## _cr14123 - EXECUTIVE SUMMARY ## Source details **Canonical URL:** [_cr14123 - EXECUTIVE SUMMARY](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14123.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14123.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14123.pdf.json) --- ### Context and Program Status - Stand-By Arrangement (SBA) approved June 7, 2013: 24-month SBA equivalent to 400 percent of quota (SDR 1.15 billion or about $1.75 billion). - Disbursements to date: SDR 427.92 equivalent to $659 million. - Completion of the third review will make SDR 145.08 million (about $225 million) available. - Program pillars: (i) achieve short-term macroeconomic stability; (ii) lay the foundation for stronger and more inclusive growth; and (iii) protect the most vulnerable. - Date on file: April 11, 2014. ### Recent Economic Developments — Growth, Inflation, External Sector, and Reserves - Real GDP growth: - 2013 revised to 2.6 percent. - Q4 2013 growth: -0.3 percent q-o-q. - 2014 projection: 2.8 percent (see medium-term potential of 4.5 percent). - Unemployment: - 15.3 percent at end-December 2013. - Youth and graduate unemployment: about 32 percent. - Inflation: - Headline inflation: 5.5 percent (y-o-y) in February 2014, down from 6 percent at end-2013. - Core inflation: 4.5 percent (from 4.7 percent in December 2013). - External position and reserves: - Current account deficit: about 8.4 percent of GDP in 2013; projected to narrow to 7.2 percent of GDP in 2014 and 6.3 percent of GDP in 2015. - Reserves: increased by an additional $500 million to $7.7 billion (about 3.5 months of imports) in 2013; gross official reserves (US$ billions, eop) series: 9.5, 7.5, 8.7, 7.7, 9.0, 10.1 (2010–2015 as shown). - Reserve coverage (months of next year's imports): 4.4, 3.4, 4.0, 3.5, 3.9, 4.3 (2010–2015). - Exchange rate and markets: - Early 2014 appreciation: 4 percent vs. U.S. dollar and 5 percent vs. euro since the beginning of the year. - Sovereign spreads declined overall; stock market rose but banking stocks weighed recently. ### Fiscal Developments, Composition, and Targets - Overall fiscal deficit: - Deteriorated to 6.1 percent of GDP in 2013 (up from 5.7 percent in 2012). - Underlying fiscal position on a payment order basis improved to 4.6 percent of GDP (from 5 percent of GDP in 2012) after corrections including 1.1 percent of GDP in arrears repayment. - 2014 budget and measures: - Approved 2014 budget incorporates a wage freeze (0.4 percent of GDP) and savings in energy subsidies (0.8 percent of GDP). - Authorities committed to salary savings (0.2 percent of GDP from deferred recruitment) and lower unallocated expenditures (0.5 percent of GDP). - Authorities decided to further reduce the structural fiscal deficit to 4.9 percent of GDP in 2014. - New measures amounting to 0.4 percent of GDP, mostly revenue-side. - Selected fiscal indicators (percent of GDP, 2010–2014 series presented): - Revenue: 23.1, 23.4, 23.6, 22.6, 23.1 - Tax revenue: 21.0, 21.1, 21.3, 21.3, 21.8 - Expenditure and net lending: 28.8, 29.5, 29.7, 29.7, 29.9 - Wages and salaries: 12.2, 12.4, 12.5, 12.4, 12.5 - Transfers and subsidies: 7.0, 7.6, 7.8, 7.0, 7.0 - Capital expenditure: 6.6, 4.9, 4.9, 5.2, 5.2 - Central government deficit (excl. grants): -5.7, -6.2, -6.1, -7.1, -6.8 - Structural fiscal balance: -5.3, -4.6, -4.6, -5.2, -4.9 - General government debt: 44.5, 45.0, 44.7, 51.7, 50.9 ### Program Implementation and Performance Criteria - Overall assessment: program is broadly on track. - Monetary targets: - End-December PC on NDA was missed by a smaller margin than previously estimated; end-March PC on NDA estimated met by a large margin. - End-December NIRs stood at $5.5 billion; end-March PC expected met by a small margin after adjustment for delayed World Bank disbursement. - Fiscal targets: - Cash-basis primary balance for end-December exceeded program target by a large margin due to spending under-execution (1.5 percent of GDP from lower investment) and deferral of cash payments (about 3.3 percent of GDP) to early 2014. - End-March fiscal target estimated to have been met. - Indicative targets and social spending: - Indicative target on social spending missed for all 2013 test dates; new social programs in 2014 expected to increase social expenditures. - End-March ceiling on current spending expected to be met by a large margin due to lower-than-expected payments on energy subsidies in Q1 2014. ### Monetary Policy, Banking Sector, and Financial Stability - Monetary stance and operations: - Policy rate: effective money market rate unchanged at 4.75 percent; policy rate increased by 50 basis points in December 2013. - Central bank lending: refinancing increased by TD 504 million in January 2014 to more than TD 5 billion (including OMOs), highest since October 2012. - Private sector credit growth subdued: 8.1 percent y-o-y in January 2014. - Banking sector vulnerabilities: - Overall capital adequacy ratio declined from 11.8 percent in 2012 to about 9.2 percent in 2013 after conservative collateral haircuts. - Provisioning ratio increased to about 60 percent (from 46 percent). - Six banks, covering 42 percent of banking assets, are below new minimum capital requirements (increased from 8 percent to 9 percent this year). - NPLs: about 15 percent of total loans, and 20 percent when including NPLs held by banks’ affiliates. - Immediate banking priorities: - Address minimum capital adequacy shortfalls; CAR requirement: "CAR of 9 percent this year but Basel II requirement of 10 percent by end-year". - Finalize audits of public banks; audits of two largest public banks indicate contingent losses around 0.7 percent of GDP and recapitalization needs estimated at least 1.5 percent of GDP (budget accounted for 1.2 percent of GDP), FSSA estimate at 2.6 percent of GDP. - Strategy for public banks by mid-April; restructuring plans for main public banks by end-July; governance decree to allow fully commercial management. - Establish an Asset Management Company (AMC) to remove tourism sector bad debt; tourism NPLs: about 54 percent of the sector’s loan portfolio and a quarter of the banking system’s NPLs. ### Structural Reform Progress and Benchmarks - Structural benchmarks progress through end-March and reprogramming: - Four of eight end-March SBs met (electronic platform; market makers agreement; Treasury Single Account; impact study on lending rate cap). - Haircut circular issued (to enter into force end-June with lender of last resort facility). - Missed/reprogrammed SBs: household targeting strategy (new SB end-June), investment code decrees (new end-September SB), tax administration modernization plan (new end-June SB), CBT regulation on loan haircut reprogrammed to end-June. - Heavy legislative calendar could further delay approval of key laws: Investment code, Bankruptcy law, Competition Law, Asset Management Company, Public Private Partnership. ### Growth Outlook, Risks, and Scenarios - Growth projections: - Real GDP: projected to expand by 2.8 percent in 2014, rising toward potential of 4.5 percent over the medium term. - Medium-term growth projection scenario: 4.5 percent for 2015–2019 in illustrative scenario lines. - Inflation forecast: - Headline inflation expected to decline to 5.3 percent (y-o-y) at end-2014. - External position: - Current account deficit projected to narrow to 7.2 percent of GDP in 2014 and to 6.3 percent in 2015. - Increasing foreign financing and gradual FDI recovery to help finance deficits and increase reserves. - Main risks: - Regional and domestic security tensions; setbacks in political transition; weaker activity in major trading partners (notably Europe); delays in external financing; increased short-term corporate debt rollover risk. - Debt dynamics and stress tests: - Public debt baseline: 44.5 percent of GDP; projected to increase to about 54 percent of GDP by 2016, then decline to about 51 percent by end-2019. - Adverse scenarios: - No policy change: debt could rise to 60.8 percent of GDP by 2019. - One-off 10 percent of GDP shock to contingent liabilities: debt about 64 percent of GDP in 2016, ~60 percent by 2019. - Permanent negative growth shock: debt about 64 percent of GDP by end-2019. - One-time 30 percent real depreciation: public debt-to-GDP ratio rises to about 69 percent initially, declining to 65 percent by 2019. - External debt vulnerability: one-time 30 percent real depreciation raises external debt ratio to more than 84 percent of GDP in bound test. ### Policy Priorities and Recommendations - Short-term stabilization: - Contain current expenditures; pursue prudent monetary policy; allow greater exchange rate flexibility. - Fiscal measures and safeguards: - Continue containing the wage bill (freeze, limited recruitments); eliminate subsidies to cement companies; further electricity tariff increases; increase fuel prices by 6 percent as of July 2014; protect vulnerable via lifeline electricity tariff (consumption < 100 kwh) and new social programs. - Staff urged cuts in non-essential current spending if revenue shortfalls occur while preserving social and capital expenditures. - Banking and financial sector reforms: - Improve banking regulation and supervision; adopt strategic orientation for public banks; finalize audits and restructuring plans; establish AMC; ensure compliance with CAR and liquidity norms; move to consolidated supervision. - Structural and medium-term reforms to boost inclusive growth: - Scale up public investments (improve procurement and execution); reform tax policy and revenue administration; accelerate public enterprise reform; improve business climate via Investment code, Competition law, Bankruptcy law, PPP framework. - Social protection: - Implement household targeting strategy ahead of fuel price increase; expand cash transfer beneficiaries from 220,000 to 250,000; increase school allowances by about 10 percent; introduce unique social identification number. - Monetary and exchange rate policy: - Stand ready to tighten policy if inflation or depreciation pressures rise; increase flexibility and move toward weekly FX auctions by end-2014 once prerequisites in place; limit FX sales to smoothing excessive fluctuations and buy FX opportunities to rebuild reserves above 100 percent of Fund’s risk weighted metric (four months of imports). ### Financing Outlook and Program Modality - Program financed for the next 12 months with assurances from multilateral and bilateral partners; future disbursements linked to reform progress. - Market issuance of $600 million expected by end-2014 (authorities seeking U.S. and Japanese guarantees). - Sukuk issuance expected in last quarter of 2014. - Contingency: authorities will consult with the Fund on alternative financing or policy adjustments if financing shortfalls emerge. - Tunisia’s capacity to repay the Fund: Fund credit outstanding projected to peak at 3.5 percent of GDP in 2015 (about 17.7 percent of gross international reserves). *International Monetary Fund — Executive Summary and staff report excerpts (April 11–25, 2014).* ### EXECUTIVE SUMMARY ### _cr14123 - EXECUTIVE SUMMARY ### Context - On June 7, 2013, the Executive Board approved a 24-month SBA in an amount equivalent to 400 percent of quota (SDR 1.15 billion or about $1.75 billion). - To date, SDR 427.92 equivalent to $659 million has been disbursed. - Program pillars: (i) achieve short-term macroeconomic stability; (ii) lay the foundation for stronger and more inclusive growth; and (iii) protect the most vulnerable. - The completion of the third review will make SDR 145.08 million (about $225 million) available. - Date on file: April 11, 2014. ### Background and Political-Economic Setting - Adoption of a new constitution and formation of a new technocratic government in January 2014 increased confidence in political prospects and economic reforms. - The protracted political stalemate of 2013 slowed the economic agenda and increased social tensions, including numerous strikes and workers’ demands. - Successful implementation of the Fund-supported program requires: government commitment, consensus among political parties backing it, capacity to push reforms past vested interests, and important external financing mostly from multilateral partners. ### Recent Economic Developments - Growth and unemployment - Real GDP growth in 2013 was revised slightly downward to 2.6 percent. - Fourth quarter 2013 growth was -0.3 percent q-o-q. - Unemployment rate: 15.3 percent in end-December 2013. - Unemployment among the young and graduates: about 32 percent. - Inflation - Headline inflation: 5.5 percent (y-o-y) in February 2014, down from 6 percent at end-2013. - Core inflation: 4.5 percent (from 4.7 percent in December 2013). - External sector and reserves - Current account deficit: about 8.4 percent of GDP in 2013. - Reserves increased by an additional $500 million to $7.7 billion (about 3.5 months of imports) due to gold revaluation and some exchange rate valuation gains. - Deposits at the Central Bank of Tunisia (CBT) from the Qatari National Bank and a European commercial bank helped keep reserves above three months of imports. - Exchange rate and financial markets - Exchange rate appreciated by 4 percent vis-à-vis the U.S. dollar and 5 percent against the euro since the beginning of the year (early 2014), reversing almost half of last year’s depreciation. - Sovereign spreads declined overall since the beginning of the year; the stock market rose but was recently weighed down by banking stocks. - Monetary conditions and credit - A 50 basis point increase in the policy rate in December 2013 left the effective money market rate unchanged at 4.75 percent. - Higher bank refinancing increased by TD 504 million in January 2014 to more than TD 5 billion (including OMOs), its highest level since October 2012. - Private sector credit growth remained subdued at 8.1 percent y-o-y in January 2014. - Banking sector vulnerabilities - Overall capital adequacy ratio declined from 11.8 percent in 2012 to about 9.2 percent in 2013 after new conservative haircuts on loan collateral. - Provisioning ratio increased to about 60 percent (from 46 percent). - Six banks, covering 42 percent of banking assets, have fallen below the new minimum capital requirements (increased from 8 percent to 9 percent this year). - Nonperforming loans (NPLs) remained stable at about 15 percent of total loans, and 20 percent once NPLs held by banks’ affiliates are accounted for. - Fiscal developments - Overall fiscal deficit deteriorated to 6.1 percent of GDP in 2013, up from 5.7 percent of GDP in 2012, driven by a decrease in capital expenditures to 4.9 percent of GDP and increases in the wage bill and subsidies. - Underlying fiscal position on a payment order basis improved to 4.6 percent of GDP (from 5 percent of GDP in 2012) after correcting for the cycle and one-off exceptional payments (e.g., 1.1 percent of GDP in arrears repayment). - Delays in external financing in the last quarter of 2013 (about 2 percent of GDP) and authorities’ preference for maintaining cash buffers at the CBT (about 2.3 percent of GDP) limited the deterioration of the overall cash deficit. - Public debt in 2013 remained broadly constant at 45 percent of GDP, with the share of foreign currency debt increasing to 64 percent. ### Program Implementation and Performance - Overall assessment: the program is broadly on track. - Monetary target - The end-December performance criterion (PC) on net domestic assets (NDA) was missed by a smaller margin than originally anticipated, due to lower credit to government linked to postponed budgetary payments and higher Treasury balances. - The end-March PC on NDA is estimated to have been met by a large margin. - Reserves - End-December NIRs stood at $5.5 billion, implying the PC was missed by a smaller margin than estimated in January 2014. - The end-March PC is expected to have been met by a small margin after adjustment for the World Bank disbursement delayed to Q2 2014. - Fiscal targets - Cash-basis primary balance for end-December was exceeded by a large margin relative to the program target due to spending under-execution (of which 1.5 percent of GDP was from lower investment spending) and cash payments (about 3.3 percent of GDP) deferred to early 2014. - The end-March fiscal target is estimated to have been met. - Indicative targets and social spending - Indicative target on social spending was missed for all 2013 test dates, reflecting implementation capacity constraints. - New social programs in 2014 are expected to increase expenditures in this area. - The end-March ceiling on current spending is expected to be met by a large margin due to lower than expected payments on energy subsidies in the first quarter of 2014 (these are not included in the program definition of social expenditures). - Structural benchmarks (SBs) and reforms - Progress on the structural reform agenda slowed owing to the 2013 political crisis and government transition. - Only four out of eight end-March SBs have been met. - Missed or reprogrammed SBs and timing: - Household targeting strategy for vulnerable households will be put in place before the July fuel price increase and is a new SB for end-June 2014. - Decrees for the investment code await ratification by Parliament (new end-September structural benchmark). - The CBT regulation on the new loan haircut has been issued but will come into effect at end-June (reprogrammed as a new SB) when the lender of last resort facility is introduced. - The modernization plan for tax administration will be finalized over the next few weeks following the latest Fund TA (new end-June SB). - The heavy legislative calendar of the National Constituent Assembly—focused on elaborating the electoral law—could further delay approval of key legislation (Investment code, Bankruptcy law, Competition Law, Asset Management Company, Public Private Partnership). ### Program Strategy and Policy Priorities - Short-term stabilization measures - Contain current expenditures. - Pursue prudent monetary policy. - Allow greater exchange rate flexibility. - Banking sector and financial intermediation - Improve banking regulation. - Adopt a strategic orientation of public banks. - Strengthen supervision. - Finalize audits of public banks to address banking sector fragilities and enable banks to play their financial intermediation role. - Structural and medium-term measures for inclusive growth - Scale up public investments. - Reform tax policy and revenue administration. - Accelerate public enterprise reform. - Protect the most vulnerable to lay foundations for more inclusive growth and level the playing field for investors. ### Risks to the Program - Main identified risks: - Regional and domestic security tensions. - Set-backs in the political transition. - Weaker economic activity in major trading partners. - Program success is contingent on: - Government’s ability to garner consensus among political parties backing it. - Capacity to push reforms through vested interests. - Continued external financing, mostly from multilateral partners. *International Monetary Fund — Executive Summary (April 11, 2014).