## _cr14277

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### Executive summary and program pillars
- On June 7, 2013, the Executive Board approved a 24-month Stand-By Arrangement in an amount equivalent to 400 percent of quota (SDR 1.146 billion or about $1.75 billion).
- To date, SDR 573 million equivalent to $877 million has been disbursed; completion of the fourth review will make SDR 143.25 million (about $220 million) available.
- Program pillars:
  - (i) achieve short-term macroeconomic stability;
  - (ii) lay the foundation for stronger and more inclusive growth;
  - (iii) protect the most vulnerable.
- Date of document: August 14, 2014.

### Recent economic developments and outlook
- Growth and production:
  - Growth for 2013 was revised down to 2.3 percent.
  - Q1 2014 growth was 2.2 percent y-o-y.
  - Growth expected: 2014 – 2.8 percent; 2015 – 4.0 percent.
- Inflation and prices:
  - Headline inflation: 5 percent in March 2014; 5.7 percent in June 2014.
  - Core inflation: 4.3 percent in June 2014.
  - Average inflation expected 2014: 5.7 percent; 2015: 5.0 percent.
- External sector and reserves:
  - Current account deficit: about 8.4 percent of GDP in 2013; expected 2014 – -7.6 percent of GDP; 2015 – -6.6 percent of GDP.
  - Gross official reserves (billions of U.S. dollars, eop): 2014 – 9.1; 2015 – 10.0.
  - Gross official reserves (months of next year's imports): 2014 – 3.9; 2015 – 4.2.
  - Since mid-March 2014 the exchange rate vis-à-vis the U.S. dollar has depreciated by 8.6 percent.
  - Gross official reserves stabilized at 3.2 months of imports by end-June 2014 in one report and reported as 3.5 months in other table entries for Q2 2014.
- Financial and monetary:
  - CBT policy rate increased by 25 basis points in June 2014 to 4.75 percent (cumulative 75 basis points since the beginning of the year).
  - Policy rate remains negative in real terms at -1 percent.
  - Broad money (M3) increased by 8 percent y-o-y as of May 2014; credit to private sector grew 7.6 percent y-o-y.
  - CBT bank refinancing reached TD 4.7 billion (end-June 2014, excluding OMOs) in staff text; another table cites TD 4.8 billion.
- Banking sector health:
  - Overall capital adequacy ratio (CAR) of banking system: 9.4 percent as of March 2014.
  - Provisioning ratio increased to 60 percent (from 46 percent in 2012).
  - Nonperforming loans (NPLs): 15 percent of total loans (21 percent for public banks) at end-March 2014; NPLs net of provisions to Tier 1 capital 79.6 (Mar. 2014).
  - Six banks—four public and two private—representing 42 percent of banking assets, are below the 9 percent regulatory CAR in one summary; other excerpts report seven undercapitalized banks at end-December 2013 (44 percent of banking assets).

### Program implementation and performance
- Overall assessment:
  - Program implementation satisfactory despite challenging environment; all quantitative performance criteria met for end-March and end-June 2014.
  - Structural reform agenda: authorities addressed key delays including public bank reforms, household support program, and tax administration modernization.
- Specific outcomes:
  - Primary balance: end-March cash-basis primary balance PC exceeded by a wide margin; end-June cumulative PC also met.
  - Net International Reserves (NIRs): end-March and end-June NIRs exceeded adjusted program targets and stood at $5.2 billion and $4.3 billion, respectively, in one staff summary; other tables list various NIR stock values.
  - Net Domestic Assets (NDA): end-March and end-June NDA PCs met by a comfortable margin, driven by lower-than-projected net credit to government.
  - Social spending ITs met due to larger-than-programmed cash transfers and family allowances.

### Fiscal policy — short-term goals, measures, and performance
- 2014 revised budget law (approved August 8, 2014) envisages:
  - Structural fiscal balance (excluding one-off banking recapitalization costs) improving to 4.7 percent of GDP (against 4.9 percent expected under the program).
  - Overall fiscal balance in line with program objectives.
- Fiscal Q1 2014:
  - Overall fiscal deficit improved by 0.5 percent of GDP due to additional tax revenues from petroleum companies and higher-than-anticipated VAT revenue.
  - Q1 2014 primary cash fiscal deficit: 1.3 percent of GDP (program projection: 2.1 percent).
- Revenue and expenditure measures (selected figures):
  - Revenue measures included in supplementary budget (In Million TD): Tax policy measures total 1,000.1 (Mar-14) / 1,300.2 (Jun-14); Tax administration measures: 1,600.2.
  - Savings in energy subsidies: 400.0 (implemented) / 70.0 percent of GDP noted in table header context.
  - Expenditure increases total: 6,480.7 (8) with components including Wage bill: 2,180.2 (6); Pension Fund: 2,500.3 (0).
  - Compensatory measures total: 3,310.4 (0) including promotion and recruitment freeze: 1,140.1 (4).
- Central Government financing (first semester 2014, in millions of dinars; staff table extract):
  - Central government deficit (incl. grants) Prog. -219; Prel./Act. 223; Prog. -1,108; Act./Est. -416.
  - Float and other statistical discrepancies Prog. 2,032; Prel./Act. 1,768; Prog. 2,465; Act./Est. 2,462.
  - Central government deficit (cash basis) C. Prog. -2,251; Prel./Act. -1,545; Prog. -3,573; Act./Est. -2,878.
  - Foreign financing (drawings minus amortization): Prog. 1,091; Prel./Act. 965; Prog. 2,197; Act./Est. 1,205.
  - Domestic financing: Prog. 1,160; Prel./Act. 580; Prog. 1,317; Act./Est. 1,673.
  - Government deposits: Prog. 638; Prel./Act. -471; Prog. 1,355; Act./Est. 532.
  - Primary balance (excl. grants, cash basis) Prog. -1,773; Prel./Act. -1,104; Prog. -2,806; Act./Est. -2,155.

### Monetary policy stance and recommendations
- Assessment:
  - A tight monetary policy stance warranted given pressures from higher administered energy prices, depreciation, and minimum wage increases.
  - Staff welcomed the policy rate increases and recommended further tightening if core inflation or depreciation pressures rise.
- Specific staff recommendations:
  - Do not let money market rates deviate consistently from the policy rate; improve interbank liquidity management.
  - Consider additional policy rate rises to keep inflation on a downward trend, achieve positive real rates, and reduce reliance on CBT refinancing.
  - Continue reducing CBT foreign exchange sales or purchase FX during excess supply to build buffers.
  - Move toward exchange rate flexibility; staff and authorities estimate the currency is about 5–10 percent overvalued in real terms.
- Operational measures:
  - Haircut on valuation of loans eligible for CBT refinancing raised from 10 percent (Dec 2013) to 25 percent by June/July 2014.
  - Collateral framework to tighten further in December 2014 when share of refinancing through government securities increases to 40 percent (up from 20 percent).
  - Introduced an “exceptional facility” (July 2014) allowing illiquid but solvent banks to access central bank liquidity at a penalty rate of 200 basis points above the money market rate; full LOLR to be completed by end-March 2015.

### Financial sector reforms, public banks, and AMC
- Capitalization and restructuring:
  - Seven banks undercapitalized at end-December 2013 (44 percent of banking assets); three private banks (9 percent of banking assets) fully capitalized by end-July 2014.
  - Public bank capital shortfall estimated at 1.2 percent of GDP to be financed by nonnegotiable bonds; total recapitalization costs implied TD 1 billion (1.2 percent of GDP) already budgeted.
  - Restructuring plans for STB and BH finalized and to be adopted by government in August 2014 (prior action for fourth review); adoption by banks’ boards by end-September 2014.
  - Audit of BNA delayed; audit to complete by September 2014; restructuring plans expected by end-November 2014; bank fully recapitalized by end-year in staff timeline.
- Governance and divestment:
  - Operational restructuring, recruit “independent” Board members, implement performance-based salary structure by end-September.
  - No plans to reduce state participation in three main state-owned banks at this stage; explore options to reduce government size in nine banks (about 10 percent of banking assets) where state has minority share.
- Asset Management Company (AMC):
  - AMC mandate broadened beyond tourism; authorities plan initial AMC operation limited to tourism sector.
  - AMC expected to be created by October/September 2014 in different passages (text shows Sep-14 and Oct-2014 as targets); draft law to be submitted with World Bank assistance.
  - AMC capital estimated at TD 150 million in supplementary budget law for tourism asset management (staff cautioned careful fiscal evaluation before extension to other sectors).
- Resolution framework and supervisory upgrades:
  - New banking law drafted with WB/IMF TA; deposit insurance law and LOLR to follow once banking resolution framework in place.
  - Adopted three-year plan with IMF TA to implement risk-based supervision; UBPR and uniform reporting to be in place by end-December 2014; staffing increases and stronger on-site inspection mandated.

### Structural benchmarks, program modalities, and monitoring
- Structural benchmarks:
  - Seven out of nine SBs expected to be completed by end-July were met; end-June SB to adopt tax modernization plan met in August with slight delay.
  - SB for lender-of-last-resort postponed to early 2015; interim exceptional facility created.
  - End-July SBs for government adoption of bank restructuring plans met in August (prior action).
  - Audit for BNA delayed to September.
- Program monitoring and targets:
  - All quantitative performance criteria for end-March and end-June 2014 met.
  - Staff proposes modification of end-September PCs and new end-December PCs and ITs for end-March 2015 per MEFP.
  - Performance criteria include floors/ceilings on NIR, NDA, and primary balance (cash basis excluding grants); continuous zero ceiling on accumulation of external arrears.
- Reporting and data requirements (periodicity and delays):
  - Core reporting items defined, e.g., monthly tax and nontax revenue (m, delay 30 days), monthly CBT accounts (m, delay 30 days), quarterly NPLs (q, delay 60 days), weekly interest rates (w, delay 14 days), daily changes in discretionary fiscal/monetary measures (d, delay 3 days).

### Program financing, IMF purchases schedule, and repayment capacity
- Official external financing (2014 selected items, US$ millions):
  - Total official external financing: 4,165.5 (Prog.); 4,046.1 (Rev. Est.).
  - IMF (Budget Support): 1,393.9 (Prog.); 1,398.7 (Rev. Est.).
  - International Market (US guarantee): 300.0 (Prog.); 500.0 (Rev. Est.).
  - Sukuk and other external financing: 500.0 (Prog.); 120.0 (Rev. Est.).
- Market and bilateral support:
  - Issuance of a 7-year $500 million U.S.-guaranteed international bond at a yield of 2.45 percent (35 basis points above U.S. treasuries of the same maturity and 4.5 times oversubscribed).
  - Algeria support: $250 million, of which $150 million is direct budget support through grant and highly concessional loan.
  - IsDB expected to guarantee $120 million ($380 million less than originally programmed).
  - National borrowing campaign mobilized TD955 million (almost double envisaged), 40 percent bought by domestic banks.
- Schedule of proposed purchases under the SBA:
  - June 7, 2013: Disbursement 98.800 SDRs; $150.155.
  - First Review Sep 15, 2013: 98.600 SDRs; $152.569.
  - Second Review Dec 15, 2013: 230.520 SDRs; $356.697.
  - Third Review Mar 15, 2014: 145.080 SDRs; $224.491.
  - Fourth Review Jun 15, 2014: 143.250 SDRs; $221.659.
  - Fifth Review Sep 15, 2014: 143.250 SDRs; $221.659.
  - Sixth Review Dec 15, 2014: 143.250 SDRs; $221.659.
  - Seventh Review Mar 15, 2015: 71.625 SDRs; $112.077.
  - Eighth Review May 15, 2015: 71.625 SDRs; $112.077.
  - Total: 1,146.000 SDRs; 1,773.042 Millions of U.S. dollars. Quota is SDR 286.5 million.
- Repayment capacity and Fund exposure:
  - Fund credit outstanding expected to reach a maximum of 3.6 percent of GDP in 2015 (about 17.9 percent of gross international reserves).
  - Staff notes Tunisia’s strong record of payments to the Fund.

### Public and external debt dynamics, stress tests, and risks
- Public sector debt:
  - Public sector debt was 44.5 percent of GDP and expected to increase by about 7 percentage points to 51.7 percent of GDP by end-2014.
  - Under baseline: public debt expected to increase to about 56 percent of GDP before declining; debt-to-GDP around 56 percent by 2017; decline to about 54 percent by end-2019.
  - General government debt projections (percent of GDP): 2014 – 51.7; 2015 – 54.4; 2016 – 55.6; 2017 – 55.8; 2018 – 54.8; 2019 – 53.9.
- External debt:
  - External debt-to-GDP: 2014 – 57.3; 2015 – 61.2; 2016 – 62.6; 2019 – 61.0.
  - Gross external financing need (US$ billions): 2014 – 11.6; 2015 – 10.1; 2016 – 10.0; 2017 – 11.1; 2018 – 10.9; 2019 – 10.9.
- Stress tests and adverse scenarios (selected outcomes):
  - No medium-term fiscal consolidation: public debt ~62 percent of GDP by 2019.
  - One-off 10 percent of GDP shock to contingent liabilities: public debt ~66 percent of GDP in 2016, ~63 percent by 2019.
  - Permanent negative shock to real growth: public debt ~67 percent of GDP by end-2019.
  - One-time 30 percent depreciation (with high foreign-currency share): public debt-to-GDP ~71 percent (peak), declining to ~68 percent by 2019.
  - External debt sensitive to large depreciation: one-time 30 percent real depreciation in 2015 raises external debt ratio to more than 90 percent of GDP in subsequent years under scenario B5.

### Structural reforms, growth, social protection, and labor market
- Structural reform priorities:
  - Improve business climate, simplify regulatory burdens, promote competition, and facilitate trade.
  - Consolidate tax laws into a single tax code; tax code approval targeted Sep-14; tax reform action plan to be adopted by Council of Ministers by Oct-2014.
  - Reform VAT, excises, and presumptive tax system; aim to converge offshore and onshore corporate tax rates.
  - Investment code to be simplified; “quick win” measures in Sep/Dec 2014.
- Protecting the most vulnerable:
  - Household support program expanded: beneficiaries from 220,000 (2013) to 235,000 in July 2014 and 250,000 by end-year.
  - Temporary transfer TD 80 for about 285,000 families in June/July when fuel prices increased.
  - Additional transfer TD 10 per month per child for vulnerable families (up to three children).
  - Lifeline electricity tariff for households consuming less than 100 kwh.
  - Unique social identification number available for 7.5 million citizens to support targeting.
- Labor market and unemployment:
  - Unemployment rate increased from 13 percent (2010) to 18.9 percent (2011); by end-2013 improved to 15.3 percent.
  - Youth unemployment rose from 27 percent to 38 percent (2010–2011).
  - Job creation recently driven largely by public sector services and some private sectors (food, chemical, mechanical, electricity).
  - Minimum wage increases of 6–10 percent not expected to harm employment in short run; future increases should be careful given falling labor productivity.
  - Tripartite “Social Pact” and technical committees in place; labor market reform measures to be developed post-elections.

### Risks to program implementation
- Main risks:
  - Regional and domestic security tensions.
  - Setbacks in the political transition and political tensions ahead of elections.
  - Weaker economic activity in major trading partners (notably the Euro area).
  - Delays in multilateral donor disbursements and lower long-term inflows.
- Implementation risks:
  - Difficult social environment and opposition from vested interests could test policies.
  - Capital controls limit immediate global financial spillovers but prolonged adverse global conditions remain a concern.

### Staff appraisal and policy recommendations (summary)
- Macroeconomic priorities:
  - Fiscal consolidation combined with improved budget composition; contain the wage bill and preserve investment and targeted social spending.
  - Save any revenue over-performance to contain external imbalances and reduce crowding out of private credit.
  - Tight monetary policy to anchor inflation expectations; move toward positive real interest rates.
  - Greater exchange rate flexibility to rebuild reserves and correct overvaluation.
- Financial sector:
  - Urged rapid implementation of public bank restructuring plans, recapitalization, governance upgrades, completion of BNA audit, and establishment of AMC and bankruptcy law.
  - Strengthen supervision, reporting, and on-site inspection capacity.
- Structural reforms:
  - Accelerate reforms in competition law, public-private partnerships, investment code, and tax reform to improve investment climate and inclusive growth.
- Social protection:
  - Strengthen household support program, use social registry for targeting, and protect most vulnerable during subsidy reforms.

*IMF staff: EXECUTIVE SUMMARY (CR14277), August 14, 2014; IMF staff report text and tables as provided in content unit _cr14277.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Stand-By Arrangement and Program Pillars
- On June 7, 2013, the Executive Board approved a 24-month Stand-By Arrangement in an amount equivalent to 400 percent of quota (SDR 1.146 billion or about $1.75 billion).
- To date, SDR 573 million equivalent to $877 million has been disbursed.
- The pillars of the program are to:
  - (i) achieve short-term macroeconomic stability;
  - (ii) lay the foundation for stronger and more inclusive growth;
  - (iii) protect the most vulnerable.
- The completion of the fourth review will make SDR 143.25 million (about $220 million) available.
- Date of document: August 14, 2014.

