2 / 2010 4.4 / 2011 3.4 / 2012 3.8 / 2013 3.8 / 2014 4.2 - External debt (percent of GDP): 2009 49.4 / 2010 48.3 / 2011 47.8 / 2012 51.6 / 2013 51.1 / 2014 54.5 - GDP at current prices (TD millions): 2009 58,883 / 2010 63,397 / 2011 65,370 / 2012 71,332 / 2013 78,334 / 2014 85,465 - Notes: - 1/ Excludes banking recapitalization costs and one-off arrears payments for energy subsidies. - 2/ Latest data for current year. - 3/ End-of-year reserves over next year’s imports of goods and services. *Italic: IMF staff report content from the Tunisia Stand-By Arrangement documents as provided in the source.* ### 8.1 percent of GDP due to weak external demand, but has been in part financed by a sharp ### _cr13161 - 8.1 percent of GDP due to weak external demand, but has been in part financed by a sharp ### Program objectives and near-term outlook - Program built around maintaining macroeconomic stability during the political transition and implementing an ambitious structural reform agenda (MEFP ¶ 10). - Growth projections: - "around 4 percent in 2013" - move "closer to its potential of 5 percent over the medium term (MEFP ¶ 10)" - Inflation: "would stabilize around 4.5 percent" - External/fiscal buffers: "strengthened" - Balance of payments / reserves: - foreign exchange reserves increased to "3.8 months of imports by the end of 2012" - Risks: - Downside risks from domestic or external conditions; upside risks from "return of confidence following the upcoming elections" ### Fiscal policy: objectives, measures, and targets - Medium-term fiscal targets: - overall deficit to "2.5 percent of GDP by 2018" - debt-to-GDP ratio to "44 percent" - 2013 fiscal stance: - supportive of transition, financing bank recapitalization and repayment of arrears "(1.5 percent of GDP)" - support for investment in marginalized regions - overall fiscal deficit (excluding grants) could reach "7.3 percent of GDP" - structural deficit (excluding on/off operations) will amount to "5 percent of GDP" - Subsidy reform strategy (two tracks): - Track 1: progressive reduction of budget cost of subsidies with a better targeted compensation system - recent increase in fuel prices and electricity tariffs "by around 7 percent in March 2013" is estimated to generate total savings of "about 1 percent of GDP" - increase in cash transfers to low-income households; new household compensation strategy under preparation with World Bank TA - new automatic fuel pricing formula to be introduced in "early 2014" - Track 2: broad public communication and national dialogue to build consensus - Tax reform measures: - broadening the tax base, rationalizing exemptions - reform of corporate income tax in coordination with a new investment code - examine reducing the gap in corporate income tax between onshore and offshore sectors "in a revenue neutral way" - comprehensive modernization program for tax administration, building on a preliminary diagnostic carried out with Fund TA - Expenditure control and governance: - contain current expenditure, limit future public sector wage increases - strengthen public financial management, budgetary framework, governance, transparency, and accountability - studies on pension system viability initiated; reforms to be decided after consultation with stakeholders ### Monetary and exchange rate policies - Monetary policy actions and stance: - CBT increased its reference interest rate "from 3.5 to 4 percent between August 2012 and Mach 2013" - policy rate judged "appropriate given the negative output-gap"; CBT ready to further tighten if core inflation rises rapidly - phasing out the massive liquidity injection used after the revolution, alongside improved liquidity forecasting and management - Measures to improve monetary transmission and reduce banks’ reliance on CBT: - eliminated in March 2013 the ceiling on creditor interest rates for all maturities - plan to revise legislation on excessive lending rates - introduce a new haircut system on bank loans eligible for CBT refinancing - increase the share of government securities as collateral for banking system refinancing - increase open market operations to improve the functioning of the interbank market - consider establishing a lender of last-resort for solvent but illiquid banks - Exchange rate management: - moved toward a more market-determined exchange rate; CBT changed intervention mode to reflect interbank exchange rates rather than a fixed basket reference - CBT limiting interventions to smoothing excessive exchange rate fluctuations - planned market infrastructure improvements: electronic bank interlinking platform and a market makers agreement - commitment to maintain an adequate level of international reserves in conformity with program objectives - Other measures: - temporary 50 percent reserve requirement on consumer loans outstanding (to curb imports of consumer goods) reduced to "30 percent" and to be eliminated as circumstances permit ### Financial sector: vulnerabilities and reform measures - Priority: address banking sector vulnerabilities via restructuring and recapitalization, dealing with nonperforming loans, strengthening regulation and supervision, and developing a crisis management and bank resolution regime (MEFP ¶ 19) - Strategic audit: - independent strategic audit of three public banks representing "about 40 percent of the total banking system assets" has started to inform restructuring strategies (merge, maintain, reduce state participation, or resolution) - Recapitalization needs: - authorities willing to mobilize necessary resources for recapitalization in the upcoming two years - recapitalization could represent "2.6 percent of GDP" according to 2012 FSSA estimates, assuming private shareholders do not participate - final amount depends on chosen restructuring/resolution options - Asset Management Company (AMC): - AMC to facilitate cleaning up banks' balance sheets and encourage bank lending - AMC legal framework being drawn up with World Bank assistance; to be submitted to the National Constituent Assembly after endorsement by an inter-ministerial committee "by end-July 2013" - Strengthening supervision and regulation: - require banks to introduce collective provisioning and tighten risk concentration ratios - increase minimum capital adequacy ratio "from 8 to 10 percent by 2014" - CBT has increased human and financial resources; Fund TA provided to strengthen the supervision department - new reporting system to improve banking data quality covering accounting, financial and institutional functions - CBT and Ministry of Finance working toward establishing crisis management and special bank resolution regime to be included in forthcoming banking law revision ### Structural reforms for growth and inclusion - Ambitious program to promote employment and inclusive growth and address social and regional disparities - Reforms under consideration include: - review of the investment code to create a simplified and more transparent incentive system and reduce the dichotomy between onshore and offshore sectors - reform of the competition law to stimulate private initiative - improve governance of public enterprises and enhance SMEs’ access to finance - address obstacles to higher employment, especially for youth: tackle skill mismatches, expand vocational training, improve regional infrastructure - build on a new social contract with labor unions signed in early 2013; broader consultations planned to consider reform of the labor code and a future employment strategy ### Conclusion - Despite democratic transition challenges and an adverse external environment, the Tunisian economy is described as "on a recovery path, underpinned by solid fundamentals and sound economic policies" in a new environment of democracy, freedom, and good governance. - Authorities committed to completing the political transition and restoring growth and employment, implementing a far-reaching reform agenda, and remaining closely engaged with the IMF for successful program implementation. *International Monetary Fund, Tunisia staff report and MEFP content as provided in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2013/_cr13161.pdf_