* ### 14. The macroeconomic framework forecasts moderate growth, despite a more favorable ### 14. The macroeconomic framework forecasts moderate growth, despite a more favorable political environment ### Macroeconomic outlook and key projections - Growth - Real GDP is projected to expand by 2.8 percent in 2014, before rising to its potential of 4.5 percent over the medium term. - Preliminary indicators for the first two months of the year imply a modest pickup in activity, with investors still waiting for a clear political calendar and reduced security tensions before expanding capacity. - A rebound in tourism and in the phosphate sector is expected to drive growth. - Inflation - Headline inflation is expected to decline to 5.3 percent (y-o-y) at end-2014, on the back of declining food price inflation and a prudent monetary policy. - External position - The current account deficit is projected to narrow to 7.2 percent of GDP in 2014, and to 6.3 percent of GDP in 2015, driven by a recovery in trading partners’ economies, phosphate exports, higher tourism receipts, and lower international commodity prices. - Increasing foreign financing flows and a gradual recovery of FDI will help finance the current account deficit and increase international reserves. ### Risks to the outlook - Increasing social tensions—including additional strikes or demonstrations—could: - slow down production further; - weigh on firms’ investment decisions; and - delay reform implementation. - Any renewed regional or domestic security tension could dampen tourist activity. - Delays in the political calendar would weaken economic policy and reform implementation, adversely affecting economic activity and job creation. - External vulnerabilities include: - weaker economic outlook in Europe (main trading partner), - higher commodity prices, - shortfalls in official external financing if reforms lag, - increased short-term debt from the offshore sector, raising corporate roll-over risk. ### Short-term stabilization goals — Fiscal policy - 2014 fiscal measures and targets - Approved 2014 budget incorporates a wage freeze (0.4 percent of GDP) and savings in energy subsidies (0.8 percent of GDP). - Government committed to salary savings (0.2 percent of GDP from deferred recruitment) and lower unallocated expenditures (0.5 percent of GDP). - These measures limit deterioration of the structural fiscal deficit to 5.3 percent of GDP (from 4.6 percent of GDP in 2013). - Authorities decided to further reduce the structural fiscal deficit to 4.9 percent of GDP in 2014. - Composition of additional measures - New measures amounting to 0.4 percent of GDP, almost exclusively on the revenue side, including: - additional revenue from the telephone company following a recent tax control; - recovery of tax arrears awaiting judicial decision; - reduction in exemptions; - hikes in excises; - bringing forward by one month the 10 percent electricity tariff increase planned in June for high and medium voltage users. - Contingency actions to rely mostly on cuts in nonessential current spending if revenue shortfalls or delays in passing the revised budget law occur; social and capital expenditures will be preserved. - Staff recommendations and observations - Staff would have preferred measures relying more on cuts in current expenditures (e.g., wages or subsidies) but recognizes political constraints. - Staff considers the identified revenue measures to be of good quality: they improve the tax base and establish a precedent for simplified tax arrears recovery procedures. - Staff urged authorities to resist undoing important policies approved in the 2014 budget law. - Specific fiscal safeguards and actions: - continue containing the wage bill by freezing salaries and limiting recruitments to those already announced in security, education, and health (recruitment increases on a net basis by 8,600 people this year, half the level of 2011); - complete elimination of subsidies to cement companies (halved in January); - further electricity tariff increases to households and industrial users (10 percent tariff increase planned for June, following 10 percent implemented in January); - increase fuel prices by 6 percent as of July 2014; - protect the vulnerable via a lifeline electricity tariff (for households consuming less than 100 kwh) and new social programs. - Selected fiscal indicators (percent of GDP) - Revenue: 23.1, 23.4, 23.6, 22.6, 23.1 (for 2010–2014 as presented) - Tax revenue: 21.0, 21.1, 21.3, 21.3, 21.8 - Expenditure and net lending: 28.8, 29.5, 29.7, 29.7, 29.9 - Wages and salaries: 12.2, 12.4, 12.5, 12.4, 12.5 - Transfers and subsidies: 7.0, 7.6, 7.8, 7.0, 7.0 - Capital expenditure: 6.6, 4.9, 4.9, 5.2, 5.2 - Net lending: -0.5, 0.0, 0.0, 1.3, 1.4 - Public banks' recapitalization (component): 0.1, 0.0, 0.0, 1.2, 1.2 - Central government deficit (excl. grants): -5.7, -6.2, -6.1, -7.1, -6.8 - Float: -0.7, -1.7, -1.6, 1.8, 1.8 - Central government deficit (excl. grants, cash basis): -5.0, -4.5, -4.5, -8.9, -8.6 - Structural fiscal balance: -5.3, -4.6, -4.6, -5.2, -4.9 - General government debt: 44.5, 45.0, 44.7, 51.7, 50.9 - Compensatory measures for 2014 (amounts in million Dn and percent of GDP as presented) - Administrative revenue: 2600.3 - Tax Policy Measures: 1000.1 - Alcoholic Beverages: 8 percent Increase Excise Tax 200.0 √ - Tobacco: 10 percent Increase Excise Tax 500.1 √ - No tax exemption for imported vehicles 1/ 300.0 √ - Tax Administration Measures: 1600.2 - Tunisie Telecom: enhanced tax control 1100.1 √ - Recovery of tax arrears awaiting judicial decision 500.1 √ - Current Expenditure savings: 400.0 - Wage bill savings: 3350.4 (Jan-14), 154.0 (Mar-14) => 0.2 percent of GDP √ - Lower unallocated expenditures: 1500.2 (Jan-14), 416.4 (Mar-14) => 0.5 percent of GDP √ - Savings in Energy Subsidies: 6500.8 (Jan-14), 400.0 (Mar-14) √ - Total reported: 11351.4 (Jan-14) ; 570.4 (Mar-14) ; 0.7 ; 3000.4 (Budget 2014) ### Monetary policy and banking sector measures - Monetary stance and inflation - Current monetary policy stance justified by low inflationary pressures, lower pressures on the exchange rate, prevalence of capital controls, weak credit growth, a negative output gap (close to –2 percent), and stable core inflation. - Staff encouraged increasing the CBT policy rate so it is consistent with CBT interventions that keep the money market rate unchanged at 4.75 percent. - The CBT agreed it should stand ready to tighten monetary policy if core inflation rises more rapidly than expected or if depreciation pressures rise (including those resulting from negative market real rates). - Collateral framework and refinancing - Implementation of higher shares of refinancing through government securities (20 percent) and a new haircut on loans (10 percent) used as collateral has been met by all banks. - Tighter collateral requirement planned for March (a 25 percent haircut on non-government loans) was postponed to June 2014 to ensure solvent but temporarily illiquid banks can use a lender of last resort facility to be introduced end-June 2014 (structural benchmark). The facility will charge penalty rates and require banks to present an exit plan from continued access to CBT refinancing. - Timely implementation of stronger collateral framework minimizes risks to the CBT balance sheet and encourages banks to manage liquidity forward-lookingly. - High liquidity provision highlights the need to move ahead with restructuring NPLs. - Lending rate caps and credit developments - The tightly regulated lending rate hampers access to finance and monetary policy functioning. - A preliminary study with World Bank TA showed that removal of caps on lending to enterprises will not lead to an increase in rates to those companies, though competition for deposits could spur higher deposit rates and then higher lending rates. - Caps on consumer credit have constrained lending; removing caps would lead to higher rates for most consumers. - Staff urged immediate removal of the cap on lending to enterprises and swift movement on removing caps in consumer loans if coupled with adequate supervision of risks. - Credit developments (Box 1) - Credit to the economy previously grew by 14–20 percent pre-revolution; now growing at 8 percent a year (about 2 percent in real terms). - Deposits are over 70 percent of banking system liabilities and slowed around the revolution. - Other funding sources became scarce, increasing banks’ reliance on CBT refinancing. - Lending pattern shifts: - Share of credit to firms fell from 72 percent in 2007 to about 65 percent in 2013. - Share of private consumer and housing loans increased from 20 percent to 30 percent of total credit. - The increase in consumer loans was recently slowed by a CBT regulation requiring additional reserve requirements of 30 percent for increases above end-September 2012 levels. - Lending to public enterprises stabilized; credit to public enterprises now increasing by less than 8 percent a year and remains relatively low at 7 percent of total credit. - Central bank independence - Forthcoming Fund TA on the Central Banking law (end-June structural benchmark) will help strengthen autonomy of the CBT, including enhanced governance structure, full operational independence, and strengthened auditing functions. ### Exchange rate policy and external buffers - Exchange rate valuation and reserves - Recent appreciation of the currency reflects short-term higher supply of foreign exchange following stricter implementation of foreign exchange regulations and continued CBT FX sales; staff and authorities agreed the exchange rate is about 5 percent to 10 percent overvalued. - Depreciation of the Tunisian dinar in 2013 helped contain overvaluation and preserve external buffers, though valuation effects affected sectoral balance sheets (see Box 2). - Staff urged authorities to use opportunities of higher FX in the market to buy FX to build cushions and increase gross international reserves in 2014 above the 100 percent of Fund’s risk weighted metric (four months of imports). - In view of overvaluation, FX sales should be limited to smoothing excessive fluctuations. - Staff welcomed plans to allow banks to conduct FX swap operations with the CBT without CBT initiation requirement. - Reserve coverage indicators (selected) - Gross official reserves (US$ billions, eop): 9.5, 7.5, 8.7, 7.7, 9.0, 10.1 (2010–2015 as shown) - Gross official reserves (months of next year's imports): 4.4, 3.4, 4.0, 3.5, 3.9, 4.3 - Reserve coverage alternative metrics shown for 2009–14. - Exchange rate assessment (CGER panel estimates excerpt) - MB approach: -4.9 - ERER approach: 4.1 - ES approach: -4.9, -2.6, 7.8 (panel presentation in source) ### Balance sheet and external position effects from exchange rate depreciation (Box 2) - Net international investment position and composition - Net international investment position reached -111 percent of GDP in 2013. - Net FDI at -71 percent of GDP. - Net debt (sum of debt assets minus debt liabilities) at -52 percent of GDP. - Reserve assets at 17 percent of GDP. - Shifts in foreign liabilities - Recent widening of the current account deficit induced a shift from non-debt-generating flows (FDI) to debt-generating flows (short-, medium-, and long-term liabilities). - Currency and maturity mismatches by sector - Private nonfinancial sector: - Short foreign currency position; liabilities to non-residents about 22 percent of GDP (close to one-fifth is short-term trade credit). - Balance sheets would be affected by large exchange rate depreciation, attenuated partly by windfall from resident foreign currency deposits held at the central bank. - Financial sector: - Lower mismatches than non-financial sector because foreign currency asset holdings partially balance liabilities (mostly nonresident deposits). - Impact of depreciation reduced by banks’ ability to hedge. - Public sector: - High maturity and currency mismatches with nonresidents, but little short-term debt, limiting rollover exposure. - Large depreciation would raise public debt ratios and increase public external debt service. - Central bank: - Long foreign currency position and could benefit from valuation effects from depreciation. - Increases in deposits from foreign counterparties, Fund borrowing, and a decline in foreign assets in recent years reduce CBT’s long FX position. - Tunisia: International Investment Position (selected indicators presented in source tables for 2012–2013; figures in millions of dinars and percent of GDP are reported in source tables) *Source: IMF staff and Tunisian authorities, as presented in the IMF country report text.* ### Box 2. Balance Sheet Effects from Exchange Rate Depreciation (concluded) ### Box 2. Balance Sheet Effects from Exchange Rate Depreciation (concluded) ### Exchange rate depreciation: quantified balance sheet effects and real-side offsetting channels - The 9.4 percent cumulative depreciation of the NEER in 2013 led to a 2.4 percent worsening of Tunisia’s short FX position (methodology: changes in balance sheets relative to values at constant exchange rate). - A large contribution to the negative impact came from public sector balance sheets. - Positive real effects from an exchange rate depreciation could emerge via an expenditure-reducing and switching mechanism that would: - lower household consumption and imports, and - increase exports (or at least keep Tunisia’s market share abroad in today’s difficult international economic environment). ### Foreign exchange market functioning - The newly installed electronic platform and market maker agreement (end-March structural benchmark) introduced an institutional mechanism to better control the volume of FX sales while letting the exchange rate adjust. - This sets the stage for the authorities’ move towards a more flexible exchange rate system governed by weekly FX auctions (2014 end-December SB). ### Reducing financial sector vulnerabilities — immediate priorities and findings - Minimum capital adequacy shortfalls should be addressed immediately (MEFP, ¶15). - CAR requirement: "CAR of 9 percent this year but Basel II requirement of 10 percent by end-year". - The CBT’s banking supervision department (DGSB) required all six banks operating below the statutory minimum to prepare detailed action plans to address capital shortfalls; these plans also concern four public banks. - Audits of the two largest public banks found: - high operational costs, - inadequate staffing, - poor governance structure (internal and external), - weak service quality, and - increasing NPLs. - The audit found contingent losses (of around 0.7 percent of GDP) that may need to be recognized. - Recapitalization and restructuring estimates and budgetary implications: - Audits for the two public banks estimated that at least 1.5 percent of GDP was needed to recapitalize them (without taking into account contingent costs, and assuming that the public sector kept its share). - The budget has so far accounted for 1.2 percent of GDP. - FSSA estimated the needs at 2.6 percent of GDP for public banks. - Priorities for the immediate future: - Strategy for public banks (MEFP, ¶17): design a strategy by mid-April for all nine banks in which the government has a stake; public presentation by end-April 2014. - Restructuring plan and recapitalization (MEFP, ¶17): finalize restructuring plans (end-July structural benchmark) for the two main public banks that completed audits (STB, BH—21 percent of total banking system assets); complete audit of the BNA (new end-July structural benchmark). - Governance of public banks (MEFP, ¶17): implement a new decree allowing banks to be managed on a fully commercial basis (e.g., no longer requiring Ministry of Finance approval for hiring or opening branches). ### Tunisian