### Context and Political-Economic Background
- After three years of uncertainty following the revolution, Tunisia is set to complete its political transition, with a new constitution and electoral law leading to a timetable for legislative and presidential elections in the last quarter of 2014.
- Progress in the political transition is leading to increased donor support in 2014, including from regional partners; an “Investing in Tunisia” conference—co-organized with the French government—is scheduled for September 2014.
- New financing commitments for 2015 are likely to be firmed up only after the formation of a post-elections government.
- The authorities have been actively building consensus among stakeholders and raising public awareness about the state of public finances and the need for economic sacrifices.

### Recent Economic Developments and Outlook
- Growth and production:
  - Growth for 2013 was revised down to 2.3 percent.
  - Q1 2014 growth was 2.2 percent y-o-y.
  - Rebound in chemical and mining production and in agriculture compensated weaker tourism.
- Inflation and prices:
  - Headline inflation declined to 5 percent in March 2014 and rebounded to 5.7 percent in June 2014.
  - Core inflation was 4.3 percent in June 2014.
  - PPI is close to 3 percent.
- External sector and reserves:
  - The current account deficit is expected to reach 5.5 percent of GDP by end-June 2014.
  - Since mid-March 2014 the exchange rate vis-à-vis the U.S. dollar has depreciated by 8.6 percent.
  - Gross official reserves stabilized at 3.2 months of imports of goods and services by end-June 2014.
  - Tunisia’s current account deficit widened to about 8.4 percent of GDP by 2013 (after averaging 2.8 percent of GDP from 1995 to 2009).
  - The energy trade deficit accounts for more than a third of the trade deficit.
- Financial markets and monetary policy:
  - Sovereign spreads declined after adoption of the new constitution, though authorities consider spreads still too high to issue eurobonds without guarantee.
  - The Central Bank of Tunisia (CBT) increased its policy rate by 25 basis points in June 2014, a cumulative 75 basis points since the beginning of the year, to 4.75 percent.
  - The policy rate remains negative in real terms at -1 percent.
  - Broad money (M3) increased by 8 percent y-o-y as of May 2014.
  - Credit to the private sector grew 7.6 percent y-o-y.
  - CBT bank refinancing reached TD 4.7 billion at end-June 2014 (excluding OMOs), mostly used to roll over existing loans or for overdrafts.
- Banking sector health:
  - Overall capital adequacy ratio (CAR) of the banking system was 9.4 percent as of March 2014 (8.9 percent at end-2013; 11.8 percent in 2012).
  - Provisioning ratio increased to 60 percent (from 46 percent in 2012) following December 2013 stricter collateral valuation rules.
  - Six banks—four public and two private—representing 42 percent of banking assets, are below the 9 percent regulatory CAR.
  - Nonperforming loans (NPLs) remained at 15 percent of total loans (21 percent for public banks) at end-March 2014.
  - Net profits have been rising, mostly from financial commissions, but could be pressured by weak loan demand and higher funding costs.

### Program Implementation and Performance
- Overall assessment:
  - Program implementation has been satisfactory despite a challenging economic and social environment.
  - All quantitative performance criteria have been met.
  - Structural reform agenda: authorities made up for some key delays, including reforming public banks, setting up a household support program, and modernizing tax administration.
- Specific targets and outcomes:
  - Primary balance: the end-March performance criterion (PC) on the cash-basis primary balance was exceeded by a wide margin due to a lower-than-estimated float arising from committed capital expenditures at end-March that were paid in Q2 2014; as a result the end-June cumulative PC has also been met.
  - Reserves (Net International Reserves, NIRs): end-March and end-June NIRs exceeded the adjusted program target and stood at $5.2 billion and $4.3 billion, respectively. Higher-than-expected short-term capital flows compensated for lower long-term inflows (delays in multilateral disbursements) and weak FDI flows.
  - Monetary target: end-March and end-June PCs on Net Domestic Assets (NDA) were met by a comfortable margin, mainly driven by lower-than-projected net credit to government.
  - Indicative targets: end-March and end-June targets on social spending were met because of larger-than-programmed cash transfers and family allowances driven by an increase in beneficiaries and student allowances.
  - Ceiling on current primary spending was met, with lower spending on subsidies and goods and services compensating for a wage overrun observed in Q1 2014.
- Fiscal first-quarter 2014 performance:
  - The overall fiscal deficit improved by 0.5 percent of GDP due to additional tax revenues from petroleum companies and higher-than-anticipated VAT revenue collection.
  - Total expenditures were in line with expectations; capital spending execution remained in line with projections (7 percent of the budgeted amount by end-March).
- Central Government financing (first semester 2014, in millions of dinars; extracted from staff tables):
  - A. Central government deficit (-) (incl. grants): Prog. -219; Prel./Act. 223; Prog. -1,108; Act./Est. -416.
  - B. Float and other statistical discrepancies: 1/ Prog. 2,032; Prel./Act. 1,768; Prog. 2,465; Act./Est. 2,462.
  - C. Central government deficit (-) (incl. grants, cash basis): Prog. -2,251; Prel./Act. -1,545; Prog. -3,573; Act./Est. -2,878.
  - C. Financing: Prog. 2,251; Prel./Act. 1,545; Prog. 3,573; Act./Est. 2,878.
  - Foreign financing: Prog. 1,091; Prel./Act. 965; Prog. 2,197; Act./Est. 1,205.
    - Drawings: Prog. 1,296; Prel./Act. 1,156; Prog. 2,716; Act./Est. 1,725.
    - Amortization: Prog. 205; Prel./Act. 191; Prog. 519; Act./Est. 519.
  - Domestic financing: Prog. 1,160; Prel./Act. 580; Prog. 1,317; Act./Est. 1,673.
    - Drawings: Prog. 861; Prel./Act. 988; Prog. 1,088; Act./Est. 2,213.
    - Amortization: Prog. -338; Prel./Act. -361; Prog. -1,126; Act./Est. -1,072.
  - Government deposits (+ = drawing / - = accumulation): Prog. 638; Prel./Act. -471; Prog. 1,355; Act./Est. 532.
  - Grants: Prog. 321; Prel./Act. 546; Prog. 4; Act./Est. (not shown in table extract).
  - Interest payments: Prog. 510; Prel./Act. 442; Prog. 820; Act./Est. 787.
  - Primary balance (excl. grants, cash basis) (F = C - D + E): Prog. -1,773; Prel./Act. -1,104; Prog. -2,806; Act./Est. -2,155.
  - Note: 1/ Float includes expenditures committed until end-December 2013 and to be paid during the complementary period in 2014 as well as committed expenditures of the current year budget to be paid in the following quarters.

### Program Strategy and Structural Reform Priorities
- Macroeconomic policy stance:
  - Sustain and intensify prudent fiscal policy, tighter monetary policy, and greater exchange rate flexibility to contain high external and fiscal deficits, anchor inflationary expectations, and bolster investor confidence.
- Financial sector reforms:
  - Important steps taken to strengthen the financial system, notably the design of public bank restructuring plans in line with international best practices; implementation will be critical.
  - Address banking sector vulnerabilities, including low CAR for some banks and high NPLs concentrated in tourism and industrial sectors.
- Structural reforms to foster inclusive growth:
  - Progress on structural reforms—particularly to improve the business climate—is critical for creating conditions for private sector–led and inclusive growth.
  - Improve composition of public expenditures to complement banking reforms and business climate improvements and generate higher, more inclusive growth.
- Energy and external adjustment:
  - The recent deterioration of the current account is driven by the energy deficit, reflecting cyclical and exogenous factors (lower gas volumes transiting from Algeria to Italy and oil production below potential).
  - Policy priorities to address energy-related imbalances include raising long-term oil production, reducing energy consumption and improving energy efficiency, gradually moving domestic energy prices towards international levels, greater exchange rate flexibility, trade openness, and improving the investment climate.

### Risks to Program Implementation
- Main risks identified:
  - Regional and domestic security tensions.
  - Setbacks in the political transition.
  - Weaker economic activity in major trading partners (notably the Euro area).
- Implementation risks:
  - The social environment is difficult and there is opposition from vested interests, which will test the implementation of program policies.
  - Delays in multilateral donor disbursements and lower long-term inflows have affected the financial account, though short-term capital flows have partially offset these effects.

### Staff Assessment and Mission Engagement
- Program implementation judged satisfactory with all quantitative performance criteria met despite challenging conditions of public dissatisfaction, high social tensions, and security risks.
- The Fourth Review focused on macroeconomic stabilization and banking sector reforms.
- Mission engagement:
  - Team comprised Amine Mati (head), Lorraine Ocampos, Carolin Geginat, Hamid Reza Tabarraei (all MCD); Jean Frederic Noah Ndela (SPR); Nolvia Saca Saca (MCM); Giorgia Albertin (Resident Representative); Laurent Gonnet (World Bank Senior Financial Expert).
  - During June 10–24, 2014, staff met with the Governor of the Central Bank, the Minister of Economy and Finance, the Minister of Energy, Industry and Mines, the Minister of Social Affairs, the Minister of Tourism, the Minister in charge of Economic Affairs at the Prime Ministry, other senior officials, and representatives of workers’ unions, the corporate and banking sector, the diplomatic and donor community, political parties, civil society, academia, media, and Parliament.

*IMF staff: EXECUTIVE SUMMARY (CR14277), August 14, 2014.*

### 13.      Seven out of nine structural benchmarks (SB) expected to be completed by end-July—

### 13.      Seven out of nine structural benchmarks (SB) expected to be completed by end-July—

### Structural benchmarks implementation
- Seven out of nine structural benchmarks expected to be completed by end-July—including three postponed from end-March—have been met (LOI, ¶3).
- The end-June SB to adopt the tax modernization plan was met in August with a slight delay.
- The end-July SBs for the government adoption of bank restructuring plans will be met in August (Prior action for completing the fourth Review).
- The SB for the establishment of the lender-of-last-resort facility has been postponed to early 2015, following the adoption of new liquidity norms and of a new banking resolution framework; in the interim, a new exceptional facility has been created (¶24, and MEFP ¶11).
- The audit for the BNA, previously scheduled for end-July, will only be completed in September as it has a delayed start in June (MEFP, ¶17).

### Outlook and risks
- Growth
  - Growth is expected to reach 2.8 percent this year, with the forecast unchanged from April estimates.
  - Economic growth for 2015 has been revised down to 4 percent (from 4.2 percent).
  - Drivers: higher agricultural production and services offsetting a more modest tourist season; stagnation in mechanical and electrical industries; investment expected to pick up if stability improves and European market recovers.
  - Note: Robust growth beyond 2015 contingent on accelerated implementation of growth-enhancing structural reforms.
- Inflation
  - Average inflation is expected to reach 5.7 percent for the year.
  - Inflation drivers: first-half developments, a depreciation of the currency, and a rise in administered energy prices and minimum wages.
  - Projection: inflation will decline in the latter part of 2014 and average 5 percent in 2015.
- External position
  - Current account deficit contained at 7.6 percent of GDP in 2014.
  - Contributing factors: tighter monetary policy, more active export promotion (e.g., phosphate sector), and greater exchange rate flexibility.
  - Medium term: tighter macroeconomic policies, improved prospects in trading partners, and recovery in tourism and phosphate industries expected to improve external position.
  - Gross reserve buffers are being reconstituted in 2014 and will cover almost four months of imports by end-year.
- Risks
  - High risks from increasing social tensions (strikes, demonstrations) that could slow production and delay reforms.
  - Security tensions remain a risk due to sporadic terrorist incidents and regional turmoil (particularly Libya).
  - Political tensions ahead of elections could weigh on the technocratic government’s ability to implement policies and reforms.
  - Global risks tilted to the downside: protracted slower growth in trading partners (particularly Europe) or higher commodity prices (including oil) could drag on growth, external, and fiscal positions.
  - Capital controls limit immediate impact from global financial side-effects, but prolonged adverse global conditions remain a concern.

### Key macroeconomic projections and indicators (selected)
- Real GDP growth (in percent): 2014 – 2.8; 2015 – 4.0
- Consumer price index (CPI), period average, in percent: 2014 – 5.7; 2015 – 5.0
- Current account (percent of GDP): 2014 – -7.6; 2015 – -6.6
- Gross official reserves (billions of U.S. dollars, eop): 2014 – 9.1; 2015 – 10.0
- Gross official reserves (months of next year's imports): 2014 – 3.9; 2015 – 4.2

### Policy discussions — focus areas
- Maintain macroeconomic stability and advance structural reform agenda with emphasis on:
  - (i) Keeping the 2014 fiscal program on track while protecting the most vulnerable.
  - (ii) A tighter monetary policy stance and an exchange rate path consistent with building up external buffers.
  - (ii) Banking sector reforms—particularly designing public bank restructuring plans in line with best international practices and appropriately accounted for in the budget.

### A. Short-term stabilization goals — Fiscal policy
- Authorities committed to achieving the program’s end-year fiscal target, with some deterioration in budget composition (MEFP, ¶5).
- 2014 revised budget law—approved by parliament on August 8, 2014—envisages:
  - An overall fiscal balance in line with program objectives.
  - Structural fiscal balance (excluding one-off banking recapitalization costs) improving to 4.7 percent of GDP (against 4.9 percent expected under the program).
- Drivers of structural balance improvement:
  - Tax policy measures beyond those agreed at the Third Review and revenue overperformance in Q1 2014.
  - Efforts to reduce untargeted energy subsidies: eliminating all energy subsidies to cement companies, increasing electricity tariffs for industrial and household users by a cumulative 20 percent since the beginning of the year, and raising fuel prices by 6 percent as of July 2014 (MEFP, ¶5).
  - Programs to support the most vulnerable (see Section C).
- Offsetting factors increasing current spending:
  - One-off election costs, increased security personnel, salary payments agreed by previous governments, food subsidies, and one-off transfers and advances to pension funds.
- Compensatory measures:
  - Freezing promotions and recruitment, reduced spending on goods and services.
  - Despite measures, end-year indicative ceiling in current primary spending increased by 0.3 percent of GDP to accommodate new spending.

### Fiscal measures and compensatory items (selected figures)
- Revenue measures included in supplementary budget (In Million TD; In Percent of GDP)
  - Tax policy measures: 1,000.1 (Mar-14) / 1,300.2 (Jun-14)
    - Alcoholic beverages: 8 percent increase excise tax — 200.0
    - Tobacco: 10 percent increase excise tax — 500.1 (implemented)
    - Tax on vehicles — 300.0 (Mar-14); 150.0 (Jun-14)
    - Tourism tax — 750.1 (Jun-14)
    - Stamp duty — 300.0 (Jun-14)
    - Other measures incl. exceptional taxation — 100.0 (Jun-14)
  - Tax administration measures: 1,600.2
    - Tunisie Telecom: enhanced tax control — 1,100.1 (implemented)
    - Recovery of tax arrears awaiting judicial decision — 500.1 (Jun-14)
  - Savings in energy subsidies — 400.0 (implemented) / 70.0 percent of GDP noted in table header context
  - Total listed: 3,000.4 (Mar-14); 1,370.2 (Jun-14)
- Expenditure increases and compensatory measures (In Millions of TD; In Percent of GDP)
  - Expenditure Increases total: 6,480.7 (8)
    - Wage bill: 2,180.2 (6)
    - Security Forces: 1,040.1 (3)
    - Honor past salary agreements: 1,140.1 (4)
    - Pension Fund: 2,500.3 (0)
    - Contributions from Transport Company: 1,000.1 (2)
    - Advances to CNRPS: 1,500.1 (8)
    - Food Subsidies: 900.1 (1)
    - Election Costs: 600.0 (7)
    - AMC additional operational costs: 300.0 (4)
  - Compensatory Measures total: 3,310.4 (0)
    - Wage bill: promotion and further recruitment freeze: 1,140.1 (4)
    - Lower goods and services: 600.0 (7)
    - Energy Subsidy: saving FX appreciation gain Q1 and other: 1,070.1 (3)
    - Additional measures: 50.0 (0.06)

### Staff and authorities positions on fiscal policy
- Staff view: prefer to save fully the revenue over-performance and tighten fiscal stance to contain external imbalances and limit crowding out of private sector credit.
- Authorities view: main goal is achieving programmed fiscal target while facing strong social pressures; scope for additional action limited to saving future revenue overperformance and containing spending to budgeted levels.
- Contingency approach: in case of revenue shortfalls or higher expenditure, authorities will preserve social and capital expenditures and implement contingency measures focusing on cuts in nonessential current spending.

### Additional external financing and national borrowing campaign
- External support and issuance helped compensate for lower sukuk issuance:
  - Issuance of a 7-year $500 million U.S.-guaranteed international bond at a yield of 2.45 percent (35 basis points above U.S. treasuries of the same maturity and 4.5 times oversubscribed).
  - Unexpected support from Algeria: $250 million, of which $150 million is direct budget support through grant and highly concessional loan.
  - IsDB expected to guarantee $120 million, $380 million less than originally programmed.
  - National borrowing campaign mobilized TD955 million (almost double the amount envisaged), of which 40 percent was bought by domestic banks.
- Policy on domestic issuance: To avoid further credit crowding out and in light of expected financing, no additional domestic bond issuance is planned for the rest of the year.
- Public sector debt: External and domestic financing increases public sector debt in 2014 to 51.7 percent of GDP; debt dynamics deemed sustainable under most shocks (See DSA annex).