Banks: key financial indicators (In percent, as of 2013*) - Public Banks vs Private Banks: - CAR: 5.2 (Public Banks) and 10.9 (Private Banks) - Government bonds to total assets: 2.5 (Public Banks) and 6.3 (Private Banks) - Loans to assets: 71.8 (Public Banks) and 66.0 (Private Banks) - Deposits to loans: 76.2 (Public Banks) and 99.0 (Private Banks) - NPL: 21.2 (Public Banks) and 10.4 (Private Banks) - Source: Tunisian authorities - (*) Preliminary data ### Addressing weak asset quality and nonperforming loans - Tourism sector NPLs represent about 54 percent of the sector’s loan portfolio, and a quarter of the banking system’s NPLs. - Priority: establish an Asset Management Company (AMC) to remove tourism sector bad debt from banks’ balance sheets. - This requires adoption by Parliament of a draft law—prepared with World Bank assistance—that assigns special resolution powers to the AMC (MEFP, ¶17). - The draft is expected to be submitted to Parliament in June; staff urged quick adoption and finalization of the business plan (valuation method for eligible assets and the list of participating banks still to be completed). - Explore solutions for high NPLs in other areas (e.g., manufacturing). - Strengthen creditor rights: - Early adoption of the revised “bankruptcy law” currently in Parliament. - Prepare a new law allowing existing “loan recovery” companies to approach debtors. ### Strengthening regulation, supervision, and data - Regulatory alignment and prudential measures (MEFP, ¶16): - Conservative application of haircuts on collateral used. - Implementation of tighter related-party and concentration risk ratios. - Improvements in loan classification rules (still room for improvement, including for public enterprises benefiting from an assumed implicit government guarantee). - Plans to align required liquidity ratios with international standards are progressing, with the impact study (2013 end-December structural benchmark) showing the need for a gradual approach moving to Basel III requirements. - In the interim, staff urged pecuniary sanctions for banks not respecting the current liquidity ratio. - Banking supervision (MEFP, ¶18): - Five inspections completed; encouraged to continue improving offsite procedures and adopt the 2014 onsite inspection plan guided by risk-based methods. - Move quickly towards consolidated-based supervision and require banks’ compliance with internal risk management frameworks. - Success requires substantial increase in human and financial resources for supervision. - Data improvements: - Uniform Bank Performance Reporting system finalized and expected to be implemented in June 2014. - Full banking data and ratings reporting system—designed in September 2013—on track for coming online by end-year. - Plans to improve national accounts, monetary statistics, and balance of payments data, with Fund TA support (MEFP, ¶38). - Staff urged preparation of a draft law guaranteeing and protecting the independence of the National Statistical Institute. ### Legal framework and crisis preparedness - IMF/WB LEG TA assisting revision of banking system laws with emphasis on developing a proper banking resolution framework (agencies responsible for resolution and liquidation, treatment of shareholders, tools of resolution). - A framework for a deposit insurance scheme is being developed. - Staff encouraged development of a crisis contingency plan based on the existing legislative framework while awaiting full revision of banking laws. ### Growth-enhancing fiscal and structural reforms - Public enterprises: - Preliminary audit of the three energy companies’ subsidy system completed (end-March 2014 structural benchmark), highlighting complex cross-subsidies. - Priority: make all energy companies accountable for their own import bills. - Creation of an interdepartmental committee to monitor financial situation of public enterprises; consolidated balance sheet of the 20 largest state-owned enterprises targeted (end-June structural Benchmark). - Governance improvements to include review of regulatory framework and revamping executive boards. - Capital expenditures: - Initiatives to improve execution of capital expenditures (MEFP, ¶26): adoption of new procurement procedures expected to start in June 2014 (decree adopted in March 2014); decentralized project execution; resolve property deed issues; accelerate major projects in disadvantaged regions. - Tax reform and revenue administration: - Major tax changes expected in FY 2015 once a new tax code is adopted (2014 end-September SB). - 2014 budget measures earlier in the year: halved the corporate tax wedge between the onshore and offshore sectors, introduced a tax on dividends, and raised the tax exemption threshold for low-income individuals. - Preparatory national tax consultations planned for June 2014. - Need to reform the presumptive tax system (encouraging tax evasion) and design a calendar for gradual elimination of the onshore/offshore corporate tax disparity. - Revenue administration: unification at the large taxpayer unit (LTU) progressing; strategic plan for modernizing tax administration (end-March 2014 SB) will require additional time; planned committee to pilot tax administration reforms. - Customs: a risk management unit set up; strengthening border controls to combat smuggling. - Business climate and competition laws: - Delays in legislative agenda: implementation decrees for the investment code pushed to end-September 2014; adoption of competition law, law on public-private partnership, and bankruptcy law also delayed. - Adoption of these laws is crucial to reduce excessive regulation and government intervention, and to foster private sector development and competition. - Recent trade agreement with Algeria could simplify import tariff barriers and foster fair competition (MEFP, ¶29). - Labor market: - Tripartite commissions revived to review the draft national employment strategy; no specific action to-date and new measures likely after elections. - Government priorities: employment creation programs financed through microcredit, and review of education programs to reduce structural skills mismatch. ### Protecting the most vulnerable - Social measures and targeting (MEFP, ¶33): - New social housing programs for needy families. - Increased income tax deduction for the poorest households. - Established a new lifeline tariff to protect households that consume less than 100 kwh per month. - Move towards a unified registry system for vulnerable households; plan to introduce a unique social identification number over the next few months. - Interim evaluation of existing school assistance programs and health benefits for needy families to be finalized by June 2014. - New targeted household strategy (expected to be completed in June, new SB, postponed from end-March) will: - expand the number of beneficiary families in the existing cash transfer program from 220,000 to 250,000, - broaden the definition of vulnerable households, and - increase school allowances for children and university students by about 10 percent. - To ensure success of energy subsidy reform, staff urged adoption and implementation of the strategy ahead of the planned fuel price increase and in conjunction with a comprehensive communication campaign explaining benefits of moving away from regressive energy subsidies. ### Program design and modalities - Program remains responsive to Tunisia’s political transition—allowing delayed fiscal consolidation and slower reform implementation—while ensuring vulnerabilities and risks are reduced by the end of the Fund-supported program. - New fiscal measures planned for the year—with continued containment of the wage bill and subsidy reduction—will drive fiscal consolidation and reduce underlying fiscal vulnerabilities. - Priority social spending will be preserved during fiscal consolidation (a floor on the level of social expenditures is an indicative target for the program). - Reserve accumulation programmed and accompanying reform agenda aim to rebuild buffers during the program while supporting inclusive growth and job creation. - Technical assistance from the Fund and other donors—in monetary policy, banking, and fiscal areas—will help the authorities achieve objectives. - An extension of the program could be considered later in the year should reforms take longer than envisaged, or fiscal consolidation not take place as expected. *Source: _cr14123 - Box 2. Balance Sheet Effects from Exchange Rate Depreciation (concluded)_ (IMF PDF).* ### 40. Risks associated with the program remain significant. Further setbacks in the political ### 40. Risks associated with the program remain significant ### Major program risks and implementation challenges - Further setbacks in the political transition, continued crowding of the legislative calendar of the Constituent assembly, and major strikes could: - put the attainment of program objectives at risk, - delay the completion of structural benchmarks, - lead to policy reversals. - A further deterioration in the international economic environment could: - dampen economic activity, - put pressure on the fiscal and external positions. - Delays in official external financing pledged to support Tunisia’s reform program, or lack of market access, could create a financing gap. - The new government’s strong commitment to the reform agenda will help reduce program implementation risks, although successful reform implementation will depend on the ability of the new authorities to build consensus within the population and the administration. ### Conditionality, performance criteria, and structural benchmarks - Final data for all end-March quantitative performance criteria will only be available after April 30. - A waiver of applicability is needed for all end-March PCs, which appear to have been met. - Staff proposes: - a modification of end-June QPCs in light of the end-March outturn and downward revisions to the balance of payments projections, - new PCs for end-September 2014 and new ITs for end-December 2014 as per the MEFP (Table 1). - Structural benchmark timing adjustments: - Three end-March structural benchmarks have been postponed to June to allow for delays caused by the transition process, - One structural benchmark was deferred to end-September to account for slow progress in the legislative agenda (Table 2b). - Banking sector structural actions: - The strategic orientation for two public banks is a Prior Action, - Two new structural benchmarks are proposed for end-July to reduce banking sector vulnerabilities. ### Financing outlook and official support - The program is fully financed for the next 12 months. - Financing assurances have been provided by multilateral and bilateral partners, with future disbursements linked to progress in the reform agenda. - From the Fund, all resources scheduled to be disbursed for 2014 will continue to be used for budget support. - Market issuance and other planned instruments: - Market issuance of $600 million is expected by the end of 2014, for which the authorities are seeking U.S. and Japanese guarantees. - The issuance of a Sukuk bond—delayed from 2013 and now expected in the last quarter of the year—will cover remaining needs. - Contingency: - If there are early indications that projected financing will not be received, the authorities will consult with the Fund on alternative financing approaches and/or further policy adjustments. ### Tunisia’s capacity to repay the Fund - Tunisia has a strong record of payments to the Fund. - Peak Fund access projections remain unchanged from the Stand-By Arrangement request: 400 percent of quota. - Standard indicators of Fund exposure will remain low, with Fund credit outstanding reaching a maximum of 3.5 percent of GDP in 2015 (about 17.7 percent of gross international reserves). ### Staff appraisal — macroeconomic context and reform priorities - Macro context: - Growth forecasts have been revised downwards. - Unemployment remains high. - Fiscal and external balances are elevated. - Social tensions continue to burden economic activity. - Favorable political developments provide a general sentiment of optimism and a window to accelerate reforms. - Fiscal policy and budget composition: - Fiscal adjustment is progressing, but at a slower pace than originally envisaged under the program. - The central government cash deficit target was met in 2013, but only because of deferred cash payments and record low levels of capital investment. - For 2014, staff welcomes the authorities’ commitment to contain the fiscal deficit and the new measures they have identified. - Staff urges cuts in non-essential current spending if there are shortfalls or delays in adopting the revised budget law, while preserving social and capital expenditures. - The quality of budget composition needs to be significantly improved: - Reversing the increase in regressive energy subsidies and containing the high wage bill are important to create fiscal space for priority spending. - The move towards more decentralized project execution and streamlined procurement procedures is welcome and will help scale up public investment. - Acceleration of major projects in disadvantaged regions is a welcome development. - Revenue reforms and tax administration: - Steps taken to reduce the corporate tax wedge between the onshore and offshore sectors, and to unify different functions at the Large Taxpayer Unit, are welcome and should be built upon. - National tax consultations in June 2014 are welcomed to build consensus on a comprehensive tax reform strategy that fosters equity and removes complex and distortive measures. - Ongoing tax administration reform efforts should be organized around an all-encompassing action plan to coordinate reforms across different functions and agencies. - Public enterprises and public financial management: - Authorities’ renewed focus on assessing the financial situation of public enterprises and improving data transparency and coverage is welcome. - Making energy companies accountable for their own imports and timely transfers to public enterprises will increase transparency and reduce costs and distortions. - Staff urges rapid improvements in the governance framework of public enterprises. - Introduction of a Single Treasury Account is welcome; budgetary control procedures will be further simplified in the organic budget law currently being designed. - Monetary policy and liquidity management: - A prudent monetary policy remains necessary to contain inflationary pressures. - Staff welcomes the authorities’ readiness to increase the policy rate further if core inflation rises more rapidly than expected or if depreciation pressures rise. - Steps taken to tighten the collateral framework are commended; staff recommends further tightening once the lender of last resort facility is in place. - Staff urges the quick revision and adoption of new legislation removing the cap on lending rates to improve monetary policy transmission and access to finance. - Exchange rate flexibility: - Greater exchange rate flexibility will help increase external buffers, reduce CBT liquidity injections, and improve competitiveness. - Authorities’ decision to limit intervention in the foreign exchange market to smoothing excessive intra-day exchange rate fluctuations is welcomed. - The newly established electronic platform and market maker agreement set prerequisites for the establishment of weekly foreign exchange auctions. - Banking sector vulnerabilities and reforms: - Addressing vulnerabilities in the banking sector is critical to safeguarding stability, strengthening financial intermediation, and supporting private sector development. - Staff welcomes recent improvements in the regulatory environment, banking supervision, governance of public banks, and banking data reporting. - Staff supports widening the authorities’ strategic orientation for public banks to encompass all banks in which the government has a stake. - Urgent actions needed: - Speedily complete the remaining bank audit. - Quickly design restructuring plans for the two main public banks; these will need to allow for important recapitalization costs. - Accelerate adoption of the draft law creating an AMC for troubled tourism debt to repair public banks’ balance sheets and spur private sector credit. - Ensure all banks are compliant with minimum adequacy ratios and prudential norms. - Enhance banking resolution and consolidated banking supervision to reduce vulnerabilities and strengthen transparency. - Structural reform agenda and business environment: - Implementation should be accelerated. - Delays in the legislative agenda have postponed adoption of the investment code and its decrees, the bankruptcy law, and the law on public-private partnerships. - The government should bring forward these laws for parliamentary consideration to provide investors with a level playing field, strengthen creditor rights, and foster private sector development. - Efforts to streamline existing business regulations should be intensified. - Social protection and communication: - Initiatives to strengthen social safety nets are important: - Progress in introducing new social housing and moving towards a unified social identification number for all vulnerable households is welcome. - Important steps have been made in identifying components of the long-delayed “household targeting strategy.” - Its adoption should be enacted quickly and ahead of the planned fuel price increase to ensure the success of the energy subsidy reform. - Staff urges authorities to step up social expenditures, which should not be used as an adjustment variable during fiscal consolidation. - Authorities’ commitment to implement program policies will continue to be tested by a difficult social environment and vested interests. - Proactive communication on Tunisia’s economic situation and the need for reforms is required to explain to stakeholders the rationale and benefits of necessary but difficult policies. - Increasing social tensions, regional or domestic security tensions, and additional delays in the political transition represent important risks to program implementation. *Source: IMF staff report (excerpts).* ### 55. On the basis of Tunisia’s performance under the SBA, and the government’s policy ### _cr14123 - 55. On the basis of Tunisia’s performance under the SBA, and the government’s policy ### Program decision and staff recommendation - Staff supports the authorities’ request for completion of the third review and a disbursement of SDR 145 million. - Staff supports waivers of applicability on the end-March QPCs on: - the primary fiscal balance, - NIR, - NDA. - Staff supports modification of end-June QPCs and recommends establishment of new end-September PCs as proposed in the attached MEFP. ### Recent economic developments (highlights) - 2013 growth described as moderate, driven mostly by private consumption; investment has recovered from the sharp drop in 2011. - Industrial production recovering only slowly, driven mostly by textile production; energy production is declining. - Tourism and remittances declined further at the beginning of the year while imports somewhat increased. - Unemployment has started to subside on the back of public sector hiring but remains high, particularly among university graduates. - Fiscal stance looser to counteract the weak economy and high unemployment; public debt stabilized at around 45 percent of GDP. - Inflation rate subsided following lower food price inflation. ### Key economic indicators and projections (selected exact figures) - Real GDP (various entries in Table 1 and Table 9): - 2010: 2.6 - 2011: -1.9 - 2012: 3.7 - 2013 (Prel.): 2.6 - 2014 (Est./Proj entries vary): 2.8; 4.2; 4.5 (medium-term projections up to 2019 include 4.5 for 2019) - CPI (annual average): 2010: 4.4; 2011: 3.5; 2012: 5.6; 2013: 6.1; 2014 proj: 5.5; medium-term proj: 4.0 - Gross national savings (in percent of GDP) 2010–15 entries: - 2010: 20.9 - 2011: 16.2 - 2012: 16.1 - 2013: 17.3; projections show variation including 15.8 for 2015 - Gross investment (in percent of GDP) 2010–15 entries: - 2010: 25.7 - 2011: 23.6 - 2012: 24.3 - 2013: 24.7; projections show 22.1 for 2015 - General government debt (foreign and domestic): - 2010: 40.7 - 2011: 44.5 - 2012: 44.5 - 2013: 45.3 - Projections show 49.5, 51.7, 50.9, 52.6 across subsequent entries ### External sector and reserves - Current account balance/GDP: - 2010: -4.8 percent - 2011: -7.4 percent - 2012: -8.2 percent - 2013: -8.4 percent - 2014 (proj): -7.2 percent; 2015 (proj): -6.3 percent - Gross official reserves (US$ billions, e.o.p): - 2010: 9.5 - 2011: 7.5 - 2012: 8.7 - 2013: 7.7 - 2014 proj: 9.0; 2015 proj: 10.1 - Reserves in months of imports of goods and services: - 2010: 4.4 - 2011: 3.4 - 2012: 4.0 - 2013: 3.5 - 2014 proj: 3.9; 2015 proj: 4.3 - External debt (US$ billions and percent of GDP): - External debt (US$ billions) 2010: 21.4; 2011: 22.1; 2012: 24.3; 2013: 25.0; later entries reach 30.2 - External debt (percent of GDP) 2010: 48.5; 2011: 48.0; 2012: 53.8; 2013: 52.0; later entries show up to 59.8 ### Balance of payments and financing (Table 2, Table 3 highlights) - Current account (Q1–Q4 2013 quarterly breakdown, in millions of US$): - Q1: -1,192 - Q2: -997 - Q3: -606 - Q4: -769 - 2013 total: -3,563 - Exports (2013 annual): 17,332; Imports (2013 annual): -23,299 - Trade balance (2013 annual): -5,967 - Capital and financial account (2013 annual): 3,445 - Overall balance (2013 annual): -608 - Total financing requirements (2013 annual): 10,455 (Table 3) - Total financing sources (2013 annual): 9,061; Financing gap and Fund credits noted under proposed SBA schedule ### Fiscal accounts and central government operations (selected precise figures) - Total revenue and grants (2013 annual, dinars): 18,111 - Total expenditure and net lending (2013 annual, dinars): 22,759 - Central government balance (excluding grants, percent of GDP): - 2010: -0.6 - 2011: -3.5 - 2012: -5.7 - 2013: -7.3 (Table 4a/4b various entries) - Central government deficit (excluding grants) 2013 reported also as -6.8 in percent of GDP in another entry - Wages and salaries (2013 annual, dinars): 9,590 - Energy subsidies (2013 entries): 2,854 (dinars, indicated under transfers and subsidies) - Capital expenditure (2013 annual, dinars): 3,768 - Central government primary balance (including grants, cash basis) 2013 memo: -1,627 (dinars, memo item) ### Monetary and banking sector (selected exact figures) - Money market rate remains unchanged at 4.75 percent (text). - Credit to the economy (annual percent change): - 2010: 19.6 - 2011: 13.4 - 2012: 8.8 - 2013: 10.8 - Proj. entries vary; e.g., 2014 proj: 7.6 - Broad money (M3) annual percent change examples: - 2010: 12.1 - 2011: 9.1 - 2012: 8.4 - 2013: 12.6 - Central bank balance sheet (reserve money e.o.p, in millions of dinars): - 2010: 8,415 - 2011: 9,406 - 2012: 10,989 - 2013 (selected quarters): values range including 11,078; projections up to 13,455 - Financial soundness indicators (Table 7, Dec-13 Prel.): - Regulatory capital to risk-weighted assets: 9.2 - Tier 1 capital to risk weighted assets: 7.6 - Nonperforming Loans (NPLs) to total loans: 14.9 - Specific provisions to total loans: 9.9 - Return on assets (ROA): 0.7 - Return on equity (ROE): 8.9 - Liquid assets to total assets: 28.4 ### Schedule of proposed SBA purchases (Table 8, precise entries) - Board approval of the SBA (June 7, 2013) — Disbursement: Millions of SDRs 98.800; Percent of quota 34.485; Millions of US$ 150.155 - First Review (September 15, 2013) — Disbursement: 98.600 SDRs; 34.415 percent of quota; US$ 152.037 - Second Review (December 15, 2013) — Disbursement: 230.520 SDRs; 80.461 percent of quota; US$ 355.453 - Third Review (March 15, 2014) — Disbursement: 145.080 SDRs; 50.639 percent of quota; US$ 223.708 - Fourth Review (June 15, 2014) — Disbursement: 143.250 SDRs; 50.000 percent of quota; US$ 220.886 - Fifth Review (September 15, 2014) — Disbursement: 143.250 SDRs; 50.000 percent of quota; US$ 220.886 - Sixth Review (December 15, 2014) — Disbursement: 143.250 SDRs; 50.000 percent of quota; US$ 220.886 - Seventh Review (March 15, 2015) — Disbursement: 71.625 SDRs; 25.000 percent of quota; US$ 111.517 - Eighth Review (May 15, 2015) — Disbursement: 71.625 SDRs; 25.000 percent of quota; US$ 111.517 - Total proposed under SBA: 1,146.000 SDRs; 400.000 percent of quota; US$ 1,767.045 ### Illustrative medium-term growth scenario (Table 9 selected figures) - Real GDP growth projections: - 2014: entries include 2.8 and 4.2 depending on table line - 2015–2019 medium-term projections: 4.5 (2015), 4.5 (2016), 4.5 (2017), 4.5 (2018), 4.5 (2019) in one scenario line - Inflation (annual average) medium-term projection: 4.0 (for multiple years) - Savings-investment gap (percent of GDP): - 2010: -4.8 - 2011: -7.4 - 2012: -8.2 - 2013: -8.4 - Medium-term projections narrow toward -3.7 by 2019 - Nominal GDP at current prices (TD millions) examples: - 2010: 63,059 - 2013: 76,570 - 2019 projection: 125,318 ### Indicators of Fund credit (Table 10, exact entries) - Stock of existing and prospective Fund credit (SDR, selected years): - 2012: 099 (table formatting uses leading zeros) - 2013: 1,003 - 2014: 1,146 - 2015 onward: entries decline e.g., 1,121; 858; 337; 27 - Stock in percent of quota: - 2012: 0.0 - 2013: 34.4 - 2014: 50.0 - Later years: values include 39.1; 42.9; 9.6; 11.7; 6.9; 9.4 (table entries) ### Annex note (public debt) - Public debt increased following the revolution due to expansionary fiscal policy and a decline in economic activity. - After decline from an average of 60 percent of GDP in the 1990s to 40.7 percent in 2010, the debt-to-GDP ratio increased in 2011 (text ends here). *Source: IMF staff and Tunisian authorities data as presented in the provided content unit.* ### 44.5 percent and has remained practically unchanged until 2013. Notwithstanding this, the debt ### _cr14123 - 44.5 percent and has remained practically unchanged until 2013. Notwithstanding this, the debt ### Public debt dynamics: baseline and medium-term projections - Public debt was 44.5 percent of GDP and "has remained practically unchanged until 2013." - Under the baseline scenario: - Public debt is expected to increase to 54 percent of GDP by 2016. - Debt-to-GDP ratio is expected to start declining in 2017, reaching about 51 percent by end-2019. - The projected 51 percent by end-2019 is "10 percentage of GDP higher than the 2010 level." - Fiscal consolidation assumed: "an overall deficit declining to 2.5 percent of GDP by 2018." - Real growth rates are expected to "start to pick up in 2015." - Factors contributing to the 2016 rise to around 54 percent of GDP: - Increased banking recapitalization costs. - A wider deficit. - Weaker-than-originally-expected growth dynamics. - Debt composition (selected historical and projected levels from Table 1): - Public sector debt (percent of GDP): 2009: 42.8; 2010: 40.7; 2011: 44.5; 2012: 44.5; 2013: 44.7; 2014: 50.9; 2015: 52.6; 2016: 53.6; 2017: 53.4; 2018: 52.1; 2019: 51.3. - Foreign-currency denominated share (percent of GDP): 2009: 25.0; 2010: 24.7; 2011: 25.8; 2012: 27.9; 2013: 28.8; 2014: 35.7; 2015: 37.9; 2016: 38.7; 2017: 38.0; 2018: 36.6; 2019: 35.8. - Key macro-fiscal assumptions (selected): - Real GDP growth (percent): historical averages and projections include values such as 3.1, 2.6, -1.9, 3.7, 2.6, 3.6, 2.4, 2.8, 4.2, 4.5, 4.5, 4.5, 4.5, 4.1 (as presented in the table). - Average nominal interest rate on public debt (percent): values include 4.9, 4.6, 4.6, 4.4, 4.5, 4.8, 0.4, 4.3, 3.4, 3.1, 2.7, 2.7, 2.6, 3.2. - Inflation rate (GDP deflator, percent): 3.3, 4.3, 4.6, 5.3, 5.7, 4.3, 1.1, 5.1, 4.8, 3.6, 4.0, 3.8, 4.0, 4.3. ### Public debt vulnerabilities and adverse scenarios (stress tests) - Adverse scenario where medium-term fiscal consolidation is not implemented: - Public debt would reach around 61 percent of GDP by 2019. - One-off 10 percent of GDP shock to contingent liabilities: - Debt would reach about 64 percent of GDP in 2016 and decline slightly to about 60 percent of GDP by 2019. - Footnote detail: "The one-off 10 percent of GDP shock to contingent liabilities reflects an additional 3 percent of GDP in bank recapitalization costs and the realization of about 7 percent of GDP of government’s contingent liabilities from public enterprises (these represent about 70 percent of government’s existing contingent liabilities)." - Permanent negative shock to real growth: - Public debt would reach about 64 percent of GDP by end-2019. - Exchange rate / currency-denomination shock: - Approximately 64 percent of public debt is denominated in foreign currency. - A one-time 30 percent depreciation would increase the public debt-to-GDP ratio to about 69 percent initially, before declining to 65 percent by 2019. - Interest rate shock: - Public debt dynamics are "relatively resilient" to an interest rate shock, with debt staying at around 53 percent of GDP over the medium term. - Bound test outcomes (selected rows from Table 1, public debt in percent of GDP): - No policy change (constant primary balance) in 2014-2019: 2014: 50.9; 2015: 53.7; 2016: 55.8; 2017: 57.5; 2018: 58.7; 2019: 60.8. - Real GDP growth at baseline minus one-half standard deviation (B2): 2014: 50.9; 2015: 54.0; 2016: 57.0; 2017: 59.4; 2018: 61.2; 2019: 64.1. - One time 30 percent real depreciation in 2015 (B5): 2014: 50.9; 2015: 68.3; 2016: 69.0; 2017: 68.5; 2018: 66.9; 2019: 65.3. - 10 percent of GDP increase in other debt-creating flows in 2015 (B6): 2014: 50.9; 2015: 62.6; 2016: 63.4; 2017: 63.0; 2018: 61.5; 2019: 60.5. ### External debt: levels, projections, and stress tests - Historical decline and recent rise: - External debt declined from "over 65 percent of GDP in 2002 to 48 percent of GDP at end-2011." - External debt rose moderately due to "post-revolution fiscal expansion and a widening current account deficit." - Baseline external debt projections: - External debt is projected to increase to 60.8 percent of GDP in 2016 and then decline to around 58 percent by end-2019. - 2013 external debt remained steady following a significant shortfall in external financing; 2014 is expected to rise to 57.3 percent. - External borrowing policy assumption: - Analysis assumes the government will "implement a significant fiscal consolidation in the medium term and continue to pursue cautious external borrowing policies." - External debt resilience and shocks: - External debt "will remain sustainable under the baseline and under most shocks, although it would be vulnerable to a large exchange rate shock." - External debt ratio remains below 65 percent of GDP "throughout the projection period under all but one alternative scenario and all bound tests." - Permanent negative shock to growth or to the current account would raise the debt ratio to "60–65 percent of GDP." - An increase in the average interest rate would have "almost no impact." - A sharp real depreciation (one-time 30 percent) would raise the debt ratio to "more than 84 percent of GDP." - External debt time series (selected from Table 2, percent of GDP): - External debt: 2009: 49.3; 2010: 48.5; 2011: 48.0; 2012: 53.8; 2013: 53.9; 2014: 57.3; 2015: 59.8; 2016: 60.8; 2017: 59.9; 2018: 58.8; 2019: 58.0. - Gross external financing need: - In billions of US dollars: 2009: 7.2; 2010: 8.6; 2011: 10.4; 2012: 10.9; 2013: 11.7; 2014: 11.4; 2015: 10.1; 2016: 10.0; 2017: 10.6; 2018: 10.2; 2019: 10.1. - In percent of GDP (selected): 2009: 16.6; 2010: 19.6; 2011: 22.7; 2012: 24.0; 2013: 24.8. - External debt bound-test outcomes (selected from Table 2): - One time 30 percent real depreciation in 2015 (B5): 2014: 57.3; 2015: 86.2; 2016: 87.6; 2017: 86.4; 2018: 84.8; 2019: 83.6. - Real GDP growth at baseline minus one-half standard deviations (B2): 2014: 57.3; 2015: 60.9; 2016: 63.0; 2017: 63.1; 2018: 63.1; 2019: 63.3. - Non-interest current account at baseline minus one-half standard deviations (B3): 2014: 57.3; 2015: 61.3; 2016: 63.8; 2017: 64.4; 2018: 64.7; 2019: 65.3. ### Fiscal/structural policy implications emphasized in the text - The authorities’ envisaged fiscal consolidation (overall deficit declining to 2.5 percent of GDP by 2018) is central to putting public debt on a declining path after 2016. - Continued cautious external borrowing policies and implementation of significant fiscal consolidation are assumed for external debt sustainability under the baseline. - Banking sector contingent liabilities and recapitalization costs are key fiscal risks that materially affect debt dynamics when realized. *Source: IMF staff estimates and Tunisia country documentation provided in the supplied content.