### Official external financing (2014, In millions of U.S. dollars) — selected items
- Total official external financing: 4,165.5 (Prog.); 4,046.1 (Rev. Est.)
- Bilateral: 200.0 (Prog.); 300.0 (Rev. Est.)
  - Algeria: 100.0
  - Turkey: 200.0
- IFIs total: 2,449.3 (Prog.); 2,455.0 (Rev. Est.)
  - IMF (Budget Support): 1,393.9 (Prog.); 1,398.7 (Rev. Est.)
  - World Bank Group: 750.0
  - AMF (Arab Monetary Fund): 43.4
- International Market (US guarantee): 300.0 (Prog.); 500.0 (Rev. Est.)
- Sukuk and other external financing: 500.0 (Prog.); 120.0 (Rev. Est.)
- Grants memorandum item: 127.3 (Prog.); 176.9 (Rev. Est.)

### Exchange rate policy
- Staff welcomed authorities’ commitment to rebuild external buffers.
- CBT foreign exchange (fx) sales were reduced to $290 million in June (about 34 percent of all fx sold, down from $400 million in previous months).
- Recent depreciation: exchange rate depreciated by 3 percent vis-à-vis the U.S. dollar and the Euro in June; dinar depreciated 8.6 percent vis-à-vis the dollar since mid-March.
- CBT fx sales: intended to smooth excessive fluctuations when large and lumpy fx demand from energy operators arise (about $340 million on average a month).
- Staff recommendations:
  - Continue reducing sales of foreign exchange or purchase foreign exchange during periods of excess supply to build up buffers, given uncertain financing for latter part of 2015.
  - Exchange rate flexibility is necessary to contain the current account deficit, rebuild buffers, and bring the dinar in line with fundamentals.
  - Staff and authorities estimate the currency is currently about 5–10 percent overvalued in real terms.
- FX market functioning:
  - Operationalization of electronic platform and implementation of market-maker agreement improved interbank flow information and quotations.
  - Stage set for moving towards a weekly foreign exchange auction mechanism (end-December 2014 SB), to benefit from Fund TA.
  - Urged change in regulation to allow banks (long in fx position) to engage in fx swap operations with the CBT to provide temporary relief from FX and money market imbalances.
- Trade adjustment instruments:
  - Staff argued macroeconomic policies (exchange rate or fiscal) are more appropriate to control widening trade deficit than ad hoc import restrictions.
  - Staff view: surcharge on imports is distortive and should only be introduced as last resort and on a temporary basis (in line with WTO practices and with clear forward guidance to be phased out).
  - Authorities cautioned surcharge might be the only option if adjustment takes longer than expected.
  - Staff urged intensification of sustainable solutions to address long-term energy imbalances and revival strategies for export-related sectors such as phosphates and tourism.

### Monetary policy
- Position emphasized: tighter monetary policy stance consistent with building external buffers and containing current account deficit.
- CBT operational actions described above (fx sales reduction, market improvements) as part of broader monetary and exchange rate strategy.

*Source: IMF staff report (content unit: _cr14277 - 13.      Seven out of nine structural benchmarks (SB) expected to be completed by end-July—).*

### 22.      A tight monetary policy stance is warranted in light of anticipated pressures on

### _cr14277 - 22.      A tight monetary policy stance is warranted in light of anticipated pressures on

### Monetary policy stance and recommendations
- Finding: A tight monetary policy stance is warranted in light of anticipated pressures on inflation from higher administered energy prices, a depreciating exchange rate, and an increase in minimum wages.
- Action taken: Staff welcomed the increase in the policy rate.
- Staff recommendations:
  - Do not blur the signal of the policy rate increase by letting the money market rate deviate consistently from the policy rate (caused by inefficient interbank liquidity management and the authorities’ preference for keeping it at the upper end of the interest rate corridor).
  - Consider additional tightening of the policy rate over the next few months if core inflation rises more rapidly than expected or depreciation pressures rise.
  - Consider additional policy rate rises to:
    - keep inflation on a downward trend,
    - achieve positive real rates to help stem depreciation pressures on the currency,
    - reduce reliance on CBT refinancing by increasing funding costs and banks’ ability to mobilize deposits.

### Collateral framework and interbank market
- Progress: CBT tightened the collateral framework.
- Specific changes:
  - Haircut on valuation of loans eligible for CBT refinancing raised from 10 percent in December 2013 to 25 percent by June 2014 (structural benchmark).
  - Collateral framework to tighten further in December 2014 when the share of refinancing through government securities increases to 40 percent (up from 20 percent).
- Impacts and remaining needs:
  - Very limited impact on liquidity so far as banks anticipated the move and adjusted their balance sheets.
  - Further actions needed:
    - Enhance the current loan collateral framework through forward-looking credit scoring techniques or rating tools.
    - Value government bonds at market value instead of historical costs.

### Exceptional facility and lender-of-last-resort (LOLR)
- New facility: Introduced in July 2014 — an “exceptional facility” to allow (at the discretion of the CBT) illiquid but solvent banks to access central bank liquidity with collateral of lesser quality at a punitive rate of 200 basis points above the money market rate and under more intrusive banking supervision.
- Transition to LOLR: A full-fledged LOLR mechanism—building on the exceptional facility—will be completed by end-March 2015.
- Prerequisites for LOLR introduction:
  - new liquidity norms,
  - a clear definition of solvent banks,
  - a more comprehensive definition of counterparty eligibility criteria,
  - implementation of the new banking resolution framework (see MEFP, ¶11).

### Lending rate regulation
- Concern: The tightly regulated lending rate hampers the proper functioning of monetary policy.
- Status: Consultation process with various ministries on evaluating the existing “lending cap” system is ongoing (prepared with World Bank assistance).
- Staff recommendations:
  - Avoid further delay in removing the cap on lending to enterprises.
  - Modify the cap on consumer loans (or remove it totally if coupled with adequate supervision of risks) to strengthen the transmission channel of monetary policy.
- Authorities’ note: Modification depends on the legislative process, which could be lengthy.

### Central banking law
- Revision status: Ongoing revisions will strengthen the monetary policy framework.
- New draft provisions: Grant the CBT more independence (institutional, functional, financial, and with respect to financial resources), a clearer mandate, and a new governance framework.
- Timeline: New draft law was presented to the CBT Board (end-June SB) and is expected to be approved by the Government in September 2014.

### Reducing financial sector vulnerabilities — capital shortfalls and restructuring
- Capitalization progress:
  - Seven banks undercapitalized at end-December 2013 (44 percent of banking assets).
  - Three private banks (9 percent of banking assets) fully capitalized by end-July with financing from new and existing private shareholders.
  - All other banks—of which three are majority state-owned (34 percent of banking assets)—will be at the 10 percent regulatory minimum level by end-December 2014 (structural benchmark).
- Public bank capital shortfall: Currently estimated at 1.2 percent of GDP, to be financed by nonnegotiable bonds.
- Time-bound action plans include:
  - Bank restructuring:
    - Restructuring plans for two public banks that completed audits (STB and BH) finalized and to be adopted by the government in August (end-July SB and prior action for completing the fourth Review).
    - Next step: adoption by each bank’s board by end-September.
    - New auditor for remaining public bank (BNA) started work in June; audit to complete by September (initially end-July SB); restructuring plans expected by end-November 2014 (new SB); bank fully recapitalized by end-year.
    - Staff urged quick consultation with existing private sector shareholders (about 46–49 percent equity stake in the main public banks) on participation in recapitalization or dilution of their share.
  - Governance of public banks:
    - Operational restructuring to restore sustained solvency and profitability.
    - Recruit “independent” Board members and implement a more performance-based salary structure by end-September.
  - Divesting:
    - No plans to reduce state participation in the three main state-owned banks at this stage.
    - Authorities plan to explore options to reduce government size in the banking sector by focusing initially on nine banks (about 10 percent of banking assets) in which it has a minority share; sale of these could help finance additional recapitalization costs.

### Asset management company (AMC)
- Status and mandate:
  - Authorities attempted to speed AMC establishment by including provisions in the revised budget law, but the National Assembly decided this should be examined under a separate law in August.
  - Mandate broadened beyond tourism sector distressed assets to ensure legislative framework if mechanism extended to other loans.
- Staff guidance on assets suitable for AMC centralized management:
  - (i) large in size, including syndicated loans and credits to borrowers with multiple exposures to banks in the system;
  - (ii) owed by corporate entities;
  - (ii) collateralized with (commercial) real estate.
- Authorities’ plan: Initially limit AMC operation to the tourism sector; an in-depth strategic study for tourism completed.
- Fiscal caution: Staff urged careful evaluation of fiscal implications before extending AMC to other sectors.
- Governance requirements: Internal legal protection for employees, internal audit; external oversight and supervision, operational independence, public accountability, external audit and reporting.
- Timeline: AMC expected to be created by October 2014 (new structural benchmark).

### Resolution framework and creditor rights
- Progress: New banking law drafted with WB/IMF TA to ensure clear identification of agencies responsible for bank resolution and liquidation and proper resolution tools and powers for the CBT.
- Staff view: Welcomed the design (end-June 2014 SB) and urged quick submission and adoption by government.
- Complementary measures:
  - Early adoption of the “bankruptcy law” to strengthen creditor rights (stalled in Parliament over the past year).
  - Drafting of a new deposit insurance law and new LOLR to be implemented once banking resolution framework is in place.

### Regulatory and supervisory upgrades
- Plan: Authorities adopted a three-year plan with IMF technical assistance to implement a risk-based supervision framework.
- Progress: Design of a uniform bank performance reporting system welcomed; will lead to full reporting and ratings system covering all accounting, financial, and institutional data (end-December 2014 SB).
- Staffing and procedural needs:
  - Rapidly increase human resources at the supervision directorate, particularly for onsite inspections (new end-November SB).
  - Strengthen coordination within banking supervision departments.
  - Establish clear and formal risk-based criteria for conducting banking supervision.
- Regulatory alignment:
  - Plans to align norms with international standards are progressing.
  - Loan classification rules could be tightened further (e.g., to cover public enterprises).
  - Staff urged implementation of the new liquidity ratio by September 2014 and application of sanctions in the interim to those not respecting the existing ratio.

### Growth-enhancing fiscal reforms — investment and procurement
- Procurement and project execution:
  - New procurement law implemented in June to modernize and streamline bidding, accelerate public investment implementation in regions.
  - Decentralized project execution and new procedures to resolve land deed constraints at regional level.
  - A full assessment of project implementation at the regional level is being finalized; staff urged quick adoption of its recommendations.
- Organic budget law reform: Ongoing reform, prepared with EU assistance, to be adopted later in 2014 to remove redundant procedures delaying budget implementation.
- Implementation caveat: Given a level of budget implementation in line with last year’s (20 percent of budgeted amount by end-May), several months will be needed before a substantial shift in project execution speed is observed.

### Tax reform and revenue administration
- Comprehensive tax reform:
  - Objective: more transparent, efficient, and equitable tax system.
  - First step: include all new permanent tax measures implemented in the last two years—including the halving of the corporate tax difference between the onshore and offshore sectors and modification/simplification of the presumptive tax system—in the new tax code (2014 end-September SB).
  - Participatory process begun in 2013 to culminate in presentation of a comprehensive tax reform strategy during national tax consultations in September.
  - Time-bound action plan to be adopted by the Council of Ministers by end-October (new structural benchmark).
- Key priorities:
  - (i) simplifying the presumptive tax system;
  - (ii) reforming the VAT (fewer rates, broader base, little or no withholding);
  - (iii) simplifying and improving targeting of excises while enhancing revenue yield.
- Staff emphasis: Include a timetable for full convergence of offshore and onshore corporate tax rates, linked to improvements in tax administration.

- Revenue administration modernization:
  - New modernization plan (end-June SB) to transfer all tax functions within the tax administration, including management, control, arrears collection, and interpretation of tax legislation.
  - First step: merger of most functions under the large taxpayer unit (LTU) and introduction of new risk-based audit procedures.
  - Enhanced powers granted to the tax agency through modification of bank secrecy laws welcomed; staff recommended accompanying safeguards to protect taxpayers.
  - Staff urged wide dissemination of the reform plan within the ministry to ensure full ownership and avoid resistance.

### Public enterprises and fiscal oversight
- SOE assessment and reforms:
  - Audit report on energy companies presented to the Council of Ministers in August showed a complex system of cross-subsidies; these will be reduced from 2015 onwards by making every energy public company accountable for its own import bill.
  - Budgeted funds should be transferred regularly and in a timely manner to food and energy public companies, with ex-post control procedures performed only once financial accounts are finalized at year-end.
  - Authorities started regular monitoring of the largest SOEs by producing key financial ratios and an aggregated fiscal position of the 28 state-owned enterprises (end-June SB); this will have to be extended to 2013.
  - Restructuring plans for the most vulnerable enterprises—such as TUNISAIR—are being prepared (MEFP, ¶24).
- Governance and oversight recommendations:
  - Quick action on governance changes to bring greater independence and responsibility to SOE boards and management.
  - Address fragmentation in structure and financial oversight of public enterprises and autonomous bodies (EPNA/EPS/EPA).
  - Improve consolidated information on financial support provided by the government to these entities.

### Public financial management (PFM)
- Progress: Reconciliation between above- and below-the-line budgetary information improving, with regular monitoring from budget commitment to payment order and actual payments.
- Remaining issues:
  - Reconciliation limited to flows; treasury balances not systematically reconciled.
  - The complementary period practice and procedures related to externally-financed projects delay closure of annual accounts and allow reclassifying data into fiscal year n or n-1.
- Staff recommendations:
  - Close accounts within one month of the end of the fiscal year as a short-term priority.
  - Abolish the complementary period in the medium term.
  - Operationalize the National Public Accounting Standards Board soon to move towards international norms, including double entry bookkeeping.
  - Quickly complete introduction of a functional classification (now scheduled for September).
  - Adoption of the new organic law will introduce greater flexibility in managing budget appropriations.

### Public sector pensions
- Current fiscal support: To ensure pension payments this year, the government will transfer around 0.3 percent of GDP to the CNRPS, of which 0.1 percent is a transfer to cover arrears from the transport public company.
- Financial situation: The public sector retirement and social security Fund (CNRPS) has deteriorated significantly and its treasury balances have been depleted.
- Staff recommendations:
  - Adopt in the 2015 budget the CNRPS recommendation to increase the retirement age to 62 (and optional to 65) to avoid covering an annual deficit of around 0.5 percent of GDP.
  - More substantial reforms needed, including changes in contribution parameters and benefits to address pay-as-you-go system shortcomings (aging population, early retirement age, generous parameters for calculating pension benefits).

### Growth-enhancing structural reforms and business climate
- Legislative reforms lagging: Laws on competition, public private partnerships, bankruptcy, and investment code are crucial but progress is slow.
- Authorities’ approach: Determined to pursue parliamentary approval but note lengthy legislative process and need for consensus building.
- Investment code:
  - Current version in Parliament judged too cumbersome; authorities working on streamlined “quick win” measures to reduce restrictions on investment and guarantee investor rights.
  - Given ongoing negotiations on regional trade agreements, greater market access will not be a priority of the “investment code” and will be left to individual trade negotiations.
- Staff advice:
  - Design and implement new “investment facilitation” measures quickly.
  - Avoid introducing tax incentives that could be distortionary and not conducive to a level playing field for investors.

*Source: IMF staff report text.*

### 38.      Labor market reforms are somewhat stalled, with key measures to be initiated

### 38.      Labor market reforms are somewhat stalled, with key measures to be initiated

### Labor market reform status and plans
- Tripartite working commissions (government, business, labor unions) have renewed dialogue under the “Social Pact” signed in January 2013, outlining a broad framework for reforms.
- Discussions on the national employment strategy—addressing the structural skills mismatch and reducing labor market rigidities—are still at the initial stage.
- New measures are expected to be announced after the elections, following a likely consensus.
- While important structural reforms are not yet in the cards, unemployment remains high and a number of job-creation initiatives have been launched or are under preparation, particularly for youth. Examples include:
  - “Virtual workplaces” to give unemployed university graduates a forum to hone skills while searching for formal employment.
  - Reform of professional training.
  - Incentives for university graduates to establish companies in disadvantaged regions.
  - Programs to increase financing for SMEs (including through World Bank assistance).

### Statistical system assessment
- An assessment of the statistical system—conducted with help from EUROSTAT—needs to be finalized (MEFP, ¶33).
- Staff urged quick adoption of a national reform plan to address weaknesses:
  - Strengthen coordination of various statistical bodies.
  - Enhance the quality of statistics and training.
- Staff welcomed:
  - Focus on strengthening national accounts.
  - Progress towards implementing the methodology of the Monetary Financial Statistics Manual (MFSM).
  - Authorities’ intention to adopt a Code of Conduct for all statistical agencies.
- Staff reiterated the importance of new legislation guaranteeing the independence of the National Statistical Office.