* ### 2. Performance under the IMF-supported program has been positive overall, especially, given ### _cr14123 - 2. Performance under the IMF-supported program has been positive overall, especially, given ### Overall program performance and immediate requests - Performance under the IMF-supported program has been positive overall, despite a difficult national and international environment affecting Tunisia as the new government took office. - Performance at end-December 2013 was better than expected at the time of the previous review. - Expectation that all performance criteria at end-March 2014 have been met (final data pending). - Owing to a political crisis and ensuing wait-and-see investor attitude after appointment of the new administration, the pace of reform was slower than expected; authorities are committed to make up for the delay in the next weeks. - Government requests: - Completion of the third review of the program supported by the stand-by arrangement. - Disbursement of SDR 145.08 million. - Waiver of applicability for quantitative performance criteria on NIR, NDA, and the primary balance at end-March 2014 (appear to have been met, but final data not yet available). - Modification of performance criteria for NIR, NDA, and the primary balance at end-June 2014, and new criteria for September 2014, plus new indicative targets (as described in the MEFP and attached Technical Memorandum of Understanding). ### Quantitative performance and targets - Quantitative criteria initially anticipated as not met at end-December 2013: - Net International Reserves (NIR): not met; deviation from target considerably lower than previously estimated during the last review. - Net Domestic Assets (NDA): not met; deviation from target considerably lower than previously estimated during the last review. - Primary balance of the central government (on a cash basis) at end-December: performance criterion met as expected; performance mainly due to deferral to early 2014 of payments authorized in 2013. - Adherence throughout to: - Zero ceiling on the accumulation of external arrears. - Non-accumulation of domestic arrears. - Quantitative indicative target for social expenditures: missed in December 2013; the ceiling on current expenditure at end-March 2014 is in line with projections. - Estimate that the NDA criterion for end-March 2014 will be met. ### Structural benchmarks and reforms (status to March/June/September 2014) - Four of eight structural benchmarks to be completed by March 2014 have been fully met: - Electronic platform implemented. - Market makers agreement implemented and now effective. - Treasury Single Account established. - Impact study on the bank lending rate cap submitted to the CBT Board of Directors. - Preliminary audit report on state-owned enterprises’ operations in the energy sector finalized. - Partially met benchmark: - Haircuts on all loans used as collateral: circular issued (partially met); will enter into force with effect from June 2014 after lender of last resort facility is established. - Benchmarks not met and revised timelines: - Implementation decrees for the investment code: to be finalized in September 2014 once the code has been approved by the National Constituent Assembly (NCA). - Targeted household support program: initially postponed to March 2014, now scheduled for June 2014; to be implemented ahead of planned increase in fuel prices. - Tax administration modernization plan: first draft ready; complete plan expected to be finalized in June 2014 following IMF technical assistance. - Strategic orientation for all banks with public participation (or at least for the STB and BH): to be approved by the Council of Ministers in mid-April 2014 (prior action); strategy to be presented to the public by end-April 2014. ### Macroeconomic developments and outlook - 2013 economic growth: around 2.6 percent year-on-year; downturn in Q4 2013 of -0.3 percent on a quarterly basis. - 2014 growth expectation: close to 2.8 percent, reflecting relatively weak performance in the first two months of 2014 and persistence of investors’ wait-and-see attitude. - Short-term risks: possibility of a protracted political transition period, heightened social tensions, and a worsening of the economic outlook for Europe. - Inflation: - Declined to 5.5 percent (year-on-year) in February 2014. - Expected to remain contained at 5.6 percent over the year. - Current account deficit in 2013: reached 8.4 percent of GDP (up from initial program projected level of 7.5 percent of GDP). - Gross reserves in 2013: reached 7.7 billion dollars (3.5 months of imports of goods and services), revised downwards during previous review then revised up due to nonresidents’ deposits, valuation effects from exchange rate fluctuations, and revaluation of CBT gold holdings at market price. - Recent improvements: higher confidence in last two months following adoption of the Constitution led to an initial rise in stock market activity, lowering of country risk premium, and appreciation of the exchange rate against the US dollar and the Euro. ### Fiscal policy and short-term objectives - Program objectives: preserve macroeconomic stability, lay foundations for inclusive growth, protect vulnerable groups. - 2013 primary deficit (cash basis): achieved at 2.7 percent of GDP, meeting objective with a comfortable margin. - Measures contributing to 2013 primary deficit outcome: - Active cash management strategy to preserve part of government deposits amid delayed donor financing. - Settlement of payment orders issued in FY2013 deferred to 2014 (around 3.3 percent of GDP) for payment within 90 days (except public investments linked to project execution). - Savings on the wage bill and social spending. - Significant under-execution of investment spending (by around 1.5 percent of GDP compared to budgeted amounts) due to absorptive capacity constraints and procurement delays. - Underperformance of social spending at end-December 2013 attributed to absorptive capacity constraints; level set for end-March 2014 is expected to have been met. - 2014 budget law (adopted December 2013): - Aims to start fiscal consolidation while preserving priority investment and development spending. - Underlying fiscal position (structural budget deficit) projected at 5.2 percent of GDP in 2014. - Deterioration of 0.6 percent of GDP compared to 2013 observed at time of previous review, taking into account planned measures including savings on unallocated expenditure (0.5 percent of GDP) and wages (0.2 percent of GDP). - Authorities intend to prepare a supplementary budget law to reduce the structural deficit to 4.9 percent of GDP by identifying measures to generate an additional 300 million dinars through revenue measures and savings on expenditure. - Commitment to limit current expenditures (subsidies and goods and services) if needed; capital and social spending (which excludes subsidies) will be protected and not constrained by fiscal consolidation. ### Energy subsidy reform (measures and timelines) - Multi-pronged strategy with short- and medium-term measures. - Measures already implemented and planned: - From January 1, 2014: reduced energy subsidies to cement companies (gray cement) by raising electricity rate and price of natural gas for cement plants by 35 percent and 47 percent, respectively. - On June 1, 2014: plan to introduce a second electricity and gas price adjustment aimed at eliminating all subsidies to producers of grey cement (a gain of 0.2 percent of GDP). - Program for gradual adjustment of electricity and gas rates for other industrial consumers to be implemented over three to six years; initial 10 percent rate increase introduced in January; second 10 percent increase planned for June 2014. - Social tariff introduced for customers that consume less than 100 kwh per month. - Commitment to raise fuel prices by 6 percent by July 1, 2014, expected to result in savings of 100 million dinars on energy subsidies. - New fuel price adjustment formula in force; international prices have not yet reached trigger of ten dinars per barrel in a quarter. - Considering a price smoothing mechanism to increase resilience to large international price fluctuations. - Price adjustments accompanied by: - Implementation of social programs included in the 2014 budget. - Creation of the Energy Transition Fund to support development of renewable energy. - Additional programs and a communication campaign prior to any new price increases. ### Wage bill and civil service reform - Commitment to contain the wage bill in 2014 as envisaged under the program. - New recruitment frozen except in security forces, education, and health sectors. - Finalizing report assessing all new hiring since 2011 to improve 2015 budget preparation; civil service reform task force established. - With World Bank technical assistance: evaluation of civil service hiring system and salary structure to be conducted; findings could form basis for comprehensive civil service reform. - Evaluation of civil service salary structure will be finalized in September 2014. ### Monetary and exchange rate policies - Money supply (M2) rose by 6.9 percent year-on-year in 2013. - NDA criterion at end-December 2013 was not met due to rapid increase in net credit to the government. - Refinancing of banks by the Central Bank: - Peak of 5.5 billion dinars on January 15, 2014 (due to seasonal withdrawals of oil company deposits). - Dropped to 4.2 billion dinars at end-February 2014. - Monetary policy stance: - Policy rate increased by 50 basis points to 4.5 percent in December 2013. - Symmetrical corridor of 25 basis points around the policy rate introduced. - Core inflation around 4.5 percent. - Credit to the private sector contained at 8.1 percent (year-on-year at end-January 2014). - Real interest rate remains negative. - Authorities do not consider it necessary to increase the policy rate immediately but stand ready to increase it to contain inflationary pressures from an accommodating budgetary policy and/or rapid dinar depreciation. - Reform of excessive lending rate system: - March 2013: eliminated ceiling on creditor interest rates for term deposits (which had been introduced in December 2011). - Impact study on modification/elimination of legislation on excessive bank lending rates finalized with World Bank assistance; presented to CBT Board (structural benchmark at end-March 2014). - CBT Board asked for wider consultations with relevant ministerial departments before revising legislation to enable banks to preserve profit margins, apply higher rates to higher-risk customers, and improve monetary policy transmission and access to credit for SMEs. ### Liquidity exit strategy and banking sector measures - Gradual exit from liquidity injections underway. - Measures launched: - Increasing the share of refinancing guaranteed by government securities to 20 percent at end-December 2013. - Introducing a ten percent haircut on loans accepted as collateral. - Entry into force of a haircut system of around 25 percent (structural benchmark at end-March 2014) postponed to June 2014; related circular to be adopted by CBT Board of Directors in March 2014. - Postponement allows banks time to prepare for tightened liquidity conditions and to benefit from implementation of a lender of last resort facility at end-June 2014 (structural benchmark). - Lender of last resort facility: - To ensure structural needs of solvent but illiquid banks are met at penalty rates and on the basis of a precise restructuring plan. - Once facility is in place: - Share of government securities used as collateral in CBT refinancing operations will be increased to 40 percent (structural benchmark at end-December 2014). - A study on possibility of valuing government securities at market prices rather than nominal value will be conducted by September 2014. *Source: Letter of Intent and Memorandum of Economic and Financial Policies (extractes provided).* ### 11. The work on the reform of the central bank law will begin in May 2014. In line with the ### 11. The work on the reform of the central bank law will begin in May 2014. In line with the ### Central bank law reform - The provisions of the central bank law will be revised to: - strengthen the independence of the CBT, - improve its governance procedures, - improve modalities for the conduct of external audits and its internal audit and control functions. - The revised draft law—prepared with the support of IMF technical assistance—will be submitted to the CBT Board of Directors in June 2014 (structural benchmark). - The revised draft law will be adopted by the government in September 2014. ### Foreign exchange market and liquidity - Liquidity pressures that marked the foreign exchange market throughout 2013 eased in the first few months of 2014 due to: - Stricter enforcement of existing regulations for the holders of professional accounts in foreign currency, - Receipt of expected budget support, - Confidence from the breakthrough in the political situation, - CBT interventions in the foreign exchange market. - Exchange rate movements and market intervention: - The dinar appreciated against the dollar by 5 percent over the last three months compared to the Euro (and 4 percent against the US dollar), reducing by half the depreciation recorded in 2013. - CBT interventions currently account for 30 percent of trades in the foreign exchange market (compared to 50 percent two months ago). - CBT intervention policy and reserves: - CBT limits interventions to ensuring smooth processing of external payments. - Policy: limit interventions to smoothing excessive intra-day fluctuations while allowing market forces to determine the trend. - Exchange rate assessment: remains slightly overvalued (by around 7 percent). - Commitment to use intervention policy to strengthen foreign exchange reserves, including through purchase of foreign exchange when conditions allow. - Goal: reduce structural liquidity deficit of banks and allow banks to engage in swaps without CBT approval as additional supply of foreign currency appears. ### Exchange rate system flexibility initiatives - Intend to introduce weekly foreign exchange auctions before end-2014 (structural benchmark at end-December). - Prerequisites in place (structural benchmark at mid-March 2014): - Implementation of the electronic platform allowing interconnection with banks, - Entry into force of the Market Makers Agreement. - Additional prerequisite before auctions: establish an efficient information system to centralize projected foreign currency payments and provide clearer overview of cash flows. ### Trade policy - Development strategy: remain open and based on free trade. - In line with WTO rules, new restrictions or surcharges on imports will be imposed only as a last resort, after exhausting market solutions that preserve appropriate incentives and only with very clear and pre-announced criteria for elimination. ### Financial sector policies — overview and asset quality - Implementation of prudential rules aligning with international norms revealed fragility in the banking sector. - Impact of new prudential rules for haircut of loan collateral: - Provisioning rate (excluding accrued interests for nonperforming loans) increased from 46 percent to 60 percent. - Average capital adequacy ratio fell from 12 percent to 9.2 percent. - Six banks are below the 9 percent required by the new regulation. - Asset quality: - Ratio of NPLs is 15 percent of total loans (20 percent with inclusion of claims transferred to bank-affiliated asset management companies). - Tightening of risk division and concentration norms (entered into force at end-2013) reduced certain risks and advanced progress toward international standards. ### Prudential compliance and supervisory actions - Banks below minimum capital requirements have been requested to prepare detailed plans to raise capital to 9 percent (scheduled to be increased by end of year to Basel II level of 10 percent). - Plan to adopt the same approach for banks noncompliant with liquidity ratio. - A study assessing impact of a new liquidity ratio (including off-balance sheet transactions and a more forward-looking approach) was submitted to the CBT Board of Directors in February 2014 (structural benchmark at end-December 2013). - The new liquidity ratio: - Will be announced to banks through a CBT circular in September 2014, with a clear timetable for gradual implementation. - In the interim, monetary sanctions will be applied for noncompliance with prevailing liquidity ratio. - Additional supervisory measures for FY 2014: - Move ahead with implementation of consolidated-based prudential norms, - Carry out regular monitoring of banks and their subsidiaries, - Conduct a diagnostic study of internal risk rating systems and implement action plan for noncompliant banks by end-December 2014. ### Public banks: vulnerabilities and restructuring - Governance improvements: greater autonomy from the state for public banks (hiring of staff, appointment of Board members). - Audits completed for two public banks (STB and BH) confirmed: - Insufficient levels of equity, capital and provisions, - High level of nonperforming loans, - Excessive operating costs, - Personnel lacking required skills and competencies, - Weaknesses in governance structure and quality of service. - Audit of Banque Nationale Agricole (BNA) postponed due to technical problem; to be finalized by July 2014 (new structural benchmark). - Short-term action plan components: - Strategy determination: - Decision on strategic approach to government role in national banking sector to be determined by outcomes of audits of STB and BH and restructuring options proposed by auditors. - Possible options: new business model, possible merger, opening to further private partnerships. - Strategy on the role of the state in banks with public participation (at least STB and BH) to be adopted by the Council of Ministers in mid-April 2014 (Prior Action) and presented to the public at end-April. - Restructuring plan for STB and BH to be adopted in July 2014 (new structural benchmark). - Funds for recapitalization could be provided as non-negotiable bonds. - Budgeted amount for bank recapitalization: 1.2 percent of GDP (subject to revision); amounts estimated by audits currently stand at 1.5 percent of GDP; FSSA estimated needs of public banks at 2.6 percent of GDP. - Asset Management Company (AMC): - Draft law on an AMC to be submitted to the NCA in June 2014. - Law provisions: (i) clear and transparent governance rules with financial and operational autonomy; (ii) explicit power to speed up resolution of debt issues. - Capitalization of AMC to follow business plan established with World Bank support. - Coordination with bank recapitalization program, particularly for public banks. - Work started to identify solutions to NPLs in other sectors (e.g., manufacturing industry). - Revision of law on asset recovery companies (Law 98) to allow such companies to contact customers directly — to be undertaken during the course of this year. ### Banking supervision reform and staffing - Introducing a formal risk-based banking supervision system; a three-year plan will be established with IMF technical assistance. - Recent inspection activity: - A first general inspection of a large bank (first since 2006) and four credit inspections improved on-site inspection methodology and highlighted need to improve risk management, data, and loan classification systems. - For FY 2014: - A risk-based inspection plan adopted in March 2014 identified six credit institutions, including four banks, for inspection. - Staffing: - Recruited 12 new people in the DGSB, representing a quarter of the envelope provided for 2012–2014. - Plan to fill remaining vacancies to acquire needed additional resources as soon as possible. ### Banking data reporting and monitoring - CBT developed a benchmarking indicator for credit institutions (Uniform Bank Performance Reporting, UBPR) used jointly by the DGSB and the DGSFPR. - UBPR will be available 60 days after the end of each quarter and is based on a very simplified risk rating system. - UBPR will be complemented by a new accounting, financial, and institutional banking data system to be put in place in December 2014 (structural benchmark). ### Crisis management, resolution framework, and deposit insurance - Draft banking law prepared with World Bank and IMF technical assistance to: - Strengthen banking supervision and regulation, - Put in place a robust legal framework for the resolution of insolvent banks. - The draft law will be presented to CBT management in June 2014. - Modalities for the operational structure and legal framework for a deposit guarantee fund are being drafted with World Bank technical assistance. ### Fiscal reform — composition and medium-term strategy - Need to improve composition of public expenditures to achieve growth-supporting medium-term fiscal consolidation and rebuild fiscal space. - Medium-term fiscal consolidation strategy will be coupled with fiscal reforms in: - tax policy, - revenue administration, - public financial management, - public enterprise reform, - effectiveness of public investment. ### Tax policy and tax code reform - Grouping of tax laws into a new tax code planned in 2014 to improve equity, efficiency, and transparency. - Based on tax consultations (June–November 2013), a report forms the basis of a strategy for a simpler and fairer taxation system. - The report will be discussed publicly at national tax consultations planned for June 2014 and used to establish a new tax code to be adopted by the Council of Ministers in September 2014 (structural benchmark). - Corporate income tax (CIT) revisions planned to achieve gradual convergence in off-shore and on-shore sectors over the next few years and announced on a clear calendar. - The difference between tax rates in these two sectors was reduced by half in the context of the 2014 budget law. - A study is underway to modify the presumptive tax system, including for liberal professions. ### Tax administration modernization - Diagnostic study on tax administration conducted in February 2013 with IMF technical assistance. - Actions taken: - Set up an in-depth verifications unit and a claims monitoring committee within the Large Taxpayers Office (LTO). - Set up a debt collection center along regional center lines. - Planned measures: - Strengthen and restructure the Large Taxpayer Unit (LTU) by including all tax functions. - Strengthen tax control by improving selectivity (targeted criteria and objectives). - Strengthen control of presumptive tax rate system (BNC) using health insurance, social security, and banking data. - Modernization plan: - A plan to modernize tax administration will be finalized in June 2014 (end-March SB postponed to June 2014). - Aim: set up a unified administration and strengthen control and evaluation mechanisms, in line with IMF technical assistance and with assistance of an IMF resident expert. - A unit responsible for overseeing modernization will be created in April 2014 within the General Directorate of Taxation to monitor implementation (organization, instruments, working methods). - Customs administration: - First risk management unit set up, enabling targeted inspections in customs offices. - Continued determination to fight smuggling and further strengthen border posts. ### Public enterprises: financial pressures and governance - Public enterprises performance places a heavy burden on government budget. - Measures since March 2014 to control increasing losses in transportation (Tunisair), trade (Grain Board), and energy (STEG, STIR): - Shortening timeframes for transferring amounts due to enterprises eligible for subsidies on energy and food products. - Reduce cross subsidization between energy companies by having STEG and STIR meet energy import needs directly from June 2014, instead of going through ETAP. - General Financial Committee prepared a preliminary audit report on three public enterprises in the energy sector (structural benchmark at end-March 2014). - Ministry of Finance committed to providing advances on budget appropriations to enterprises receiving energy and food subsidies to reduce recourse to bank loans. - Share of public enterprises in total loans was around 10 percent in 2013, distributed almost evenly between public and private banks. - Monitoring and governance agenda: - Strengthen monitoring of public enterprises: - Monitoring committee (DG for Holdings, CBT’s DGSFPR, Unit responsible for Monitoring Productivity of Public Enterprises and Institutions) reviewing financial and organizational situation of 28 enterprises considered most important for budget and economy. - Prepare a consolidated balance sheet for the 20 largest public enterprises (structural benchmark at end-June 2014) for more precise estimation of real impact on government budget. - Preliminary report including financial ratios to be finalized in April 2014. - Publish a quarterly report on financial situation and action plans for rehabilitating loss-making enterprises for first time in June 2014. - Improve governance of public enterprises: - Review regulatory framework to enhance role of boards of directors, - Set up audit committees, - Increase transparency of operations. ### Public financial management improvements - Government published a “citizens’ budget” for the first time and respected budget execution procedures during the complementary period. - A first draft organic law prepared by the Budget Directorate (with EU and France technical assistance) to introduce greater flexibility in management of appropriations and greater accountability of managers. - The draft law will be presented to the Council of Ministers in September 2014. - Designed to introduce medium-term “performance budgeting” (currently nine ministries—around 70 percent of the budget—present budgets with performance objectives). - Treasury and budgetary reforms: - Consolidated government accounts, excluding project loan accounts, in a Treasury Single Account (structural benchmark at end-March 2014). - Intend to assess exhaustiveness and quality of budget documentation and prepare a report on financial risks. - Immediate focus: prepare a new budgetary nomenclature consistent with international standards. - Draft of the new functional classification of the budget to be finalized in June 2014. ### Public investment execution and procurement - Need to improve execution and effectiveness of investment spending to generate inclusive growth. - Diagnostic study on public investments (with World Bank) highlighted need to implement major critical projects impacting disadvantaged regions. - Procurement reforms: - Simplified, improved, and considerably modernized procurement procedures consistent with World Bank recommendations; decree approved in March 2014 and to be implemented in June 2014. - Goal: more rapid and transparent relaunch of investments. - Additional measures: - Strengthened control of public investments to avoid rollovers and under-execution from regional loan transfers. - Decentralized project execution by professionalizing oversight of public projects, reinforcing role of Governors, and carrying out periodic central government visits. - Adopted procedures to address land deeds issues that cause delays in project preparation and execution of investment spending. _Italicized: IMF staff report content (extracted unit)._ ### 27. Our structural reform agenda focuses on improving the business environment and ### _cr14123 - 27. Our structural reform agenda focuses on improving the business environment and ### Structural reform agenda: objectives and laws to be enacted - Focus: improving the business environment and promoting a competitive private sector to generate inclusive growth. - Main measures under implementation: - New investment code: prepared with World Bank technical assistance and consultations with civil society and donors; aims to encourage private investment through a more transparent and effective regulatory framework and the streamlining of incentives. - Submitted to the National Constituent Assembly (NCA) in November 2013; examination delayed to June 2014. - Implementation decrees (structural benchmark at end-March 2014) delayed; these decrees can only be finalized after June 2014 (new structural benchmark for end-September 2014). - Competition law: draft submitted to the NCA in 2013; to be examined by the NCA by June 2014. - Aim: reduce government intervention, reduce excessive regulations, strengthen competition among enterprises. - Law on collective proceedings (Law 95): prepared with World Bank assistance; aims to modernize and simplify restructuring and liquidation of insolvent firms. - Policy design to establish clear rules on government’s status as a preferred creditor and grant private creditors the right to vote on recovery plans. ### Trade integration and infrastructure actions - Commitment to closer integration into the global economy to generate inclusive growth by: - Reducing tariff and non-tariff barriers. - Implementation of a free trade agreement with Algeria. - Deepening trade agreements with neighboring and African countries. - Launching negotiations for a Deep and Comprehensive Free Trade Area (ALECA) with the EU in 2014. - Logistics and port infrastructure action plan: - Improve logistics systems of the Rades port (Tunisia’s main port). - Build a new deep water port at Enfidha. ### Administrative simplification and regulatory clean-up - Ongoing simplification of administrative procedures in tax collection and customs to: - Promote private sector development. - Limit discretionary application of regulations. - Actions taken and planned: - Phase out restrictive administrative procedures in transport, customs, and export sectors. - Continue regulatory clean-up campaigns, including procedures related to the VAT. ### Labor market and social pact implementation - Commitment to reduce obstacles to proper functioning of the labor market. - Implementation begun of the social contract signed on January 14, 2013, with employers and trade unions: - Setting up technical commissions: labor and professional relations, social protection, employment, regional development, and investment. - Broad consultation planned for a new employment strategy; process expected to culminate in labor reform including analysis of flexicurity and reduction of structural skills mismatch. - Employment promotion programs and micro project programs financed by loans from the solidarity bank and the employment fund to foster youth employment. ### Statistics and statistical capacity strengthening - Reliable statistics prioritized for monitoring macroeconomic policies and social programs. - Collaboration with Eurostat for a comprehensive diagnostic study of the statistics system. - Planned IMF technical assistance to strengthen: - Institutional arrangements and production of the system of national accounts (particularly quarterly demand side). - Balance of payments. - Commitment to expand regular publication of survey results on current conditions, employment, and household living conditions. - Legislative work initiated to guarantee independence of the National Statistical Office. ### Protecting the most vulnerable: 2014 budget social measures and targeting - Fiscal consolidation and reforms to consider impacts on the most vulnerable; strengthen social protection. - Government’s 2014 budget includes: - (i) a social housing program for needy families; - (ii) an increase in the income tax deduction for the poorest households; - (iii) a tiered electricity rate system introducing a second social (“lifeline”) tariff for households that consume less than 100 kwh per month. - Social targeting and program enhancements in 2014: - Introduce a unique social identification number to create a new register of families in need and improve targeting to reduce “leakages.” - Launched evaluations to be finalized by June 2014: - Evaluation of school assistance programs (with UNICEF). - Assessment of families-in-need/health benefits card program. - Household targeting strategy to take effect on July 1, 2014 in view of planned fuel price increases, consisting of: - (i) expansion to 250,000 beneficiary families (from 220,000 at present) of the existing cash transfer program for needy families; - (ii) broadening population groups eligible for one-off and temporary aid to mitigate fuel price increases; targeting will use databases of STEG and social security or any new social identification numbers; - (iii) a 10-dinar (about 10 percent increase) in social allowances for school children and university students at the start of the academic year. ### Pension system reform: fiscal risk and planned analysis - Retirement and health insurance systems considered financially unsustainable over the long term. - Projected combined deficit if unreformed: could amount to 2 percent of GDP by 2018. - Government actions: - Analyzing scenarios for retirement and health insurance reform. - Implementing a support and welfare program financed by the transition fund to ensure system viability. - Decision on reform to be taken on the basis of a national consensus reached through the consultative process launched with the social pact in January 2013. ### Quantitative performance criteria, indicative targets, and program assumptions (selected figures from Tables) - Quantitative Performance Criteria (Millions of Tunisian Dinars) - 1. Floor on the primary balance of the central government (cash basis excl. grants): -2,256; -4,318; -3,818; -2,015; -2,032; Met; -2,796; -1,773; -3,119; -2,806; -4,007; -5,609 - 2. Ceiling on net domestic assets of the Banque Centrale de Tunisie (Stock): -1,332; -1,084; 417; 3,510; 1,382; Not Met; 3,952; 4,340; 3,009; 4,662; 4,086; 4,071; 1,173 - Quantitative Performance Criteria (Millions of US$) - 3. Floor on net international reserves of the Banque Centrale de Tunisie (Stock): 7,937; 8,066; 7,099; 5,439; 5,710; Not Met; 5,308; 5,058; 5,071; 5,086; 4,754; 5,275; 7,066 - Continuous Performance criteria (Millions of Tunisian Dinars) - 4. Ceiling on the accumulation of new external debt payment arrears by the central government: ...; 0; 0; 0; 0; 0; 0; 0; 0 - Quantitative Indicative Targets (Millions of Tunisian Dinars) - 5. Ceiling on Current Primary Expenditure: 4,253; 4,253; 4,010; 8,432; 8,267; 12,796; 17,815 - 6. Floor on Social Spending 3/: 1505; 1,588; 1,371; 1,281; Not Met; 229; ...; 562; 900; 1,350 - 7. Ceiling on the accumulation of new domestic arrears: ...; 0; 0; 0; Met; 0; 0; 0; 0; 0 - Program assumptions on which adjusters are calculated (selected) - Disbursment of public external Financing on a cumulative basis (in US$ million) 4/: 2,239; 845; 859; 544; 296; 984; 707; 1,163; 2,771 - Public debt service (interest and amortization) on a cumulative basis (in US$ million): 1,387; 1,379; 1,344; 208.2; 213; 503; 516; 718; 968 - Bank recapitalization (in million TD): 500; 500; 500; ...; 0; 0; 0; 300; 700 - Privatization receipts (in million USD): 394; 41; 39; 39; ...; 0; 0; 0; 0; 0 - Resident deposits at the BCT (in million USD) 5/: 1,490; 1,852; 1,854; ...; 1,854; 1,854; 1,854; 1,854 - Program exchange rate TD/ U.S. dollars: 1.55235 (listed repeatedly) - Note: Quantitative performance criteria and structural benchmarks are described in the Technical Memorandum of Understanding; foreign currency amounts converted at program exchange rates. ### Structural benchmarks and implementation status (selected items) - Financial sector (2013–2014 benchmarks and status): - Approval of new reporting system architecture covering bank-related accounting, financial and institutional functions. Objective: Financial sector stability. Date: Aug-13. Status: MET, with delay. Reporting system presented in September 2013. - Adoption by the Council of Ministers of the strategic vision of the government's future role in banks on the basis of preliminary audit results. Date: mid-September 2013. Status: NOT MET. Strategic vision pushed to March 2014. - On-site inspections and credit risk inspections: Dec-13. Status: MET. - Presentation to the Board of the CBT of a study on impact on banks of liquidity ratio changes toward international standards. Date: Dec-13. Status: MET, with delay; study presented to CBT Board on February 24. - Fiscal policy (selected benchmarks): - Approval by Council of Ministers of corporate tax reform: Jul-13. Status: MET, with delay. Specifics: reduction of on-shore corporate tax rate from 30 to 25 percent and increase of off-shore rate from 0 to 10 percent incorporated in 2014 draft budget. Draft budget approved by Council of Ministers on November 18, 2013; adopted by Parliament on December 30, 2013. - Adoption of Ministry of Industry decree approving a new automatic fuel pricing formula. Date: Aug-13. Status: MET, with delay. Automatic pricing mechanism in place but does not smooth large price increases. - Submission to Council of Ministers of new targeted household support program to accompany energy subsidy reform. Date: Aug-13. Status: Not MET; technical work done but decision on beneficiaries and compensating mechanism pending. - Merge