### Box 3 — Causes of the Rise and Fall in Tunisia’s Unemployment Rate: key findings and statistics
- Unemployment rate changes:
  - Increased from 13 percent in 2010 to 18.9 percent in 2011.
  - Youth unemployment rose from 27 percent to 38 percent during the same period.
  - By end-2013, unemployment rate had improved to 15.3 percent.
- Regional comparators:
  - North Africa average unemployment rate: 12.2 percent.
  - Middle East average unemployment rate: 10.9 percent.
- Drivers of the rise in unemployment after the revolution:
  - Job losses mainly in agriculture, tourism, and mining due to protracted strikes, reduced tourism because of security concerns, and closing of firms linked to the previous regime.
  - Number of people newly registered as unemployed was twice as high as those losing jobs, reflecting:
    - A temporary monthly unemployment transfer scheme.
    - A one-time increase in the maximum age for those taking public service exams.
- Factors behind recent improvements in unemployment:
  - Predominantly the result of a reversal in the number of registered unemployed.
  - Reductions in registered unemployment contributed by at least two-thirds to the reduction in the unemployment rate in the past two years.
  - The remaining one-third was the result of new jobs, 36 percent of which were created in public sector services such as education, health, administration, and the mining sector.
  - In the private sector, additional jobs were mainly created in the food, chemical, mechanical, and electricity sectors.
- Distributional and demographic details:
  - Job seekers without university degrees are the main beneficiaries of renewed job growth.
  - During the revolution, job losses were particularly pronounced among those without a university education; the same group has gained most from renewed job growth.
  - Among university graduates:
    - Those with science degrees represented 16 percent of all unemployed with university degrees in 2006 and 30 percent in the later period—showing the most uninterrupted increase in unemployment among graduates.
    - Science-degree holders are the main group that has not benefited from renewed job creation in the past two years.
  - Unemployment among university graduates in Tunisia is nearly twice as high as in comparable countries such as Jordan, Egypt or Morocco.
- Minimum wage considerations:
  - Recent increases in the minimum wage of 6–10 percent are not expected to have an adverse effect on employment in the short run.
  - Future minimum wage increases should be considered carefully given the trend of falling labor productivity in the last decade.
  - Evidence suggests existing youth minimum wages are not respected and youth instead receive the regular minimum wage, which is relatively high given lower youth productivity.
  - Increases in the regular minimum wage could therefore lead to further increases in youth unemployment.

### Protecting the most vulnerable
- Staff welcomed actions to protect the poor, including:
  - A new social housing program for those in need.
  - A lifeline electricity tariff to protect households consuming less than 100 kwh while electricity subsidies are being reduced.
- Household support program (2014 end-June SB) measures and coverage:
  - Increased transfers to vulnerable households by 10 percent.
  - Broadened number of beneficiary families in the existing cash transfer program from 220,000 in 2013 to 235,000 in July 2014 (and 250,000 by end-year).
  - Provided a temporary transfer of 80 dinars for about 285,000 families in June/July when fuel prices were increased (and during Ramadan).
  - Provided an additional transfer of TD 10 per month per child to vulnerable families with schoolchildren (up to three per family).
- Social registry and targeting:
  - Authorities are finalizing the unique social identification number, already available for 7.5 million citizens, which could be used as a basis for a new registry of vulnerable households.
  - Staff urged authorities to start improving targeting using the current registry and results of the ongoing evaluation of the cash transfer scheme, rather than waiting until the unique social identification number is available to all.

### Program design, modalities, and financing
- Program modalities broadly unchanged; new benchmarks mostly on the financial sector.
- Performance and structural benchmarks:
  - All end-March and end-June PCs have been met.
  - Staff proposes modification of end-September performance criteria (PCs) in light of end-June outturn and new BOP projections, and new PCs for end-December 2014 and ITs for end-March 2015 as per the MEFP (Table 1).
  - Structural benchmarks: adoption by government of STB and BH restructuring plans in line with best international practices is a prior action for completing the fourth review.
  - Audit of the BNA delayed to September 2014.
  - Five new benchmarks introduced to anchor banking sector objectives; one new benchmark on tax policy.
  - End-September structural benchmark on the investment code will be reviewed in the next review; authorities intend to propose “streamlined measures” as an alternative.
- Program extension and contingencies:
  - Authorities are not favoring an extension of the program at this stage, but an extension could be considered later if reforms take longer than envisaged, fiscal consolidation does not occur as expected, or rebuilding external buffers requires more time.
- Financing details:
  - Program is fully financed for the next 12 months via multilateral and bilateral assurances; some disbursements linked to program reform progress.
  - From the Fund, all resources scheduled to be disbursed for 2014 will continue to be used for budget support.
  - Market issuance of $1.1 billion will cover remaining financing needs for the rest of 2014.
  - If early indications show projected financing will not be received over the next six months, authorities will consult the Fund on alternative financing approaches and/or further policy adjustments.
  - For 2015 amounts not covered by a Fund program, greater recourse to international market issuances and/or greater policy adjustment would be warranted if new bilateral/multilateral financing commitments for 2015 do not materialize after the elections.

### Repayment capacity and risks
- Tunisia has a strong record of payments to the Fund.
- Standard indicators of Fund exposure will remain low, with Fund credit outstanding reaching a maximum of 3.6 percent of GDP in 2015 (about 17.9 percent of gross international reserves).
- Risks that could jeopardize program objectives and repayment capacity include:
  - Delays in the political agenda.
  - Increasing social and security tensions.
  - Delays in official financing.
  - Major structural constraints including a weak investment climate.
  - Further deterioration of the international economic environment.
- The government’s reiterated strong commitment to the reform agenda helps reduce program implementation risks.

### Staff appraisal — macroeconomic context and policy priorities
- Political progress provides a window to advance reforms and galvanize investors, but macroeconomic conditions remain difficult.
  - Rising external imbalances are putting pressure on the exchange rate and reserves.
  - Social tensions and security incidents dampen the investment climate and burden economic activity.
- Fiscal policy:
  - Fiscal consolidation remains key; should be accompanied by improved budget composition.
  - Staff welcomes government efforts to identify new measures to offset spending pressures and remain on track to meet the end-year deficit target.
  - Staff regrets the end-year increase in current primary spending that was not offset by permanent cuts in nonessential current expenditures.
  - Urged authorities to:
    - Contain the wage bill at program levels.
    - Speed up execution of the investment budget, which should be preserved during fiscal adjustment.
    - Adopt a tighter fiscal stance and save any revenue over-performance to contain external imbalances and reduce crowding out of the private sector.
- Subsidy reform and social safety net:
  - Commended electricity tariff increases, fuel price increases, removal of all electricity subsidies for energy companies.
  - Welcomed initiatives to strengthen the social safety net, including new social programs and the “household targeting strategy.”
- Revenue and tax reform:
  - Moving forward with comprehensive revenue reform is essential for a more efficient, transparent, and equitable tax system.
  - Welcomed adoption of measures to combat tax evasion and the tax modernization plan—urged quick implementation.
  - Enhanced powers to the tax agency via modification of bank secrecy laws are welcome but should be balanced with protection of taxpayers’ rights.
  - Urged adoption of a new tax reform strategy that includes permanent base-broadening measures, with some proposed in the 2015 budget.
- Public financial management and public enterprise reform:
  - Strengthening PFM and reforming public enterprises important to improve governance, fiscal credibility, and service delivery.
  - Implementation of streamlined procurement procedures and decentralized project execution, together with revised budget procedures in the new organic budget law, will help scale up investment.
  - Urged quick action on designing restructuring plans for enterprises in difficulty.
- Monetary policy and exchange rate strategy:
  - Tight monetary policy necessary to anchor inflationary expectations.
  - Welcomed recent increase in the policy rate and authorities’ readiness to increase further if inflationary pressures materialize.
  - Urged moving towards a positive real interest rate to keep inflation down and reduce exchange rate pressures.
  - Commended efforts to tighten the collateral framework and urged quick conclusion of ministerial consultation to revise legislation capping interest rates, which hampers monetary policy transmission.
  - Establishment of a LOLR facility will enhance the monetary framework.
  - CBT should focus on rebuilding foreign reserve buffers, including through increased exchange rate flexibility.
  - Welcomed recent reduction in CBT foreign exchange sales and depreciation of the exchange rate.
  - Supported policy to smooth excessive exchange rate fluctuations and encouraged stepping up purchases during periods of excess fx supply.
  - Moving towards a weekly auction system will help promote greater exchange rate flexibility.
- Financial sector stability:
  - Important steps taken to reduce vulnerabilities: adoption of public bank restructuring plans.
  - Urged quick implementation of restructuring plans by banks’ boards, including recapitalization and governance requirements.
  - Welcomed efforts to establish an Asset Management Company to address distressed tourism assets; implementation of a new bankruptcy law is essential to address weak asset quality.
  - Regretted delay in launching audit of remaining large public bank and urged rapid completion to enable restructuring.
  - Enhancing the banking resolution framework and upgrading regulatory and supervisory frameworks are essential to safeguard banking stability.
- Structural reforms and investment climate:
  - Structural reforms remain critical to improve the investment climate and generate more inclusive growth.
  - Regretted delays in moving forward with legislative agenda (competition law, investment code, law on public-private partnerships).
  - Encouraged authorities to avoid introducing new tax incentives to foster investment.
  - Urged further reduction of the difference between tax rates in onshore and offshore sectors via gradual convergence and simplification of regulatory procedures.
- Pension reform:
  - Reforming the public sector pension system is a priority given mounting deficits.
  - While substantial reforms may take time, staff urged quick actions to reduce the pension system’s annual deficit and move towards financial viability.
- Political will and communication:
  - Authorities’ sustained commitment to reform implementation during the political transition is crucial.
  - Implementation of program policies will continue to be tested by a difficult social environment and vested interests.
  - Staff welcomes the government’s effort to communicate on its policies and explain the need for difficult economic reforms.

*International Monetary Fund — Tunisia: section on labor market reforms, statistical system, unemployment dynamics, social protection, program design, financing, risks, and staff appraisal.*

### 55.      On the basis of Tunisia’s performance under the SBA, and the government’s

### _cr14277 - 55.      On the basis of Tunisia’s performance under the SBA, and the government’s

### Program support and IMF decision
- Staff supports the authorities’ request for completion of the fourth review and a disbursement of SDR 143.25 million.
- Staff supports the modification of end-September QPCs and recommends the establishment of new end-December PCs as proposed in the attached MEFP.

### Recent economic developments (high-level findings)
- Tourism and remittances are recovering slowly while exports are declining.
- Unemployment has started to subside on the back of public sector hiring but remains high, particularly among university graduates.
- In 2013, to counteract the still-weak economy and high unemployment, the fiscal stance has been looser, while public debt has stabilized at around 45 percent of GDP.
- Inflation is on the rise due to higher food prices while core inflation is declining.
- Growth continues to be moderate, driven mostly by private consumption while investment is recovering from the sharp drop in 2011.
- Industrial production has recovered in Q1-2014, driven mostly by textile production, while energy production is still weak.

### Key indicators of activity and prices (figures and trends)
- Consumer price index (CPI), average: 4.4 (2010), 3.5 (2011), 5.6 (2012), 6.0 (2013), 6.1 (2014 Prog.), 4.7 (2014 Prel.), 5.5 (2015 Prog.), 5.7 (2015 Rev.), 5.0 (2015 Proj.).
- CPI end of period: 4.0 (2010), 4.2 (2011), 5.9 (2012), 5.3 (2013), 6.0 (2014 Prog.), 5.0 (2014 Prel.), 5.3 (2015 Prog.), 5.5 (2015 Rev.), 4.5 (2015 Proj.).
- Real GDP growth: 2.6 (2010), -1.9 (2011), 3.7 (2012), 4.0 (2013), 2.3 (2014 Prog.), 4.5 (2014 Prel.), 2.8 (2015 Prog.), 2.8 (2015 Rev.), 4.0 (2015 Proj.).
- Contribution to growth components shown (Net exports, Investment, Public consumption, Private consumption) with Real GDP growth series displayed in figures.

### External and financial indicators (findings)
- The current account deficit remains high and FDI flows weak.
- Reduced intervention in the FX market stabilized international reserves while the exchange rate has been depreciating.
- Reserve levels remain below the new metric.
- Credit to the economy continues to be lackluster while deposits have been falling.
- The Central Bank Policy Rate increased by another 25 basis points in June to 4.75 percent.
- Sovereign spreads have decreased and the stock index has improved but has been weighed down by bank stocks.

### External position and reserves (selected figures)
- Gross reserves (in billions of U.S. dollars, e.o.p): 9.5 (2010), 7.5 (2011), 8.7 (2012), 9.0 (2013), 7.7 (Q1 2014), 7.7 (Q2 2014), 7.1 (Q3 2014), 7.6 (Q4 2014), 9.1 (2014 Prel.), 10.0 (2015 Proj.).
- Reserves in months of imports of goods and services: 4.4 (2010), 3.4 (2011), 4.0 (2012), 3.8 (2013), 3.4 (Q1 2014), 3.5 (Q2 2014), 3.2 (Q3 2014), 3.5 (Q4 2014), 3.9 (2014 Prel.), 4.2 (2015 Proj.).
- External position: Current Account (in percent of GDP) -4.8 (2010), -7.4 (2011), -8.2 (2012), -7.5 (2013 Prog.), -8.4 (2013 Prel.), -6.0 (2014 Prog.), -7.2 (2014 Prel.), -7.6 (2015 Prog.), -6.6 (2015 Proj.).
- FDI (in percent of GDP): 3.0 (2010), 0.9 (2011), 3.9 (2012), 2.1 (2013 Prog.), 2.2 (2013 Prel.), 2.5 (2014 Prog.), 2.2 (2014 Prel.), 2.1 (2015 Prog.), 2.7 (2015 Proj.).

### Balance of payments highlights (selected values, US$ millions)
- Current account: -2,105 (2010), -3,401 (2011), -3,706 (2012), -3,961 (2013 Year), Q1 2014 -1,417; Q2 2014 -1,144; Q3 2014 -568; Q4 2014 -632; 2014 Prel. -3,760; 2015 Proj. -3,302.
- Trade balance: -4,575 (2010), -4,799 (2011), -6,105 (2012), -5,937 (2013 Year), 2014 Prel. -6,333.
- Exports: 16,431 (2010), 17,824 (2011), 16,997 (2012), 17,050 (2013 Year), 2014 Prel. 17,397.
  - Energy exports: 2,315 (2010), 2,592 (2011), 2,849 (2012), 2,591 (2013 Year), 2014 Prel. 2,485.
  - Non-energy exports: 14,116 (2010), 15,231 (2011), 14,147 (2012), 14,459 (2013 Year), 2014 Prel. 14,913.
- Imports: -21,006 (2010), -22,623 (2011), -23,102 (2012), -22,987 (2013 Year), 2014 Prel. -23,730.
  - Energy imports: -2,653 (2010), -3,409 (2011), -4,100 (2012), -4,172 (2013 Year), 2014 Prel. -4,905.
  - Non-energy imports: -18,353 (2010), -19,214 (2011), -19,001 (2012), -18,815 (2013 Year), 2014 Prel. -18,825.
- Services and transfers (net): 2,470 (2010), 1,398 (2011), 2,399 (2012), 1,976 (2013 Year), 2014 Prel. 2,573.
  - Tourism receipts (of services): 2,461 (2010), 1,680 (2011), 2,031 (2012), 1,988 (2013 Year), 2014 Prel. 2,110.
  - Workers' remittances: 2,063 (2010), 1,990 (2011), 2,235 (2012), 2,267 (2013 Year), 2014 Prel. 2,410.

### External financing and reserve movements
- Changes in gross reserves (US$ millions): 107 (2010), 819 (2011), 984 (2012), -1,130 (2013), 965 (Q1 2014), -416 (Q2 2014), 03 (Q3 2014), -518 (Q4 2014), -1,454 (2014 Prel.), -1,410 (2015 Proj.).
- Overall balance (US$ millions): -1,078 (2010), -1,984 (2011), 1,130 (2012), -1,115 (2013), Q1 2014 -468; Q2 2014 -825; Q3 2014 721; Q4 2014 1,232; 2014 Prel. 116; 2015 Proj. 77.

### External financing needs and sources (Table 3 highlights, US$ millions)
- Total financing requirements: 9,226 (2010), 10,551 (2011), 10,270 (2012), 10,728 (2013 Year), 2014 Prel. 10,216, 2015 Proj. 9,819.
- Current account deficit - Capital transfers: 2,022 (2010), 3,247 (2011), 3,264 (2012), 3,714 (2013 Year), 2014 Prel. 3,542, 2015 Proj. 3,099.
- Amortizations: 6,887 (2010), 7,412 (2011), 6,975 (2012), 7,001 (2013 Year), 2014 Prel. 6,766, 2015 Proj. 6,801.
- Short-term debt (component of amortizations): 5,187 (2010), 5,357 (2011), 4,916 (2012), 5,480 (2013 Year), 2014 Prel. 5,960, 2015 Proj. 5,732.
- Total financing sources: 9,226 (2010), 10,551 (2011), 10,270 (2012), 10,578 (2013 Year), 2014 Prel. 8,817, 2015 Proj. 9,594.
  - FDI (net): 1,309 (2010), 417 (2011), 1,772 (2012), 1,029 (2013 Year), 2014 Prel. 1,024, 2015 Proj. 1,376.
  - Disbursements (debt): 6,791 (2010), 8,555 (2011), 10,037 (2012), 8,905 (2013 Year), 2014 Prel. 9,416, 2015 Proj. 9,315.
- Drawdown in gross reserves appears as a financing source: 1,078 (2010), 1,984 (2011), -1,130 (2012), 965 (2013 Year), 2014 Prel. -1,410, 2015 Proj. -901.
- Financing gap (Fund credits under SBA counted): Fund credits and purchases shown as zero except specific small entries (e.g., Purchases 150, 50 etc. in schedule elsewhere).

### Fiscal position and central government operations (selected figures)
- Central government (percent of GDP): Total revenue (excluding grants) 23.4 (2010), 24.5 (2011), 23.1 (2012), 23.8 (2013 Prog.), 23.6 (2013 Prel.), 24.0 (2014 Prog.), 23.1 (2014 Prel.), 23.5 (2015 Prog.), 23.5 (2015 Proj.).
- Total expenditure and net lending: 24.0 (2010), 28.0 (2011), 28.8 (2012), 31.1 (2013 Prog.), 29.8 (2013 Prel.), 30.3 (2014 Prog.), 29.9 (2014 Prel.), 30.3 (2015 Prog.), 28.0 (2015 Proj.).
- Central government balance (excluding grants): -0.6 (2010), -3.5 (2011), -5.7 (2012), -7.3 (2013 Prog.), -6.2 (2013 Prel.), -6.4 (2014 Prog.), -6.8 (2014 Prel.), -6.7 (2015 Prog.), -4.5 (2015 Proj.).
- Central government deficit (excluding grants, cash basis): 1.6 (2010), -2.8 (2011), -5.0 (2012), -7.3 (2013 Prog.), -4.5 (2013 Prel.), -6.4 (2014 Prog.), -8.6 (2014 Prel.), -8.5 (2015 Prog.), -4.5 (2015 Proj.).
- Structural fiscal balance: -1.1 (2010), -3.0 (2011), -5.3 (2012), -5.0 (2013 Prog.), -4.5 (2013 Prel.), -3.8 (2014 Prog.), -4.9 (2014 Prel.), -4.7 (2015 Prog.), -4.0 (2015 Proj.).
- General government debt (foreign and domestic): 40.7 (2010), 44.5 (2011), 44.5 (2012), 45.3 (2013 Prog.), 44.8 (2013 Prel.), 49.5 (2014 Prog.), 50.9 (2014 Prel.), 51.7 (2015 Prog.), 54.4 (2015 Proj.).

### Central government financial operations (selected 2014 dinar figures)
- Total revenue and grants (2014 Prel./Rev/Proj series): Total revenue and grants 18,150 (2013 Prel.), 19,271 (2014 Prog.), 19,325 (2014 Prel.), Q1 2014 4,653; Annual Prel. 19,829; 2015 Prog. 21,576.
- Total expenditure and net lending (annual): 22,746 (2013 Prel.), 24,825 (2014 Prog.), 24,720 (2014 Prel.), Annual Prel. 25,128; 2015 Prog. 25,292.
- Wages and salaries (annual): 9,572 (2013 Prel.), 10,515 (2014 Prog.), 10,361 (2014 Prel.), Annual Prel. 10,465; 2015 Prog. 11,195.
- Energy subsidies (annual): 2,854 (2013 Prel.), 2,500 (2014 Prog.), 2,460 (2014 Prel.), Annual Prel. 2,353; 2015 Prog. 1,394.
- Central government primary balance (excluding grants, cash basis) memorandum: -2,256 (2012), -2,032 (2013), -3,304 (2014 Prog.), -5,599 (2014 Prel.), -1,773 (2015 Prog.), -2,554 (2015 Proj.).

### Monetary and financial sector (selected indicators)
- Credit to the economy (percent change): 19.6 (2010), 13.4 (2011), 8.8 (2012), 10.8 (2013 Prog.), 6.8 (2013 Prel.), 11.7 (2014 Prog.), 8.5 (2014 Prel.), 6.7 (2015 Prog.), 8.3 (2015 Proj.).
- Broad money (M3) annual percent change: 12.1 (2010), 9.1 (2011), 8.4 (2012), 12.6 (2013 Prog.), 6.6 (2013 Prel.), 12.0 (2014 Prog.), 9.6 (2014 Prel.), 10.2 (2015 Prog.), 10.0 (2015 Proj.).
- Money market/Reference/Lending rates (July 2011–July 2014 series shown); Central Bank Policy Rate increased in June to 4.75 percent.

### Central bank balance sheet highlights (selected dinar figures)
- Net Foreign Assets (central bank): 13,705 (2010), 11,315 (2011), 13,455 (2012), 12,701 (2013 Year), Q1 2014 12,265; Q2 2014 12,062; Q3 2014 13,331; Q4 2014 16,315; 2014 Prel. 19,130; 2015 Proj. 12,631.
- Reserve Money: 8,415 (2010), 9,406 (2011), 10,989 (2012), 9,212 (Q1 2013), 9,915 (Q2 2013), 10,278 (Q3 2013), 11,078 (2013 Year), 11,072 (Q1 2014), 11,137 (Q2 2014), 12,479 (Q3 2014), 12,142 (Q4 2014), 13,356 (2014 Prel.).

### Banking sector soundness (selected indicators as of Mar. 2014)
- Regulatory capital to risk-weighted assets: 9.4 (Mar. 2014).
- Tier 1 capital to risk-weighted assets: 7.7 (Mar. 2014).
- Capital to assets: 6.2 (Mar. 2014).
- Nonperforming Loans (NPLs) to total loans: 15.1 (Mar. 2014).
- Specific provisions to NPLs: 60.4 (2013 figure where reported).
- NPLs, net of provisions, to Tier 1 capital: 79.6 (Mar. 2014).
- Return on assets (ROA): 0.7 (2013).
- Interest rate average spread (between loans and deposits): 2.9 (Mar. 2014).
- Liquidity: Liquid assets to total assets 27.7 (Mar. 2014); Liquid assets to short-term liabilities 90.6 (Mar. 2014).
- Deposits to loans: 89.7 (Mar. 2014).
- FX net open position to Tier 1 Capital: 2.0 (Mar. 2014).

### Schedule of proposed purchases under the Stand-By Arrangement (Table 8)
- June 7, 2013 Board approval of the SBA: Disbursement 98.800 Millions of SDRs; Percent of quota 34.485; Millions of U.S. dollars 150.155.
- First Review September 15, 2013: Observance of end-June 2013 performance criteria, completion of the first review: Purchase 98.600 SDRs; 34.415 percent of quota; $152.569.
- Second Review December 15, 2013: Observance of end-September 2013 performance criteria, completion of the second review: Purchase 230.520 SDRs; 80.461 percent of quota; $356.697.
- Third Review March 15, 2014: Observance of end-December 2013 performance criteria, completion of the third review: Purchase 145.080 SDRs; 50.639 percent of quota; $224.491.
- Fourth Review June 15, 2014: Observance of end-March 2014 performance criteria, completion of the fourth review: Purchase 143.250 SDRs; 50.000 percent of quota; $221.659.
- Fifth Review September 15, 2014: Purchase 143.250 SDRs; 50.000 percent of quota; $221.659.
- Sixth Review December 15, 2014: Purchase 143.250 SDRs; 50.000 percent of quota; $221.659.
- Seventh Review March 15, 2015: Purchase 71.625 SDRs; 25.000 percent of quota; $112.077.
- Eighth Review May 15, 2015: Purchase 71.625 SDRs; 25.000 percent of quota; $112.077.
- Total: 1,146.000 Millions of SDRs; 400.000 percent of quota; 1,773.042 Millions of U.S. dollars.
- Quota is SDR 286.5 million. (Schedule labeled "Under the proposed schedule of purchases during SBA".)

### Illustrative medium-term growth scenario (Table 9, selected series)
- Real GDP growth: 2.6 (2010), -1.9 (2011), 3.7 (2012), 2.3 (2013 Est.), 2.8 (2014), 4.0 (2015), 4.5 (2016), 4.5 (2017), 4.5 (2018), 4.5 (2019).
- Inflation (annual average): 4.4 (2010), 3.5 (2011), 5.6 (2012), 6.1 (2013), 5.7 (2014), 5.0 (2015), 4.2 (2016), 4.0 (2017), 4.0 (2018), 4.0 (2019).
- Gross national savings (percent of GDP): 20.9 (2010), 16.2 (2011), 16.1 (2012), 13.6 (2013), 12.9 (2014), 14.5 (2015), 16.2 (2016), 18.9 (2017), 21.4 (2018), 22.9 (2019).
- Gross investment (percent of GDP): 25.7 (2010), 23.6 (2011), 24.3 (2012), 22.0 (2013), 20.6 (2014), 21.1 (2015), 23.5 (2016), 24.7 (2017), 26.0 (2018).
- General debt in percent of GDP (memorandum): 40.7 (2010), 44.5 (2011), 44.5 (2012), 44.8 (2013 Est.), 51.7 (2014), 54.4 (2015), 55.6 (2016), 55.8 (2017), 54.8 (2018), 53.9 (2019).
- Central government balance in percent of GDP (excluding grants and privatization): -0.6 (2010), -3.5 (2011), -5.7 (2012), -6.2 (2013), -6.7 (2014), -4.5 (2015), -4.2 (2016), -3.3 (2017), -2.6 (2018), -2.1 (2019).
- Current account balance in percent of GDP: -4.8 (2010), -7.4 (2011), -8.2 (2012), -8.4 (2013), -7.6 (2014), -6.6 (2015), -5.5 (2016), -4.6 (2017), -3.4 (2018), -3.1 (2019).

### Indicators of Fund credit (Table 10, selected)
- Disbursement (existing and prospective Fund credit): 099 (2012), 904 (2013), 143 (2014) (table entries as shown).
- Stock of existing and prospective Fund credit: 099 (2012), 1,003 (2013), 1,146 (2014), 1,121 (2015), 876 (2016), 355 (2017), 27 (2018), 0 (2019) as presented.
- Stock in percent of quota: 0.0 (2012), 34.4 (2013), 35.0 (2014), 40.0 (2015), 39.1 (2016), 43.0 (2017), 5.9 (2018), 12.3 (2019), 9.4 (final years shown).

### Public and external debt context (Annex note)
- An expansionary fiscal policy in the aftermath of the revolution, combined with a decline in economic activity, increased public debt.
- After having declined from an average of 60 percent of GDP in the 1990s to 40.7 percent of GDP in 2010, the debt-to-GDP ratio increased in 2011.

*Source: IMF staff report text and tables as provided in the content unit.*

### 44.5 percent and remained practically unchanged until 2013, though it is expected to increase to

### _cr14277 - 44.5 percent and remained practically unchanged until 2013, though it is expected to increase to

### Public debt dynamics and baseline projections
- Public sector debt was 44.5 percent of GDP and remained practically unchanged until 2013, and is expected to increase to about 7 percentage points of GDP to 51.7 percent of GDP by end-2014.
- Under the baseline scenario:
  - Public debt is expected to increase to 56 percent of GDP before declining over the medium term.
  - Debt-to-GDP ratio around 56 percent of GDP by 2017.
  - Debt-to-GDP ratio expected to start declining in 2018, reaching about 54 percent by end-2019.
  - This path is consistent with fiscal consolidation envisaged by the authorities: an overall deficit declining to 2.0 percent of GDP by 2019, and real growth rates that start to pick up in 2015.
- Debt composition and recent history (Annex Table 1, selected rows):
  - Public sector debt (percent of GDP): 2009: 42.8; 2010: 40.7; 2011: 44.5; 2012: 44.5; 2013: 44.8; 2014: 51.7; 2015: 54.4; 2016: 55.6; 2017: 55.8; 2018: 54.8; 2019: 53.9.
  - 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: 39.3; 2016: 40.7; 2017: 40.0; 2018: 39.0; 2019: 38.5.
  - Gross financing need (in billions of U.S. dollars): 2009: 2.5; 2010: 1.9; 2011: 3.1; 2012: 3.9; 2013: 4.6; 2014: 5.8; 2015: 4.4; 2016: 6.8; 2017: 8.7; 2018: 9.8; 2019: 10.1.

### Public debt stress tests and alternative scenarios
- Adverse scenarios would materially deteriorate debt dynamics relative to the baseline:
  - No medium-term fiscal consolidation (no policy change): public debt would reach around 62 percent of GDP by 2019.
  - One-off 10 percent of GDP shock to contingent liabilities (additional 3 percent of GDP bank recapitalization costs and realization of about 7 percent of GDP of government’s contingent liabilities from public enterprises): public debt would reach about 66 percent of GDP in 2016 and slightly decline to about 63 percent of GDP by 2019.
  - Permanent negative shock to real growth: public debt would reach about 67 percent of GDP by end-2019.
  - One-time 30 percent depreciation (with around 69 percent of public debt denominated in foreign currency): public debt-to-GDP ratio would increase to about 71 percent before declining to 68 percent by 2019.
  - Interest rate shock: relatively small impact, with debt staying at around 56 percent of GDP over the medium term.
- Bound tests (selected results, Annex Table 1):
  - B2 (Real GDP growth at baseline minus one-half standard deviation): 2014: 51.7; 2015: 55.9; 2016: 59.2; 2017: 62.1; 2018: 64.2; 2019: 67.0.
  - B5 (One time 30 percent real depreciation in 2015): 2014: 51.7; 2015: 70.0; 2016: 71.0; 2017: 70.9; 2018: 69.5; 2019: 67.9.
  - B6 (10 percent of GDP increase in other debt-creating flows in 2015): 2014: 51.7; 2015: 64.4; 2016: 65.5; 2017: 65.5; 2018: 64.2; 2019: 63.0.

### External debt dynamics and baseline projections
- External debt trends and baseline projections:
  - External debt declined from over 65 percent of GDP in 2002 to 48 percent of GDP at end-2011.
  - Under the baseline projections, external debt is projected to increase to 62.6 percent of GDP in 2016 before declining to around 61 percent by end-2019.
  - External debt-to-GDP ratio: 2009: 49.3; 2010: 48.5; 2011: 48.0; 2012: 53.8; 2013: 54.0; 2014: 57.3; 2015: 61.2; 2016: 62.6; 2017: 62.0; 2018: 61.4; 2019: 61.0.
  - 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: 11.6; 2015: 10.1; 2016: 10.0; 2017: 11.1; 2018: 10.9; 2019: 10.9.

### External debt stress tests and vulnerabilities
- External debt ratio is resilient to most adverse external shocks except large exchange rate depreciation:
  - Permanent negative shock to growth or to the current account would raise the debt ratio to 67–68 percent of GDP.
  - Increase in average interest rate would have almost no impact.
  - One-time 30 percent real depreciation (in 2014/2015 per scenarios) would raise the external debt ratio to more than 90 percent of GDP (example: B5 one-time 30 percent real depreciation in 2015: 2014: 57.3; 2015: 88.0; 2016: 90.1; 2017: 89.2; 2018: 88.3; 2019: 87.7).

### Key macroeconomic and fiscal assumptions (selected)
- Real GDP growth (in percent): selected projections: 2013: -1.9; 2014: 3.7; 2015: 2.3; 2016: 3.6; 2017: 2.4; 2018: 2.8; 2019: 4.0; beyond: 4.5.
- Average nominal interest rate on public debt (in percent): historical and projected values include 2013: 4.6; 2014: 4.4; 2015: 4.5; 2016: 4.8; 2017: 0.4; 2018: 4.3; 2019: 3.4.
- Inflation rate (GDP deflator, in percent): 2013: 4.6; 2014: 5.3; 2015: 5.7; 2016: 4.3; 2017: 1.1; 2018: 5.7; 2019: 4.8.
- Primary deficit (percent of GDP): 2012: 1.6; 2013: 3.4; 2014: 4.0; 2015: 2.9; 2016: 1.7; 2017: 2.2; 2018: 1.4; 2019: 0.7; target 2019: 0.2 in some tables and overall deficit declining to 2.0 percent of GDP by 2019 as noted in text.

### Alternative scenarios and bound tests (external debt, selected)
- A1 (Key variables at historical averages in 2014-2019): external debt rises from 57.3 in 2014 to 63.7 in 2019.
- B2 (Real GDP growth at baseline minus one-half standard deviations): external debt: 2014: 57.3; 2015: 62.3; 2016: 64.9; 2017: 65.4; 2018: 65.8; 2019: 66.5.
- B5 (One time 30 percent real depreciation in 2015): external debt: 2014: 57.3; 2015: 88.0; 2016: 90.1; 2017: 89.2; 2018: 88.3; 2019: 87.7.

### Policy context and authorities’ commitments
- The authorities committed to implementing the economic program and reforms supported by the IMF, aiming to preserve macroeconomic stability and promote higher and more inclusive growth.
- The authorities envisage significant fiscal consolidation in the medium term (overall deficit declining to 2.0 percent of GDP by 2019) and continuation of cautious external borrowing policies.