management, tax collection, and control of large enterprises in large taxpayer unit. Date: Sep-13. Status: MET, with delay. - Finalize audit of electricity company (STEG) and petroleum refinery company (STIR). Date: Dec-13. Status: Not Met; audits started, benchmark postponed to March 2014. - Monetary and exchange rate policy (selected benchmarks): - Publication of a circulaire by the CBT announcing haircuts on all loans used as collateral for refinancing operations at the Central Bank. Date: Jul-13. Status: MET. Circulaire adopted end-July; includes a general haircut of 10 percent. - Ensure proportion of refinancing volume at the CBT backed by government securities is at least 10 percent for each bank. Date: Aug-13. Status: MET. - Implementation of an electronic bank interlinking platform and launch of the Market Makers Agreement. Date: Oct-13 / mid-Mar 2014. Status: NOT MET for Oct-13; later listed as MET mid-Mar 2014. - Ensure refinancing proportion backed by government securities at least 20 percent for each bank. Date: Dec-13. Status: MET. - Structural reforms/private-sector development: - Adoption of the Investment Code. Date: Jul-13. Status: MET, with delay. New code approved by Council of Ministers in November 2013; next step drafting implementation decrees to accompany ratification by Parliament. ### 2014 Structural Benchmarks (selected) - Prior actions and benchmarks for Jun–Dec 2014 include: - Submission of banking resolution framework in line with international practices (Crisis management); Jun-14: In progress with WB and IMF TA. - Submission to the Central Bank Board of a draft Central Banking law in line with international practices; Jun-14: In progress; IMF TA planned for May 2014. - Completion of the financial audit of the Banque Nationale Agricole (BNA); Jul-14. - Adoption by Government of restructuring plans for BH and STB; Aug-14. - Development and implementation of new reporting and bank classification systems; Dec-14. - Adoption by Ministry of Finance of a plan to modernize tax administration; Mar-14 → Jun-14: Not MET; IMF TA assisting. - Unification of government accounts into a Single Treasury Account (excluding project loan accounts); Mar-14: MET. - Finalize audit of STEG and STIR; Mar-14: MET (First Report submitted March 30, 2014). - Submission to Council of Ministers of new targeted household support program to accompany energy subsidy reform; Mar-14 → Jun-14: Not MET; work in progress. - Prepare consolidated balance of 20 main public enterprises (2010-2012); Jun-14. - Government approval of a new tax code; Sep-14. - Implementation of an increase of the haircut for loans used as collateral for refinancing operations to at least 25 percent: Mar-14 → Jun-14: Not MET; new regulation adopted March 25, 2014 and application announced for June 2014. - Establishment of the lender of last resort facility; Jun-14: In progress with IMF TA assistance. - Ensure refinancing proportion backed by government securities is at least 40 percent for each bank; Dec-14. - Implementation of a weekly foreign exchange auction mechanism; Dec-14. - Decree for implementing the new investment code (protect market access, reduce restrictions, rationalize incentives). Mar-14 → Sep-14: Not Met. Implementation decrees to be finalized once investment code ratified by Parliament. ### Fiscal compensatory measures – March 2014 (selected numeric items) - Fiscal Revenues: 2600.3 (In Million Dn) - Tax Policy Measures: 1000.1 - Alcoholic Beverages: 8 percent Increase Excise Tax: 200.0 - Tabac: 10 percent Increase Excise Tax: 500.1 - No tax exemption for imported vehicles 1/: 300.0 - Tax Administration Measures: 1600.2 - Tunisie Telecom: enhanced tax control: 1100.1 - Recovery of tax arrears awaiting judicial decision: 500.1 - Current Expenditures: 400.0 - Additional reduction of energy subsidies 2/: 400.0 - Total: 3000.4 (In Million Dn) - Notes: - 1/ At the moment of resale for cars imported by tunisians leaving abroad. - 2/ Bringing forward the planned increase of tariffs to May 2014. *Italic: Content derived from the IMF chapter/section labeled "_cr14123 - 27. Our structural reform agenda focuses on improving the business environment and" (PDF).* ### 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff ### 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff concerning the definition of the quantitative performance criteria and indicative targets ### Overview - Establishes agreement on: definition of quantitative performance criteria and indicative targets; content and frequency of data reporting to IMF staff for program monitoring purposes. - Quantitative criteria and targets are defined in Table 1 of the Memorandum of Economic and Financial Policies (MEFP) attached to the Letter of Intent dated April 10, 2014. - For program purposes: - All assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” except items affecting the government’s budgetary accounts, which will be measured at current exchange rates. - Program exchange rate corresponds to the accounting exchange rate of the CBT prevailing on December 31, 2012. - For the SDR, the program exchange rate is 1SDR = 2.38852 Tunisian dinars. ### Program exchange rates and valuations - Monetary gold: price of 0.6498 dinar per gram of gold as established in decree No. 86-785 of August 18, 1986. - Stock of gold: 6.73 tons (6739902 grams) on December 31, 2012. - Program exchange rates (Tunisian Dinar per FX Currency, Accounting Exchange Rate of the CBT, December 31, 2012) — Source: Central Bank of Tunisia: - Algerian dinar: 100.19860 - Saudi riyal: 104.13930 - Canadian dollar: 11.56175 - Danish krone: 10027.44020 - USA dollar: 11.55235 - British pound sterling: 12.50510 - Japanese yen: 100018.02650 - Moroccan dirham: 101.83535 - Norwegian krone: 10027.73730 - Swedish krona: 102.37995 - Swiss franc: 1016.95450 - Kuwaiti dinar: 15.51955 - United Arab Emirates dirham: 104.22660 - Euro: 12.04725 - Libyan dinar: 11.23740 - Mauritanian ouguiya: 1000.51230 - Bahraini dinar: 14.11770 - Qatari riyal: 104.26380 ### A. Performance criteria and indicative targets (specified in Table 1 of the MEFP) - Performance criteria: - A performance criterion (floor) on the net international reserves of the Central Bank of Tunisia. - A performance criterion on the net domestic assets (ceiling) of the Central Bank of Tunisia. - A performance criterion (floor) on the primary balance of the central government, excluding grants. - A continuous performance criterion on the accumulation of external arrears (zero ceiling). - Indicative targets: - An indicative target (ceiling) on total domestic arrears. - An indicative target (ceiling) on total primary current expenditure of the central government. - An indicative target (floor) on capital expenditures in priority social sectors and social programs. ### B. Institutional definition - Central government: all ministries and agencies subject to central budgetary administration in accordance with the organic law on the government budget. Regional governments and municipalities subject to central budgetary administration are part of the central government. - Authorities will inform Fund staff of any new entity and any new program or special budgetary or extra-budgetary fund created during the program period; such funds or new programs will be included in the definition of the central government. ### C. Floor on the Net International Reserves (NIR) of the Central Bank of Tunisia (CBT) - NIR defined as difference between 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, negotiable foreign securities and bills purchased and discounted (per fifth edition of IMF Balance of Payments Manual). - CBT liabilities in foreign currency to nonresidents include: commitments to sell foreign currencies associated with financial derivative transactions (swaps, futures, options), any portion of CBT’s assets used as collateral, IMF and Arab Monetary Fund (AMF) credits outstanding, deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions. - Exclusions and treatment: - Government’s foreign currency deposits at the CBT are not included in the liabilities. - Any SDR allocation received after May 15, 2013 is not included. - 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 prospectus and protocol clearly indicate CBT acted as agent and debt is liability of the central government and CBT authorized procedures allow direct deduction from the Treasury's current account. - Valuation: CBT reserve assets and liabilities in foreign currency calculated using program exchange rates. - Stocks at program rates on December 31, 2012: - Stock of net international reserves: US$7.937 billion - Stock of reserve assets: US$8.645 billion - Stock of CBT liabilities in foreign currency: US$730.399 million - Operational note on residents’ foreign currency deposits at the CBT: - Deposits of residents in foreign currency at the CBT are treated operationally within reserve money; for program consistency, agreed to retain accounting definition of external liabilities used in CBT balance at December 31, 2012 and to adjust NIR in opposite direction of net domestic assets based on variation in residents’ deposits in foreign currency from end-December of the previous year. - At end-December 2013, value of stock of deposits in foreign currencies of residents at the CBT was US$1,852.07 million at the program exchange rate. ### D. Ceiling on Net Domestic Assets (NDA) - NDA defined as difference between the monetary base and the net foreign assets of the CBT. - Monetary base includes: - Fiduciary money (money in circulation outside the banks and cash balances of commercial banks). - Deposits of commercial banks at the central bank (including foreign currency and deposit facility). - Deposits of all other sectors at the central bank (other financial enterprises, households, and companies). - Net foreign assets: 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. ### E. Floor on the Primary Balance of the Central Government (Excluding Grants) - Primary fiscal balance (excluding grants, on a cash basis) measured on a financing basis and equals the negative sum of: - (i) total net external financing; - (ii) privatization receipts; - (iii) net domestic bank financing; - (iv) net domestic nonbank financing; - plus (v) interest on domestic and external debt paid by the central government; - less external budgetary grants received by the central government. - Definitions: - Total net external financing: net external loans of the government = new loan disbursements less repayments of principal; includes project and budgetary loans and any form of debt used to finance central government operations. - Privatization receipts: government receipts from sale of any government asset; includes sale of government shares in public and private enterprises, sales of nonfinancial assets, sales of licenses, sale of confiscated assets (excluding confiscation of bank accounts). For NIR adjustor, only receipts in foreign currency included. - Net domestic bank financing: change in net bank loans to central government (in dinars and foreign currency) plus change in central government deposits at the CBT (lists specific accounts included). - Net government borrowing from banking system: change in stock of government securities held by banks and any other central government borrowing from banks, less repayments. Stock of nonnegotiable bonds issued to banks during recapitalization of public banks and serviced entirely by government is excluded from bank claims on the government. - Net domestic nonbank financing: change in stock of government securities held by nonbanks (including social security funds) and any other central government borrowing from nonbanks, less repayments; instruments taken at nominal/face value shown on institutions’ balance sheet and exclude accrued interest. ### F. Ceiling on the Accumulation of External Arrears - External arrears 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 (per External Debt Statistics: Guide for Compilers definition of debt). ### G. Indicative Ceiling on the Accumulation of Domestic Arrears - Domestic arrears 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 contractual grace period). If no maturity date, arrears are amounts unpaid 90 days or more after contract signing or receipt of invoice. ### H. Indicative Ceiling on Central Government Primary Current Expenditure (excluding Interest Payments on Public Debt) - Central government primary current expenditure defined as sum of central government expenditure on: - (i) personnel wages and salaries; - (ii) goods and services; - (iii) transfers and subsidies; - (iv) other unallocated current expenditure. - Methodologies used to measure current expenditure categories are those used to design the table of central government financial operations presented in the macroeconomic framework. ### I. Indicative Floor on Social Expenditures - Social expenditures 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; - all current expenditures (“dépenses de gestion”) of the above-mentioned sectors and programs. - Exclusions: food and energy subsidies are excluded. ### J. Adjustment factors for the program performance criteria - NIR targets adjusted upward (downward) if the cumulative sum of: - 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 - are greater (lower) than the levels indicated in the table below. NIR targets also adjusted upward (downward) if total amount of cash payments on external debt service of the government is greater (lower) than the levels included in the table below. - NDA targets adjusted upward (downward) based on downward (upward) adjustment of the NIR floor given the same drivers as above; NDA targets also adjusted based on cash payments on external debt service being greater (lower) than the levels in the table. NDA ceiling will be converted into Tunisian dinars at the program exchange rate. - Program assumptions on adjustment factors for quantitative performance criteria (Millions of US dollars) — 2014: - Government External Financing: - 2014 Q1: 803.68 - 2014 Q2: 55.46 - 2014 Q3: 76.91 - 2014 Q4: 828.74 - Year: 164.6 - Project loans: - 2014 Q1: 74.41 - 2014 Q2: 108.45 - 2014 Q3: 8.81 - 2014 Q4: 114.13 - Year: 55.8 - Multilateral donors: - 2014 Q1: 507.57 - 2014 Q2: 38.06 - 2014 Q3: 603.46 - 2014 Q4: 600.42 - Year: 449.3 - AMF (Arab Monetary Fund): 0.04, 3.4, 0.0, 0.04, 3.4 - IMF (budget support): 507.54, 44.62, 220.92, 220.9, 393.9 - World Bank Group: 0.0, 250.0, 250.0, 250.0, 750.0 - European Union: 0.0, 0.0, 132.5, 129.6, 262.1 - Bilateral donors: - 2014 Q1: 200.0 - 2014 Q2: 0.0 - 2014 Q3: 0.0 - 2014 Q4: 0.0 - Year: 200.0 - Turkish loan: 200.0, 0.0, 0.0, 0.0, 200.0 - Financial Market Access: - 2014 Q1: 21.79 - 2014 Q2: 9.0 - 2014 Q3: 14.7 - 2014 Q4: 1114.11 - Year: 159.5 - Sukuk: 0.0, 0.0, 0.0, 500.0, 500.0 - Market Financ. (with possible Japanese guarantee): 0.0, 0.0, 0.0, 300.0, 300.0 - Market Financ. (with possible US Treasury guarantee): 0.0, 0.0, 0.0, 300.0, 300.0 - Other (incl. Loan Transfers to SOEs): 21.79, 9.0, 14.7, 14.15, 59.5 - Budget Grant: - 2014 Q1: 20.7 - 2014 Q2: 13.8 - 2014 Q3: 27.67 - 2014 Q4: 5.8 - Year: 137.9 - Privatization Receipts: 0.0, 0.0, 0.0, 0.0, 0.0 - Government External Debt Service: - 2014 Q1: 213.53 - 2014 Q2: 302.7 - 2014 Q3: 202.2 - 2014 Q4: 249.9 - Year: 968.3 - Amortization: 118.9, 196.3, 114.1, 185.7, 615.1 - Interest: 94.5, 106.4, 88.1, 64.2, 353.2 - Resident deposits at the BCT: (End December 2013 reference level estimated at USD 1,852.07 million) - Sources: Tunisian authorities and IMF staff estimates. - Additional adjustments: - NDA ceilings adjusted downward/upward based on amount of CBT reserves released/mobilized because of decrease/increase in the reserve requirement. - Floor on primary balance (excluding grants) adjusted upward/downward based on amount used to recapitalize public banks. Recapitalization amounts for 2013 assumed to be 500 million dinars (Q4 2013). ### K. Monitoring and reporting requirements - For data reporting purposes, the Ministry of Economy and Finance, the National Institute of Statistics (INS), and the Central Bank of Tunisia (CBT) will follow the rules and the format considered appropriate for data reporting as covered by this technical memorandum of understanding, unless otherwise agreed with IMF staff. *Source: IMF staff—Memorandum establishing quantitative performance criteria, indicative targets, valuations, definitions, and adjustment factors (as provided in the supplied content).