*Italic: Source – IMF staff report and annex tables and figures contained in the referenced IMF chapter.*

### 3. The performance under the IMF-supported program was positive, with results in certain

### 3. The performance under the IMF-supported program was positive, with results in certain areas exceeding the targets despite the difficult national and international context during the transition period.

### Program performance and review request
- Performance at end-March and end-June 2014 was in line with the projections from the last review.
- The government requests the completion of the fourth review of the program supported by the Stand-By Arrangement and the disbursement of SDR 143.250 million.
- The government proposes to modify the performance criteria for NIR, NDA, and the primary balance at end-September 2014 and to propose new criteria for December 2014, as well as new indicative targets, as described in the attached MEFP and TMU.
- The Letter of Intent is based on the previous LOI and MEFP approved on April 25, 2014.

### Quantitative performance criteria and indicative targets
- Quantitative criteria at end-March and end-June 2014 for net international reserves (NIR), net domestic assets (NDA) and the central government primary balance (on a cash basis) were met.
- Continuous zero ceiling on accumulation of external arrears was adhered to.
- Indicative target for the non-accumulation of domestic arrears was met.
- Quantitative indicative target for social spending and the ceiling on current spending at end-March and end-June 2014 were met.

### Structural reforms and benchmarks
- Six of the seven structural benchmarks (SB) for end-June 2014 were met:
  - Implemented a new haircut system for loans used by banks as collateral in refinancing operations at the Central Bank of Tunisia (CBT).
  - Presented the proposed new organic law of the CBT to its Board of directors (structural benchmark).
  - Submitted a new banking resolution framework consistent with international practices to CBT management.
  - Finalized the tax administration modernization plan.
  - Completed the consolidated balance of the 28 largest public enterprises.
  - Put in place the household support program to accompany the reform of energy product subsidies (structural benchmark originally set for August 2013).
- The lender-of-last-resort facility (end-June benchmark) was delayed to March 2015 to align with the new banking resolution framework; in the interim, an “exceptional and temporary emergency liquidity” mechanism was adopted.
- The end-July benchmark for Banque de l’Habitat (BH) and Société Tunisienne de Banque (STB) restructuring plans will be adopted by the government in August 2014 (Prior Action for completing the fourth review) in accordance with international best practices.
- Audit of Banque Nationale Agricole (BNA) (end-July SB) was delayed to September 2014 due to auditor delays.

### Macroeconomic outlook and recent developments
- 2013 growth estimate revised from 2.6 percent to 2.3 percent.
- Q1 2014 growth: 2.2 percent (y-o-y).
- 2014 annual growth projected at 2.8 percent.
- Inflation (y-o-y) rose from 5 percent in March 2014 to 5.7 percent in June 2014; core inflation declined to 4.3 percent at end-June 2014.
- Inflation projection for 2014: reach a high of 6 percent in September and slow to 5.5 percent at end year.
- Current account deficit: record 8.4 percent of GDP in 2013.
- Current account deficit in Q1 2014: 2.7 percent of GDP; estimated 2.3 percent of GDP in Q2 2014.
- Projected current account deficit for 2014: 7.6 percent of GDP.
- Gross reserves at end-June 2014: $7.1 billion (3.5 months of imports).
- Exchange rate movement over the past three months: 8.6 percent depreciation of the dinar (TD) vis-à-vis the euro and U.S. dollar during this period, eliminating earlier appreciation.

### Policy priorities and strategy
- Program objectives:
  - Maintain macroeconomic stability: mobilize resources, control current expenditures, tighten monetary policy, limited interventions in the foreign exchange market.
  - Lay foundations for inclusive growth: define bank restructuring plans, reduce banking sector weaknesses, improve budget structure via tax reforms, more effective public investment execution, ambitious structural reforms to support private sector development.
  - Protect vulnerable groups: strengthen social protection mechanisms and systematically assess social impact of programmed reforms.

### Fiscal policy: short-term objectives and actions
- Primary deficit (cash basis) at end-March 2014: 1.3 percent of GDP (program projection: 2.1 percent of GDP).
  - Overperformance driven by revenue overperformance (0.5 percent of GDP) from taxes collected from oil companies, higher VAT revenues, and dividends from non-oil public companies.
- Wage bill at end-March exceeded programmed level by 0.2 percent of GDP; plan to return to programmed level during 2014 by containing recruitment and controlling promotions.
- Social spending targets at end-March and end-June achieved via increased beneficiaries of the “families-in-need” program and increased educational assistance.
- Structural fiscal deficit revised to 4.7 percent of GDP in 2014 (compared to program projection of 4.9 percent of GDP), excluding cyclical effects and exceptional transactions.
- New constraints accounted for in 2014: transfers of 0.3 percent of GDP to CNRPS; additional payments for security personnel 0.1 percent of GDP; additional spending for elections 0.1 percent of GDP; additional salaries from sectoral agreements 0.1 percent of GDP.
- Savings measures in 2014 budget execution: unallocated spending savings 0.5 percent of GDP; salaries savings 0.2 percent of GDP.
- Revenue target: total revenue at 23.5 percent of GDP (0.4 percent of GDP above programmed amount).
- Measures implemented/adopted:
  - Reduction of energy subsidies:
    - Cumulative 70 percent increase in electricity tariffs and a 94 percent increase in the price of gas over six months for cement companies; budgetary gain TD 180 million (0.2 percent of GDP).
    - Increased electricity rates for industrial and low-voltage consumers by 10 percent in both January and May 2014.
    - Introduction of a second social (“lifeline”) tariff for customers consuming less than 100 kWh per month to protect most vulnerable.
    - Fuel price increase (gasoline and diesel) about 6 percent on July 1, 2014, generating TD 100 million savings envisaged in the 2014 budget law.
    - Additional savings (0.1 percent of GDP) expected from exchange rate valuation gains and reduction in energy subsidies to brick and glass producers.
    - Energy subsidy reduction accompanied by household support program and increase in minimum salary (see section C).
  - Control of the wage bill:
    - Salary and promotion freeze for the year; freeze of new hiring except for security forces, education, and health sectors.
    - Hiring budgeted but not completed will not be carried over to next year’s budget.
    - Council of Ministers to adopt decree in August 2014 creating a civil service monitoring and steering committee; validate report on structure of public sector salaries to serve as basis for reform.
    - Technical support to be requested from the World Bank/European Union.
  - Revenue measures:
    - Additional revenue achieved in first quarter 2014 to be saved, bringing total revenue to 23.5 percent of GDP (0.4 percent of GDP above programmed amount).
    - Measures identified during the third review and new ones adopted in the LFC (Table 3) to further reduce financing requirements, including revisions to presumptive tax regime and combating tax evasion.

- Commitment to preserve investment expenditure and social spending (excluding subsidies) while reducing current spending.
- Financing and borrowing developments:
  - National borrowing campaign initiated in May 2014 mobilized TD955 million through government securities of small denominations.
  - Greater donor support: U.S. guarantee allowing a $500 million international market issuance (i.e., $200 million more than initially programmed); bilateral support from Algeria $250 million (of which $150 million is direct budgetary support).
  - Offsetting lower sukuk issuance: Islamic Development Bank expected guarantee $120 million (i.e., $380 million less than initially programmed).

### Monetary policy and financial sector measures
- Money supply (M2) increased by 8.5 percent (year on year) during the first five months of 2014.
- Net domestic assets criterion at end-March and end-June 2014 met by a wide margin, primarily due to a more-than-expected reduction of net credit to the government during the quarter.
- Bank refinancing from the CBT at end-June 2014: TD 4.8 billion excluding open market operations (OMO).
- Monetary policy actions:
  - CBT benchmark policy rate raised by 25 basis points to 4.75 percent on June 25, 2014.
  - Preparedness to raise policy rate further if inflationary pressures persist.
- Rationale for tightening:
  - Increase in minimum salary impacts 900,000 Tunisians (including retirees).
  - Increase in electricity and fuel prices.
  - Presence of a negative real interest rate.
  - Depreciation of the exchange rate in recent months.
- Monetary framework reforms:
  - Increase haircut on valuation of loans used as collateral from 10 percent to 25 percent, effective July 2014.
  - Increase share of government securities used as collateral from 20 percent to 40 percent (structural benchmark at end-December 2014).
  - Plan to improve haircut system using rating instruments.
  - Study on valuing government securities at market price instead of nominal value to be completed by September 2014.
- Lender-of-last-resort facility:
  - Implementation delayed to March 2015 to define eligibility criteria, liquidity standards, and establish new legal and institutional banking resolution framework.
  - Interim “exceptional facility” implemented on July 1, 2014:
    - Allows any solvent institution unable to provide top-tier collateral to access facility by providing second-tier collateral at a penalty rate of 200 basis points above the lending facility.
    - Access subject to more intrusive banking supervision and a precise restructuring plan approved by the CBT.
- Excessive lending rate law:
  - CBT Board launched broad consultation with relevant ministerial departments to amend the law, if needed, by December 2014, following a study conducted with World Bank assistance.
- Central Bank of Tunisia law:
  - Revised draft law presented to the CBT board of directors in June 2014 (structural benchmark) to confer greater autonomy on the CBT and improve governance, transparency, and accountability; to be adopted by the government by September 2014.

### Exchange rate policy
- Strategy includes a more flexible exchange rate and limited interventions in the foreign exchange market to help reduce the current account deficit.
- Recent exchange rate developments: 8.6 percent depreciation of the dinar (TD) vis-à-vis the euro and U.S. dollar over the past three months, eliminating the appreciation observed during the first two months of the year.

*Letter of Intent and attachments (MEFP, Tables 1, 2a, and 2b) and related staff report authorized for publication by signatories Chedly Ayari and Hakim Ben Hammouda.*

### 14.      The widening of the current account deficit increased pressures for a depreciation of

### 14.      The widening of the current account deficit increased pressures for a depreciation of

### Exchange rate and foreign exchange policy
- The dinar depreciated by 8.6 percent since March, eliminating the appreciation seen at the beginning of the year.
- CBT interventions (currency sales) were substantial: 50 percent of the foreign currency supplied to the foreign exchange market in May and reduced to $290 million in June 2014.
- Policy commitments to a more flexible exchange rate to preserve official reserves:
  - Further limiting CBT interventions on the foreign exchange market; refraining from selling foreign currency to the exchange rate market except for smoothing substantial exchange rate fluctuations related to large energy-related orders.
  - Expectation to intervene by buying foreign currencies on the market to rebuild reserves, reduce the overvaluation of the exchange rate (7 percent to 10 percent) and reduce banks’ structural liquidity deficit.
  - Increasing swap transactions by revising the functioning of the swap market to allow banks to initiate swaps with dinars and other currencies with the CBT.
  - Introducing weekly foreign currency auctions in December 2014 (structural benchmark); requires an electronic platform and an efficient information system to centralize projected foreign-currency settlements and provide clearer cash-flow views.

### Trade openness and development strategy
- Development strategy remains open and based on free trade.
- Measures to reduce the widening trade deficit: increased promotion of exports and rebalancing of the energy mix.
- Will not consider new restrictions or import surcharges except as a last resort and in line with World Trade Organization rules, with clear criteria and advance announcement for removal.

### Financial sector — systemic condition and vulnerabilities
- Banking system remains fragile despite some positive indicators:
  - Banks’ net profits increased 12 percent year on year at end-March 2014, primarily due to financial fees and interest margins.
  - Increased cost of deposits and weak demand for new credit could reduce banks’ profitability.
  - Transition to international standards, including more rigorous application of haircuts on loan collateral, contributed to a 14 percentage point increase in the provisioning rate.
  - Capital adequacy ratio reduced to 9 percent by end-December 2013, pushing seven banks below minimum capital requirements required by regulations (six banks are below that threshold since end-March 2014).
  - Asset quality: ratio of nonperforming loans increased from 14.9 percent of total loans at end-2012 to 15.2 percent at end-December 2013 and 15.1 percent at end-March 2014 (or 20 percent, if loans transferred to bank-affiliated asset management companies are included).

### Banking strategy, restructuring, and public banks
- Government banking strategy: refocus government role, rationalize number and influence of publicly held banks, guarantee universal public banks’ financial soundness, establish new governance framework, strengthen institutional capacities, and improve legal framework.
- Audits completed for STB and BH; restructuring plans to be finalized and adopted by the government in August 2014 (Prior Action).
- Audit of Banque Nationale Agricole (BNA) delayed; began in June 2014, to be completed by September 2014, with restructuring plan finalized in November 2014 (new structural benchmark).
- Action plan elements for public banks:
  - Strengthened governance: new decree increases autonomy; change compensation system of banks’ board members in September 2014; ensure public banks operate on a commercial basis and follow best management practices.
  - Recapitalization of public banks:
    - Funding to come first from private shareholders; public funding only after losses distributed among existing shareholders.
    - Public funds provided as non-negotiable bonds not eligible for central bank refinancing.
    - BNA capital to be at the level required by applicable regulations by end-2014.
    - STB and BH to meet minimum capital requirement of 10 percent in December 2014.
    - Total recapitalization costs implied: TD 1 billion (1.2 percent of GDP), already budgetized.
  - Creating an Asset Management Company (AMC):
    - Draft law prepared with World Bank technical assistance; submission to National Constituent Assembly expected in September 2014 (new structural benchmark); AMC expected to be created in 2014.
    - AMC initially limited to tourist loans given sector difficulties (tourist sector share of nonperforming loans about 54 percent of the total).
    - Capitalization of the SGA estimated at TD 150 million in the supplementary budget law; to adhere to World Bank-supported business plan and be closely coordinated with bank recapitalization.
    - Amendments to the law on asset recovery companies to be submitted in December 2014 to improve effectiveness.

### Prudential compliance and supervision actions
- Prudential compliance:
  - Three of the seven non-compliant banks submitted recapitalization plans that would bring solvency ratio to required levels by end-December 2014.
  - Remaining banks (all publicly owned) to comply by end-December2014 (new structural benchmark) in line with restructuring plan.
  - Monetary sanctions imposed on banks that fail to comply with current liquidity ratio pending adoption of a new liquidity ratio (including off-balance-sheet operations) announced in March 2014 and effective in September 2014.
  - Directorate General of Bank Supervision (DGSB) to establish new procedures in 2014 to ensure “fragile” banks face tightened supervision and more frequent monitoring.

### Reform of banking supervision (priorities and benchmarks)
- Three-year plan prepared in June 2014 with IMF technical assistance to establish risk-based supervision on individual and consolidated bases; adopted by CBT management.
- Short-term priorities:
  - Strengthening DGSB human resources:
    - Hired 12 individuals in 2013, representing about one-fourth of the envelope expected for 2012–14.
    - Plan to double this figure in 2014 and change BCT hiring criteria to allow hiring of experienced, qualified personnel (new structural benchmark), especially to strengthen on-site inspection.
    - Formalize DGSB powers and responsibilities and institute clear rules on relations within DGSB by March 2015.
  - Improving reporting:
    - Finalize Uniform Bank Performance Reporting (UBPR) benchmarking indicator by June 2014 with IMF TA; UBPR to be available 60 days after the end of each quarter and provide a simplified risk rating system by December 2014.
    - New system of accounting, financial, and institutional data of banks to be put in place in December 2014 (structural benchmark) and automated in June 2015.
  - Strengthening inspections and integrating on-site inspections:
    - Inspection plan provided for 14 inspections in 2014 (compared to five in the previous year).
    - Implement formal procedures by December 2014 to define criteria for the inspection plan and structure of teams.
    - Strengthen coordination between DGSB units and other CBT areas (e.g., DGSFPR).
  - Strengthening internal control of banks:
    - Based on articles 52 and 53 of Circular 2006–19, DGSB requested reports on internal control and risk management.
    - DGSB to conduct a diagnostic assessment of banks’ rating systems and ask institutions with weak systems to submit action plans by end-September 2014.

### Crisis management, resolution framework, and deposit insurance
- Draft banking law prepared with World Bank and IMF technical assistance to strengthen supervision and establish legal framework for resolution of insolvent banks; submitted and presented to CBT management in June 2014 (structural benchmark) and to be adopted by the government in September 2014.
- Proposed amendments to the draft central bank law include establishment of a lender of last resort facility to strengthen banking resolution framework.
- Provisions for operational structure and legal framework for a deposit guarantee fund being drafted with World Bank assistance.

### Fiscal reform and public expenditure management
- Need to improve structure of public expenditure to support medium-term growth and rebuild fiscal buffers.
- Medium-term fiscal consolidation strategy to be accompanied by reforms in tax policy, tax administration, public expenditure management, reform of public enterprises, and public investment effectiveness.

### Tax policy, tax administration, and revenue mobilization
- Consolidation of tax laws into a single tax code in September 2014 (structural benchmark) to increase transparency.
- Government’s tax policy strategy to be presented at National Tax Consultations in September 2014; action plan to be adopted by the Council of Ministers in October 2014 (new structural benchmark).
- Continued revision of corporate tax (CIT) to achieve gradual convergence of off-shore and on-shore sectors; difference between tax rates in these two sectors was reduced by half in the 2014 budget.
- For 2015 budget law, focus—with IMF technical assistance—on reforming VAT and excise tax and simplifying the presumptive tax system.
- Tax administration modernization plan adopted by the Ministry of Economy and Finance on August 7, 2014 (structural benchmark of end-June); aims to establish unified tax administration and strengthen audit and evaluation mechanisms.
- Creation of a new modernization unit within the General Directorate of Taxes (DGI) and ongoing strengthening/restructuring of Large Taxpayers Unit (LTU).
- Measures to combat tax evasion: require large transactions to be paid by check, introduce tax certificates for transactions with the government, strengthen risk management within customs administration, and lift bank secrecy provisions that hinder tax audits while protecting taxpayers’ rights.

### Public enterprises and monitoring
- Public Enterprise Monitoring Committee report on 28 public enterprises (representing 80 percent of public sector turnover) shows substantial financial deterioration between 2010 and 2012, with a deficit of 1.2 percent of GDP (including 24 enterprises in deficit).
- Rehabilitation measures identified for vulnerable enterprises (e.g., Tunisair) to be examined case by case.
- Developing a new regulatory framework for public enterprise governance to provide greater independence and responsibilities to boards and management.
- For enterprises receiving energy and food subsidies, government committed to regular budget appropriations and ex-post verification after accounts are closed.
- Priorities for energy companies following audit recommendations (presented to Council of Ministers in August 2014): improve recovery and management of expenditures and, in 2015 budget, eliminate cross-subsidies for STEG and STIR, which will import energy directly instead of via ETAP.

### Public expenditure management and public investment
- All payment orders authorized during the 2013 carryover period were paid.
- Plan to prepare budget execution statements with IMF technical assistance to facilitate reconciliation of authorized, budgeted, and disbursed expenditures.
- Draft of new functional budget classification completed in September 2014 to improve transparency and comprehensiveness.
- Creation of a National Public Accounting Standards Board to introduce double-entry bookkeeping and focus on new budget nomenclature.
- Draft organic law prepared with EU and France to be presented to Council of Ministers in September 2014 to provide greater flexibility in managing appropriations and greater accountability.
- Public investment execution remains low: budget execution rate of 7 percent during the first quarter of 2014.
- New procurement rules effective June 1, 2014 to simplify and modernize procedures and accelerate regional public investments.
- Regional project monitoring committee to present recommendations following visits to 24 governorates in July 2014.

*Source: _cr14277 - 14.      The widening of the current account deficit increased pressures for a depreciation of*

### 27.      Our structural reform program will continue to focus on improving the business

### _cr14277 - 27.      Our structural reform program will continue to focus on improving the business

### Structural reform program: objectives and measures
- Continue to focus on improving the business climate and promoting a competitive private sector that can generate inclusive growth.
- Step up efforts, inter alia, to simplify and clarify regulations for investments, promote competition, and facilitate trade.

### Investment code and related measures
- The investment code, prepared with technical assistance from the World Bank following consultations with civil society and donors, was withdrawn from the Constituent Assembly for revision and further simplification.
- Government considered the new code too complex and leaving too much discretion to implementation decrees.
- Plan to introduce a list of measures in September 2014—intended to supplement the current code—to reduce restrictions on investments. These measures—approved by the Council of Ministers—will be added to the current code in December 2014.

### Passage of economic laws (priority legislation)
- Priority commitment to advance the legislative calendar to pass in particular:
  - The collective proceedings law (Law 95): new law on collective proceedings (commercial bankruptcy proceedings) prepared with World Bank assistance; will modernize and simplify restructuring and liquidation; will set out clear rules regarding government’s status as preferred creditor and grant rights to private creditors to vote on reorganization plans.
  - The competition law: proposed law submitted to the Constituent Assembly in 2013; to be reviewed in summer of 2014; intended to reduce government intervention, reduce excessive regulation, and increase competition.
  - The Public-Private Partnership Law: proposed law to facilitate private concessions; reviewed by parliamentary committees and to be adopted as early as possible in 2014.

### Administrative simplification and trade integration
- Rationalized administrative procedures that burdened the private sector in transport, customs, and exports.
- Continue path based on expected outcomes of the regulatory “guillotine” project.
- Commit to promoting trade, including reduction of tariff and nontariff barriers and enhancement of commercial agreements with neighboring and African countries.
- Discussions initiated with the European Union in 2012 on negotiating a comprehensive free trade agreement (DFTCA).
- Export development program action plan (supported by the World Bank PDE III program) will, inter alia, improve logistics at the Radès port and build a new deep-water port at Enfindha.

### Labor market reforms and job promotion
- Commit to reducing obstacles to proper functioning of the labor market.
- Technical committees (work and professional relations, social protection, employment, regional development, and investment) established to implement the social contract signed on January 14, 2013; their work will be presented during the national economic dialogue.
- Broad consultation to discuss new employment strategy expected to culminate in labor market reforms, including evaluation of “flexi-security” in labor relations and reduction of structural skills asymmetry.
- Programs to promote jobs:
  - Support programs for small and medium-sized enterprises financed by the World Bank.
  - Micro-project programs financed by Banque Tunisienne de Solidarité and the Fonds National de l’Emploi to create jobs for young Tunisians.
  - Development of a professional training program for unemployed university graduates.
  - Initiative providing incentives for firm creation in disadvantaged regions.

### Statistics and institutional capacity
- Undertaking a comprehensive diagnostic assessment of the statistics system in cooperation with Eurostat.
- Plan—with IMF technical assistance—to strengthen institutional mechanism and system used to produce national accounts (particularly the quarterly demand side), monetary statistics and the balance of payments.
- Enable expansion of regular publication of surveys on current economic, employment, and household living conditions.
- Working on legal framework to ensure and protect the independence of the National Statistics Institute (INS).

### Protecting the most vulnerable: measures and targeting
- Protecting the most vulnerable is absolute priority in implementing fiscal and structural reforms.
- Measures already included in the 2014 budget law: a social housing program, increase in the income tax deduction for the poorest households, and introduction of an additional lifeline electricity rate.
- Agreement with trade unions will increase the guaranteed minimum salary (SMIG and SMAG) by about 6 percent, effective retroactively from May 1, 2014; this increase will benefit 900,000 individuals (primarily private sector workers, including roughly 600,000 retirees).
- Evaluation of school assistance programs showed a 25 percent “leakage” to non-poor.
- Conclusions of the evaluation of the needy families/health benefits card program to be presented in September 2014.
- Unique social identifier now available to 7.5 million Tunisians and will be used to create a new “targeting system”; system to be refined as “exclusion and inclusion errors” are corrected.
- Household support program (end-June structural benchmark) implemented ahead of imminent fuel price increase and Ramadan:
  - Expansion of the existing program of assistance to families in need (PNAFN) from 220,000 in 2013 to 250,000 beneficiaries in 2014; system currently benefits 235,000 individuals.
  - Increase of TD 10 for all beneficiaries of the PNAFN (representing a 10 percent increase) to an amount of TD 120 month/family. Families having children at schooling age will receive an additional TD 10 per month per child (up to three children per family).
  - Provision of one-time, temporary assistance of TD 80 (TD 40 in June and TD 40 in July) for the 235,000 PNAFN beneficiary households and for an additional 50,000 poor households identified by the regional committees.

### Pension system and fiscal support
- CNRPS (national retirement and social security fund) shows an annual deficit of TD 450 million (about 0.5 percent of GDP) in 2014 and currently has no cash reserves.
- Government decided to provide a TD 250 million transfer in the 2014 revised budget law 2014.
- Will review long-term scenarios for reform of the retirement and health insurance system in the context of the social pact; studies supported by a support program and technical assistance financed through the transition fund.

### Annex: Principles for Successful Restructuring of Public Banks — key pillars
- Financial restructuring: restore solvency (net assets) by rehabilitating and strengthening banks’ balance sheets.
  - Existing and new fit-and-proper private shareholders should be asked to contribute to recapitalization through cash injection; public funds can be used once sources of private capital have been exhausted.
  - Before public funds are injected, shares of existing shareholders have to be diluted or overall loss distributed amongst them.
  - Government should seek authorization in a supplementary budget if government’s share of recapitalization costs is higher than budgeted amount.
- Operational restructuring: create conditions for restoring sustained solvency and profitability.
  - Ensure Bank Board members representing the State and bank managers are fit and proper and professionally suitable.
  - Sign a relationship framework to govern interaction between the Finance Ministry and each state-owned bank to ensure no political interference in banks’ commercial operations.
  - Requirements to ensure effective governance and communication in use of public funds for recapitalization and restructuring:
    - A high-level committee comprising the Minister of Finance and the CBT Governor should be established to coordinate the process, including approval of overall strategy and monitoring of progress.
    - Committee should appoint a spokesperson to manage communication strategy of the recapitalization and restructuring process.
    - State’s interest in the banks should be managed in a dedicated, specialized unit set up at the Ministry of Finance.

### Quantitative Performance Criteria, Indicative Targets and Program Assumptions (selected figures)
- Quantitative Performance Criteria (Millions of Tunisian Dinars) — selected items and values shown tabled in the source:
  - 1. Floor on the primary balance of the central government (cash basis excl. grants): values include -2,796; -1,104; -2,806; -2,155; -4,007; -3,793; -5,609; -5,587; -1,233.
  - 2. Ceiling on net domestic assets of the Banque Centrale de Tunisie (Stock): values include 3,952; 4,327; 2,457; 4,086; 4,840; 2,995; 4,071; 3,961; 1,173; 1,466; 2,549.
- Net international reserves of the Banque Centrale de Tunisie (Stock) (Millions of US$): values include 5,308; 5,067; 5,180; 4,754; 4,268; 4,342; 5,275; 5,487; 7,066; 6,877; 6,579.
- Continuous Performance Criteria:
  - 4. Ceiling on the accumulation of new external debt payment arrears by the central government: 0 (listed repeatedly as 0 and Met).
- Quantitative Indicative Targets (Millions of Tunisian Dinars):
  - 5. Ceiling on Current Primary Expenditure: values include 4,253; 4,058; 8,267; 8,085; 12,796; 12,915; 17,815; 18,033; 4,638.
  - 6. Floor on Social Spending 3/: values include 229; 282; 562; 624; 900; 962; 1,350; 1,412; 310.
  - 7. Ceiling on the accumulation of new domestic arrears: 0 (listed repeatedly as 0 and Met).
- Program assumptions on which adjusters are calculated (External Financing of the central government on a cumulative basis in US$ million) 4/:
  - Values include 544; 230; 707; 352; 1,163; 1438; 2,771; 2647.
  - Of which multilateral (excluding IMF), bilateral and budget grants: 450; 201; 528; 241; 718; 812; 968; 1534.
- Public debt service (interest and amortization) on a cumulative basis (in US$ million): 213; 203; 506; 459; 708; 662; 958; 913.
- Bank recapitalization (in million TD): values include 0; 300; 0; 700.
- Privatization receipts (in million USD): 0 (listed).
- Resident deposits at the BCT (in million USD) 5/: 1,854; 1,852; 1,852; 1,607; 1,607; 1,607; 1,607; 1,607.
- Program exchange rate TD/ U.S. dollars: 1.55235 (listed repeatedly).

### Structural benchmarks (selected status and dates)
- Table 2a (Jan–Jun 2014) — examples of completed (MET) items:
  - Submission to management of the Central Bank of Tunisia of a banking resolution framework in line with international practices — Jun-14 — MET.
  - Submission to the CBT board of the draft of the new central banking law — Jun-14 — MET; presented to the CBT board on June 25, 2014.
  - Adoption by the Ministry of Finance of a plan to modernize tax administration — Mar-14 → Jun-14 — MET with delay; plan completed and adopted by the Ministry of Finance in August 2014.
  - Unification of all public accounts into a Single Treasury Account at the CBT — Mar-14 — MET.
  - Finalize the audit of STEG and STIR — Mar-14 — MET; first report submitted March 30, 2014.
  - Presentation to the Central Bank board of the impact study for removing the upper limit of excessive rates — Mar-14 — MET; presented March 26, 2014.
  - Implement increase of haircut for loans used as collateral to at least 25% — Mar-14 → Jun-14 — MET; regulation put in place March 28, 2014 and effective since July 1, 2014.
  - Establishment of the lender of last resort facility — Jun-14 → Mar-15 — NOT MET; interim “exceptional” system adopted June 25, 2014; formal facility to be put in place in March 2015.
- Table 2b (Jul–Dec 2014) — selected items and comments:
  - Prior Action: Adoption by the government of restructuring plans for BH and STB in line with international best practices as described in Annex I.
  - Completion of the financial audit of the Banque Nationale Agricole (BNA): Jul-14 → sept.-14 — In progress; selection of new auditor delayed completion to end-September 2014.
  - Creation of Asset Management Company (AMC) through publication in the Official Journal of the Law on the AMC — Sep-14.
  - Adoption by the Government of the BNA restructuring plan — Nov-14.
  - All banks, including public banks, to comply with minimum solvency ratio required by the existing regulations (10 percent) — Dec.-14.
  - Government approval of the new tax code — Sep-14 — In progress.
  - Following national consultations on taxation, adoption of a tax reform plan covering direct and indirect taxes by the Council of Ministers — Oct.-2014.
  - Ensure that the proportion of the refinancing volume at the CBT backed by government securities is at least 40 percent for each bank — Dec-14 — Completed; circular issued in March 2014 and will take effect on January 1, 2015.
  - Decrees for implementing the new investment code to protect market access, reduce restrictions to investments and rationalize incentives — Sep-14 — The decrees will not be submitted to Parliament because the government withdrew the draft law on the investment code from parliament; new measures for investment promotion will be taken and eventually included in the new code.

### Compensatory Fiscal Measures, March/June 2014 (Table 3)
- Total revenue (In Millions of TD / In Percent of GDP): 2600.31 / 1300.16 (Mar-14); 3000.36 / 1300.16 (Jun-14) — as tabulated.
- Tax policy (In Millions of TD / In Percent of GDP): 1000.12 / 1300.16.
  - Alcoholic beverages: 8 percent increase excise taxes — 200.02.
  - Cigarettes: 10 percent increase excise taxes — 500.06.
  - Vehicle taxes 1/ — 300.04 (Mar); 150.02 (Jun).
  - Tourism taxes — 750.09.
  - Stamp taxes — 300.04.
  - Other tax measures incl. exceptional taxation on revenues — 100.01.
- Tax administration measures — 1600.19.
  - Tunisie Telecom: enhanced tax control — 1100.13.
  - Expedite judiciary procedures — 500.06.
- Current expenditure — 400.05.
- Decreased energy subsidies 2/ — 400.05 (Mar); 70.01 (Jun).
- Total (table bottom line): 3000.36 / 1300.16 (as presented).
- Footnotes:
  - 1/ In March: at the moment of resale for cars imported by Tunisians leaving abroad.
  - 2/ in March: bringing forward the planned increase of tariffs to May 2014.

*IMF staff report content as presented in the supplied PDF excerpt.*

### 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff

### _cr14277 - 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff

### Overview
- Establishes agreement between the Tunisian authorities and IMF staff 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 August [xx], 2014.
- All assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate” for program purposes, except items affecting the government’s budgetary accounts, which will be measured at current exchange rates.

### Program Exchange Rates and Valuations
- Program exchange rate for the SDR: 1SDR = 2.38852 Tunisian dinars.
- Monetary gold valuation: 0.6498 dinar per gram of gold (decree No. 86-785 of August 18, 1986).
- Stock of gold on December 31, 2012: 6.73 tons (6739902 grams).
- 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 riyal104.13930
  - Canadian dollar11.56175
  - Danish krone10027.44020
  - USA dollar11.55235
  - British pound sterling12.50510
  - Japanese yen100018.02650
  - Moroccan dirham101.83535
  - Norwegian krone10027.73730
  - Swedish krona102.37995
  - Swiss franc1016.95450
  - Kuwaiti dinar15.51955
  - United Arab Emirates dirham104.22660
  - Euro12.04725
  - Libyan dinar11.23740
  - Mauritanian ouguiya 1000.51230
  - Bahraini dinar14.11770
  - Qatari riyal104.26380

### Definition of Performance Criteria and Indicative Targets
- Performance criteria specified in Table 1 of the MEFP:
  - 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.

### Measurement and Institutional Definitions
- Measurement:
  - NIR and NDA performance criteria are measured on a stock and quarterly basis.
  - Central government deficit performance criterion is measured on a quarterly basis and cumulatively from the end of the previous year.
  - Accumulation of external arrears is measured on a continuous basis.
  - Adjustment factors apply to some criteria.
- Institutional definition:
  - The central government comprises all ministries and agencies subject to central budgetary administration in accordance with the organic law on the government budget.
  - Regional governments and municipalities subject to central budgetary administration are part of the central government.
  - Authorities will inform Fund staff of any new entity, program, or special budgetary or extra-budgetary fund created during the program period; such funds will be included in the definition of the central government.