* ### 31. Performance under the program will be monitored using data supplied to the IMF by the ### _cr14123 - 31. Performance under the program will be monitored using data supplied to the IMF by the ### Monitoring framework and data reporting requirements - Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities as outlined in the table. - The authorities will promptly transmit to the IMF staff any data revisions. - Selected data items, periodicity, and reporting delays (as presented): - GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices — q; Delay: 45 days. - Inflation: Including the underlying inflation of non-administered and administered prices — m; Delay: 14 days. - Tax and nontax revenue of the central government decomposed on the basis of main tax and nontax revenues items — m; Delay: 30 days. - Total expenditures: current and capital, transfers and subsidies — m; Delay: 30 days. - Capital expenditure: by type of financing (domestic and external, differentiating loans and grants), and by main sectors and projects (agriculture, social, infrastructure) — m; Delay: 45 days. - Current expenditure: by type of expenditure: wages, goods and services, transfers — m; Delay: 45 days. - Social expenditure — q; Delay: 45 days. - Stock of domestic and foreign debt of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency — q; Delay: 30 days. - Stock of domestic arrears as per TMU, and stock of accounts payable that correspond to expenditures committed/payment ordered more than 90 days before (and by type of expenditures) — q; Delay: 45 days. - 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 — m; Delay: 30 days. - Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities — m; Delay: 30 days. - Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency) — m; Delay: 60 days. - External payment arrears: external debt contracted and guaranteed by the government — q; Delay: 30 days. - Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors — q; Delay: 45 days. - Consolidated accounts of the central government at the CBT: stock of deposits broken down by Treasury current account; special account of the Tunisian government in foreign currency and its equivalent in dinars; miscellaneous dinar accounts; loan accounts; grant accounts; FONAPRA-FOPRODI accounts; and accounts pending adjustment (including privatization receipts from Tunisia Telecom) — m; Delay: 30 days. - Imports of Petroleum Products: average import price of main petroleum products — m; Delay: 30 days. - Foreign trade: imports and exports of goods, including volumes and prices, by sector — m; Delay: 30 days. - Deposits: Stock of foreign currency deposits, according to the residence of the holder — m; Delay: 14 days. - 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); 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) — q/m/q; Delays: 30 days, 30 days, 90 days. - Overall net external position of Tunisia (preliminary) — q; Delay: 90 days. - Overall gross external debt position — q; Delay: 90 days. - Balance of payments: Prepared by the CBT — q; Delay: 30 days. - CBT accounts at the current exchange rate: detailed table including the monetary system — m; Delay: 30 days. - CBT accounts at the program exchange rate: Including net international reserves — m; Delay: 30 days. - Foreign exchange market operations, interbank market, retail market and wire transfers for CBT purchases on the retail market (detailed CBT spot sales and purchases, stock of CBT currency swap with transaction details, other forward foreign exchange operations, terms and conditions of any new transactions) — m; Delay: 30 days. - CBT foreign exchange reserves, breakdown by currency and by instrument, and the institutions where such reserves are held — m; Delay: 30 days. - 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 (indication of the different banks is optional) — m; Delay: 30 days. - Direct refinancing of commercial banks by the CBT: Breakdown by bank — m; Delay: 14 days. - Interest rates: Deposit rates, interbank rates, and lending rates — w; Delay: 14 days. - NPLs: Stock of banking sector NPLs, and breakdown by commercial banks — q; Delay: 60 days. - Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff — q; Delay: 60 days. - 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; official notices of changes in gas and electricity rates and any other surcharge, as well as the prices of petroleum products and levies/surcharges on gas and petroleum — d; Delay: 3 days. ### Banking sector strategy, prior actions, and recapitalization - Prior action on the strategic orientation of the banking sector has been met: the Council of Ministers adopted an overall banking strategy. - Objectives of the strategy: limit role of the State to key sectors; reduce number and weight of banks with government participation (currently, 12); develop prerequisites for more Public-Private Partnerships. - Five pillars of the banking sector strategy: - Clean-up of public banks’ balance sheets and recapitalization following a plan that improves governance, strengthens institutional capacities, and enhances performance. - Creation of an asset management company to deal with troubled debt. - Establishment of a pillar to fund development projects (e.g., through the “Caisse des Dépôts et Consignation”). - Focusing public intervention on SME funding. - Development of microfinance. - Implementation needs: strengthened banking supervision, a new bankruptcy and banking law, modern collateral framework, and less restrictions on lending rates. - Government will maintain in the near term its share in the three main public banks, which represent about 35 percent of banking assets. - Banking recapitalization costs borne by the government will have to be adjusted depending on private sector shareholder participation; these costs—potentially higher than the 2.6 percent of GDP estimated at the time of the last FSSA—will need to be included in the restructuring plans (planned for completion by end-July for STB and BH), debt sustainability analysis, and the 2014 supplementary budget. - Two out of three end-December quantitative performance criteria (QPC) were missed by a smaller margin than originally estimated in the last review. - Four out of eight structural benchmarks were realized. - Progress noted towards increasing haircuts for loans used as collateral for refinancing operations, and on the design of a plan to modernize tax administration. ### IMF Executive Board decision and financing - Press Release No. 14/177 — April 25, 2014: IMF Executive Board completed the third review under the Stand-By Arrangement for Tunisia and approved US$225 million disbursement. - Disbursement details: - Immediate disbursement of SDR 145.08 million (about US$225 million). - Total disbursements to date: SDR 573 million (about US$888.4 million). - Stand-By Arrangement (two-year) amount: SDR 1.146 billion (about US$1.78 billion, or 400 percent of Tunisia’s quota at the IMF); approved June 7, 2013. - In completing the third review, the Executive Board approved the authorities’ request for modification of end-June 2014 performance criteria and granted waivers of applicability for the end-March 2014 performance criteria for which data are not yet available and for which there is no evidence they were not observed. ### Staff assessment, policy recommendations, and priorities - Staff (Min Zhu, Deputy Managing Director and Acting Chair) observations: - End-March quantitative performance criteria appear to have been met, but progress on structural reforms has been slowed by last year’s protracted political crisis. - Adoption of a constitution and formation of a new government improved confidence, but growth remains moderate, unemployment remains high, and fiscal and external imbalances are elevated. - Newly identified fiscal measures—coupled with those aimed at containing the high wage bill and reducing regressive energy subsidies—will help restrain the widening fiscal deficit in 2014. - Revenue reforms, strengthened public financial management, and reform of public enterprises are necessary to improve the composition of fiscal consolidation. - Improved procurement procedures and project execution are needed to reverse the under-execution in investment spending. - Social expenditures should continue to be preserved during fiscal consolidation. - The current monetary policy stance is appropriate, but would need to be tightened if inflationary or exchange rate pressures arise. - The removal of the lending rate cap is essential to strengthen monetary transmission channels and access to finance. - Greater exchange rate flexibility would help rebuild external buffers, reduce liquidity injections, and improve competitiveness. - Improved data reporting, strengthened supervision, and the new strategic vision for public banks are important steps to reduce banking sector fragilities. - Near-term priorities: design bank restructuring plans, establish the asset management company for troubled tourism debt, address weak asset quality, and enhance resolution mechanisms. - Accelerated implementation of structural reforms is crucial to ensure stronger and more inclusive growth. - A well-targeted social safety net needs to accompany the energy subsidy reform so as to protect vulnerable households. ### Economic developments, outlook, and fiscal outcomes - Recent developments: - Growth in 2013: 2.6 percent. - Unemployment reduced from 18.3 percent in 2011 to 15.3 percent (still high, particularly for young graduates and women). - Headline CPI inflation: 5 percent in March 2014 from 6 percent in December 2013. - Core inflation: 4 percent. - Overall fiscal deficit on a cash basis at end-2013: 6.1 percent of GDP (in line with estimate under previous review). - Primary fiscal deficit on a cash basis: 2.7 percent of GDP at end-2013. - Program target for overall deficit: 7.3 percent of GDP. - External pressures: weak demand from Europe, lower exports of phosphates, increased cost of energy imports, and shortfalls in external financing worsened the balance of payments outcome. - Outlook for 2014 and 2015: - Growth projected to increase moderately to about 2.8 percent in 2014. - Inflation projected to decline to 5.3 percent on average in 2014. - Current account projected to narrow to 7.2 percent of GDP in 2014 and 6.3 percent in 2015. - Additional fiscal adjustment of about 0.4 percent of GDP in 2014 was agreed during this review. - Downside risks remain; growth could surprise on the upside if confidence strengthens more than expected. *Source: IMF staff report excerpts, Statement by the Staff Representative on Tunisia, Executive Board Press Release No. 14/177, and associated material (April 25, 2014).* ### 4.6 percent of GDP against 5 percent foreseen in the program. ### _cr14123 - 4.6 percent of GDP against 5 percent foreseen in the program. ### Fiscal policy and public finances - Outturn: "4.6 percent of GDP against 5 percent foreseen in the program." - Authorities' commitment: continued fiscal adjustment that will be gradual and involve a combination of short-term measures and structural reforms. - Additional fiscal measures identified since January: about "0.4 percent of GDP", mostly revenue measures, to be included in a supplementary budget. - Structural deficit objective: "4.9 percent of GDP in 2014." - Wage bill containment: - Wage freeze already in place. - Limited net recruitment in the civil service, except for security, education, and health sectors. - Civil service reform task force set up; evaluation of the civil service hiring system and salary structure with World Bank assistance to be carried out by "September 2014" (MEFP ¶5). ### Energy subsidy reform and social mitigation - Expected budgetary savings from initial reform steps: "about 0.9 percent of GDP in 2014." - Price adjustments implemented: - Electricity and natural gas prices for cement companies increased by "35 percent" and "47 percent", respectively. - Electricity tariffs for household and industrial users increased by "10 percent". - Planned additional adjustments: - Second round of electricity and gas price adjustment planned for "June 2014" to fully eliminate subsidies for cement companies. - Fuel prices to be adjusted by "6 percent in July." - Automatic fuel-price formula: adopted early this year to insulate the budget from large international oil price increases. - Protection for vulnerable groups: - Social programs already included in the 2014 budget. - Lifeline electricity tariff introduced for households consuming "less than 100 kw/h per month." - Household targeting strategy expected to take effect on "July 1, 2014" to increase number of beneficiary families, broaden eligible groups for one-off and temporary aid, and raise social allowances for school children and university students (MEFP ¶33). - Communication: authorities intend to launch a new communication campaign ahead of price increases. ### Public investment execution and public financial management (PFM) - Public procurement: new decree adopted with implementation to start in "June 2014" to strengthen procurement, simplify tendering, and devolve more responsibilities to regional authorities. - PFM measures underway: - Setting of a single treasury account. - Shortening of the complementary budget period. - Ongoing work on a new organic budget law. - Planned adoption of a functional budget classification in "June 2014." - Expected outcomes: improved oversight of public investment projects, better control of current spending, and improved quality of expenditure. ### Tax reform and revenue administration - Comprehensive tax reform under preparation to promote equity, efficiency, and transparency. - Measures already included in the 2014 budget: - Halved the corporate tax wedge between the on-shore and off-shore sectors. - Introduced a "10 percent" tax on dividends. - Raised tax exemption thresholds for low-income individuals. - Consultation and timetable: - National consultations on planned reform to take place in "June 2014". - Adoption of a new tax code by the Council of Ministers targeted for "September 2014" (structural benchmark). - Revenue administration: unification progress in the large taxpayer unit (LTU); strategic plan for modernizing tax administration to be adopted in "June 2014", based on IMF Technical assistance recommendations. ### Monetary policy and exchange rate policy - Monetary stance: described as appropriate. - Reference: December 2013 increase in the policy rate by "50 basis points"; current policy rate remains appropriate given stable core inflation, declining headline inflation, and a negative output gap. - CBT stands ready to further tighten monetary stance, as needed. - Credit access and rate caps: - Study completed with World Bank assistance on options for modification or elimination of existing caps on banks’ lending rates. - Consultations underway between the CBT and relevant ministerial departments. - Measures to reduce banks’ reliance on central bank refinancing: - New haircut of "10 percent" on bank loans eligible for CBT refinancing introduced, to be increased in June to "25 percent". - Planned introduction of a lender of last resort facility (structural benchmark) to allow solvent but illiquid banks’ use of the facility at penalty rates. - Share of government securities used as collateral for central bank refinancing to be increased later this year to reduce risks to the CBT’s balance sheet. - Exchange rate policy: - Policy remained flexible to reflect market developments and build international reserves. - Early 2014 easing of earlier pressures due to increased budget support disbursements, stricter enforcement of regulations for holders of professional accounts in foreign currency, and improved political confidence. - Resulting appreciation of the Tunisian Dinar partly reversed the earlier depreciation in 2013. - CBT limited market interventions to smoothing excessive exchange rate fluctuations. - Electronic bank interlinking platform introduced; together with the Market Maker Agreement, will facilitate establishment of a weekly foreign exchange auction mechanism. ### Financial sector reform and public bank restructuring - Priority: addressing vulnerabilities of the financial sector with a multi-pronged strategy aimed at: - Addressing capital adequacy shortfalls in six banks below the statutory minimum requirement. - Aligning prudential rules with international norms. - Strengthening bank supervision, including improving offsite procedures and onsite inspections before moving to risk-based methods. - Upgrading reporting and ratings systems. - Recapitalization and restructuring of public banks: - Strategic orientation of the role of the state in public banks adopted (a prior action for this review), defining objectives, guiding principles, and modalities of government intervention. - Based on completed audit reports for two public banks, restructuring plans for these banks (STB and BH) to be approved in "July 2014". - Necessary resources for bank recapitalization will be mobilized; the 2014 budget already incorporates an amount equivalent to "1.2 percent of GDP" for this purpose. - Asset Management Company: efforts directed at establishment to address NPL problem in the tourism sector; necessary legal framework to be submitted to the National Assembly by "June 2014." ### Structural reforms and business climate - Comprehensive reform strategy underway to improve the business climate. - Legislative and institutional actions: - National Assembly reviewing the investment code, the competition law, and a law on public-private partnership to encourage private sector investment and foster development of disadvantaged regions. - Preparation of a strategy to reform public enterprises; audit of three energy companies completed with efforts underway to improve their efficiency. - Labor market reform: tripartite dialogue between labor unions, the business association, and the government revived to review a draft national employment strategy, with objective of adopting specific actions after the elections. ### Conclusion and authorities' stance - Authorities are steadfastly moving forward in implementing an ambitious reform agenda and appreciate partner support. - Tunisia described by the Prime Minister as a "democracy start-up" that needs to be supported by the international community. *IMF staff report content as presented in the source PDF.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2014/_cr14123.pdf_