### Floor on the Net International Reserves (NIR) of the CBT
- NIR definition: difference between the CBT’s reserve assets and its liabilities in foreign currency to nonresidents.
- CBT 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 IMF Balance of Payments Manual, fifth edition).
- CBT liabilities in foreign currency to nonresidents include:
  - Commitments to sell foreign currencies associated with financial derivative transactions (swaps, futures, options).
  - Portions of CBT 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 special treatments:
  - Government’s foreign currency deposits at the CBT are not included in liabilities.
  - Any SDR allocation received after May 15, 2013 is not included as a liability.
  - 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 are treated as CBT liabilities unless prospectus and a protocol with the Ministry of Finance clearly state the CBT is acting as an agent and the debt is a liability of the central government and payments are authorized via direct deduction from the Treasury's current account.
- Valuation: CBT reserve assets and liabilities in foreign currency will be calculated using program exchange rates.
- Reference stock values (at program rates, December 31, 2012):
  - Stock of net international reserves: $7.937 billion.
  - Stock of reserve assets: $8.645 billion.
  - Stock of CBT liabilities in foreign currency: $730.399 million.
- Residents’ deposits in foreign currencies at the CBT at end-December 2013: $1,852.07 million (program exchange rate).

### Ceiling on Net Domestic Assets (NDA) of the CBT
- NDA definition: 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 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.
- NDA ceilings will be converted into Tunisian dinars at the program exchange rate.
- NDA ceilings will be adjusted downward or upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement.

### Floor on the Primary Balance of the Central Government (Excluding Grants)
- Primary fiscal balance (excluding grants, on a cash basis) is measured on a financing basis and equals the negative sum of:
  - Total net external financing;
  - Privatization receipts;
  - Net domestic bank financing;
  - Net domestic nonbank financing;
  + 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). 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, sales of nonfinancial assets, sales of licenses, sale of confiscated assets (excluding confiscation of bank accounts). For the NIR adjustor, only receipts in foreign currency are included.
  - Net domestic bank financing = change in net bank loans to the central government (in dinars and foreign currency) plus change in central government deposits at the CBT (all central government accounts at the CBT, including Treasury current account; Tunisian government account; loan accounts; grant accounts; FONAPRA-FOPRODI accounts; special account of Tunisian government in foreign currency; current accounts of paying U.S. Treasury; accounts in foreign currency pending adjustment (subaccount: available); and any other account opened by the central government at the CBT). Government accounts are consolidated into two categories on the CBT’s balance sheet following unification: “Compte Central du Government” and “Comptes Spéciaux du Government.”
  - Net government borrowing from the banking system = change in the stock of government securities (Treasury bills and bonds) 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 the government is excluded from bank claims on the government.
  - Net domestic nonbank financing = change in the stock of government securities held by nonbanks (including social security funds) and any other central government borrowing from nonbanks, less repayments. Treasury bills and other public debt instruments are taken at nominal/face value shown on institutions’ balance sheets and do not include accrued interest.
- Adjustment: Floor on the primary balance will be adjusted upward/downward based on the amount used to recapitalize the public banks.
  - Assumed recapitalization amounts for 2013: 500 million dinars (Q4 2013).

### Ceilings on Accumulation of Arrears and Expenditure Indicators
- Ceiling on accumulation of external arrears:
  - Arrears on external debt payment defined as late payments (principal and interest) on external debt or guarantees by the central government or the CBT after 90 days from the due date or expiration of the applicable grace period (per External Debt Statistics: Guide for compilers).
- Indicative ceiling on 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 as defined in contractual grace period). If no maturity date is specified, arrears are amounts unpaid 90 days or more after contract signing or receipt of invoice.
- Indicative ceiling on central government primary current expenditure (excluding interest payments on public debt):
  - Central government primary current expenditure = sum of central government expenditure on:
    - personnel wages and salaries;
    - goods and services;
    - transfers and subsidies;
    - other unallocated current expenditure.
- 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 as well as 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, as well as food and energy subsidies, are excluded from social expenditures.

### Adjustment Factors for Program Performance Criteria
- NIR targets adjustment:
  - NIR targets are adjusted upward (downward) if the cumulative sum of net external financing of the central government (excluding project loans and any access to capital markets), the sum of budgetary grants, privatization receipts received in foreign currency, and the increase (decrease) in the residents’ foreign currency deposits at the CBT are greater (lower) than the levels observed at end December 2013.
  - NIR targets will also be adjusted upward (downward) if the total amount of cash payments on external debt service of the government is greater (lower) than the levels included in the program assumptions table.
- NDA targets adjustment:
  - NDA targets will be adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the cumulative sum of net external financing of the central government (excluding project loans and any access to capital markets), the sum of budgetary grants, privatization receipts received in foreign currency, and the increase (decrease) in residents’ foreign currency deposits at the CBT are lower (greater) than the levels indicated in the program assumptions table.
  - NDA targets are also adjusted upward (downward) based on the downward (upward) adjustment of the NIR floor if the total amount of cash payments on external debt service are greater (lower) than the levels included in the program assumptions table.
- NDA ceilings will be converted into Tunisian dinars at the program exchange rate.
- NDA ceilings will be adjusted downward or upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement.
- Floor on primary balance adjustment:
  - Floor on the primary balance of the central government, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks (recapitalization amounts for 2013 assumed to be 500 million dinars, Q4 2013).

### Key Quantitative Figures and Reference Values
- 1SDR = 2.38852 Tunisian dinars.
- Gold price used for valuation: 0.6498 dinar per gram.
- Stock of gold on December 31, 2012: 6.73 tons (6739902 grams).
- Residents’ deposits in foreign currencies at the CBT at end-December 2013: $1,852.07 million.
- Stock of net international reserves (December 31, 2012): $7.937 billion.
- Stock of reserve assets (December 31, 2012): $8.645 billion.
- Stock of CBT liabilities in foreign currency (December 31, 2012): $730.399 million.
- Assumed recapitalization amounts for 2013: 500 million dinars (Q4 2013).

*Memorandum of Understanding between the Tunisian authorities and IMF staff, technical memorandum of understanding (extract).*

### 31. Performance under the program will be monitored using data supplied to the IMF by the

### _cr14277 - 31. Performance under the program will be monitored using data supplied to the IMF by the

### Program monitoring: key data types, periodicity, and reporting delays
- GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices. Periodicity: q. Delay: 45 days.
- Inflation: Including the underlying inflation of non-administered and administered prices. Periodicity: m. Delay: 14 days.

### Fiscal sector reporting
- Tax and nontax revenue of the central government decomposed on the basis of main tax and nontax revenues items. Periodicity: m. Delay: 30 days.
- Total expenditures: current and capital, transfers and subsidies. Periodicity: 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). Periodicity: m. Delay: 45 days.
- Current expenditure: by type of expenditure: wages, goods and services, transfers. Periodicity: m. Delay: 45 days.
- Social expenditure. Periodicity: q. Delay: 45 days.

### Domestic and foreign debt reporting
- Stock of domestic and foreign debt of the central government and debt guaranteed by the government, with breakdown by instrument and type of currency (in dinars and foreign currency with the equivalent in domestic currency). Periodicity: q. Delay: 30 days.
- Stock of domestic arrears as per TMU, as well the stock of accounts payable that correspond to expenditures committed/payment ordered more than 90 days before (and by type of expenditures). Periodicity: q. Delay: 45 days.
- 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. Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities. Periodicity: 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). External and domestic debt service: amortization and interest. Periodicity: m. Delay: 60 days.
- External payment arrears: external debt contracted and guaranteed by the government. Periodicity: q. Delay: 30 days.
- Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors. Periodicity: q. Delay: 45 days.
- Consolidated accounts of the central government at the CBT: stock of deposits broken down as (i) Treasury current account; (ii) special account of the Tunisian government in foreign currency and its equivalent in dinars; (iii) miscellaneous dinar accounts; (iv) loan accounts; (v) grant accounts; (vi) FONAPRA-FOPRODI accounts; and (vii) accounts pending adjustment (including privatization receipts from Tunisia Telecom). Periodicity: m. Delay: 30 days.

### External sector reporting
- Imports of Petroleum Products: average import price of main petroleum products. Periodicity: m. Delay: 30 days.
- Foreign trade: imports and exports of goods, including volumes and prices, by sector. Periodicity: m. Delay: 30 days.
- Deposits: Stock of foreign currency deposits, according to the residence of the holder. Periodicity: 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). Periodicity: q and m as indicated; Delay values: 30, 30.
- Overall net external position of Tunisia (preliminary). Periodicity: q. Delay: 90 days.
- Overall gross external debt position. Periodicity: q. Delay: 90 days.
- Overall net external position of Tunisia (in conformity with our obligations under SDDS). Periodicity: q. Delay: 90 days.
- Balance of payments: Prepared by the CBT. Periodicity: q. Delay: 30 days.

### Monetary and financial sector reporting
- CBT accounts at the current exchange rate: detailed table including the monetary system. Periodicity: m. Delay: 30 days.
- CBT accounts at the program exchange rate: Including net international reserves. Periodicity: m. Delay: 30 days.
- Foreign exchange market operations, interbank market, retail market and wire transfers for CBT purchases on the retail market: CBT spot sales and purchases on the foreign exchange market, stock of CBT currency swap (provide details on direction of transactions (TD/FX or FX/TD), amounts of principal, spot exchange rate in swaps agreement, interest rate applied on FX counterpart), detailed information on other BCT’s forward foreign exchange operations, including outright forward sales of Tunisian Dinar. The terms and conditions of any new transactions (including the extension or renewal of existing terms and conditions) will also be provided. Periodicity: m. Delay: 30 days.
- CBT foreign exchange reserves, breakdown by currency and by instrument, and the institutions where such reserves are held. Periodicity and delay: m. 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. The indication of the different banks is optional. Periodicity: m. Delay: 30 days.
- Direct refinancing of commercial banks by the CBT: Breakdown by bank. Periodicity: m. Delay: 14 days.
- Interest rates: Deposit rates, interbank rates, and lending rates. Periodicity: w. Delay: 14 days.
- NPLs: Stock of banking sector NPLs, and breakdown by commercial banks. Periodicity: q. Delay: 60 days.
- Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff. Periodicity: q. Delay: 60 days.

### Other information to be reported
- Information on Fiscal, Monetary, and Financial Policy: Decrees or circulars newly adopted or revised concerning changes in tax policy, tax administration, foreign exchange market regulations, and banking regulations. A copy of official notices of changes in gas and electricity rates and any other surcharge (automatic or structural), as well as the prices of petroleum products and levies/surcharges on gas and petroleum. Periodicity: d. Delay: 3 days.

### Staff assessment and recent indicators (Statement by the IMF Staff Representative on Tunisia — August 29, 2014)
- The statement reports on the latest economic data updates and implementation of the prior action since the Staff Report was issued on August 15, 2014.
- Recent indicators remain in line with staff’s projections:
  - Headline inflation rate at end-July was 6 percent y-o-y.
  - Core inflation remains contained at around 4.5 percent.
  - At 5.3 percent of GDP, the end-June current account deficit was slightly lower than estimated, reflecting some revisions in 2013 data and lower food imports.
  - Gross reserves at end-June remain unchanged (text ends here).

*Statement by the IMF Staff Representative on Tunisia, August 29, 2014*

### 3.2 months of imports of goods and services.

### 3.2 months of imports of goods and services.

### Executive summary
- The IMF Executive Board completed the fourth review of Tunisia’s program under a 24-month Stand-By Arrangement and approved a disbursement of SDR 143.25 million (about US$217.5 million), bringing total disbursements to SDR 716.25 million (about US$1.1 billion).
- The two-year SBA amount is SDR 1.146 billion (about US$1.74 billion, or 400 percent of Tunisia’s quota at the IMF), approved on June 7, 2013.
- All quantitative performance criteria have been met for end-March and end-June, and six out of seven structural benchmarks (SB) for end-June 2014 were met; the lender-of-last-resort facility (seventh SB) was delayed to end-March 2015 with an interim “exceptional facility” introduced.

### Recent economic developments and outlook
- Real GDP growth:
  - 2013 actual: 2.3 percent (instead of 2.6 percent previously estimated).
  - 2014 projected: 2.8 percent, with risks tilted to the downside.
- Inflation:
  - CPI inflation for 2014 estimated at 5.7 percent.
  - Core inflation: 4.3 percent in June (on a downward trend).
- External sector:
  - Current account deficit expected to decline to 7.6 percent of GDP in 2014.
  - Gross official reserves: equivalent of 3.2 months of imports of goods and services at end-June 2014.
- Factors affecting the outlook:
  - Weak external demand (including tourism), lower exports of phosphates, high energy imports due mainly to falling oil production and lower volume of gas transiting from Algeria to Italy.
  - Exchange rate depreciation of 8.6 percent since mid-March.
  - Strengthened confidence following elections and potential increased external financing could improve the outlook, mainly in 2015 and beyond.

### Fiscal policy and performance
- End-June fiscal target:
  - Primary fiscal deficit reached 1.7 percent of GDP at end-June, almost one percentage point of GDP lower than envisaged (and 1.7 percent of GDP lower than programmed).
  - The 2014 end-March and end-June fiscal targets were achieved with a comfortable margin.
- Q1 2014 primary cash fiscal deficit: 1.3 percent of GDP (compared to 2.1 percent projected under the program).
- Drivers of fiscal overperformance:
  - Underexecution in current and capital outlays.
  - Strong revenue collection — particularly from indirect taxes.
  - Improved tax collection from oil companies, higher VAT revenues, and dividends from non-oil companies.
- 2014 revised budget:
  - Envisages an overall fiscal deficit in line with the program target.
  - Structural deficit: 4.7 percent of GDP (against 4.9 percent projected in the program).
- Policy measures:
  - Freeze on promotions and recruitment to compensate for recent increases in current expenditure.
  - Energy subsidy reductions and associated social protection measures.
  - Gasoline and diesel prices raised by 6 percent on July 1, 2014, bringing total savings on subsidies to about 0.9 percent of GDP this year.
  - Comprehensive tax reform planned:
    - Consolidation of all existing tax laws and codes into a single tax code in September 2014.
    - Adoption of an action plan to implement the government tax reform strategy in October 2014.
    - Plans to revise the corporate income tax to achieve gradual convergence of the off-shore and on-shore sectors.
    - Continued focus on reforming the VAT and excise taxes and simplifying the presumptive tax system.
  - Tax administration reform following the plan adopted by the Ministry of Economy and Finance on August 7, 2014.

### Monetary and exchange rate policies
- Central Bank of Tunisia (BCT) actions:
  - Policy rate raised by 25 basis points in June 2014, bringing cumulative increase this year to 75 basis points.
  - Committed to further policy tightening as needed and vigilant monitoring of inflation.
- Credit and central bank balance-sheet measures:
  - Growth of credit to the private sector has remained moderate.
  - Increased haircut on valuation of loans eligible for refinancing from 10 to 25 percent (July 2014).
  - Increased share of government securities used as collateral from 20 percent to 40 percent (effective as of December 2014).
- Liquidity facilities:
  - Interim “exceptional facility” established on July 1, 2014 to allow illiquid but solvent banks to access BCT resources at a penalty rate and subject to intrusive banking supervision.
  - Lender-of-last-resort facility delayed to end-March 2015 to align with the new banking resolution framework.
- Exchange rate policy:
  - Increased exchange rate flexibility has allowed the dinar to reflect market developments and helped build official reserves.
  - Authorities committed to a flexible exchange rate while smoothing excessive fluctuations from large energy transactions.
  - Establishment of an electronic bank interlinking platform and implementation of the market maker agreement to facilitate a weekly foreign exchange auction mechanism by year-end (SB for end-December 2014).

### Financial sector and bank restructuring
- Banking sector vulnerabilities and policy strategy:
  - Multi-pronged strategy: address capital adequacy shortfalls in seven banks, align prudential rules with international norms, strengthen supervision (offsite and onsite), and upgrade reporting and ratings systems.
- Recapitalization and restructuring:
  - Of seven undercapitalized banks at end-December 2013, three private banks fully recapitalized by end-July with financing from private shareholders.
  - Recapitalization of remaining four public banks to be carried out under the banking strategy adopted in April, involving public resources estimated at 1.2 percent of GDP, already included in the 2013 and 2014 budgets.
  - Prior action met: adoption of restructuring plans for Banque de l’Habitat (BH) and Societe Tunisienne de Banque (STB); independent audits completed.
  - Restructuring of Banque Nationale Agricole (BNA) to follow completion of its audit in September 2014.
  - Next step: restructuring plans to be adopted by end-September by the board of each bank.
- Restructuring plans for STB and BH include:
  - (i) A recapitalization scheme that ensures banks meet prudential norms this year.
  - (ii) A dilution of private shareholders if they choose not to inject new capital.
  - (iii) Convergence toward key performance indicators of private sector banks by 2016.
  - (iv) An enhanced governance framework, including via new management and board of directors at the banks.
  - The plans also call for a communication strategy and the establishment of a committee to follow up on implementation.
  - Creation of a public asset management company to deal with troubled debt, and the adoption of new bankruptcy and banking laws, will be important to support successful implementation.
- Asset Management Company (AMC):
  - Work continued to establish an AMC to address NPLs in the tourism sector; draft law to be submitted to the National Constituent Assembly with expected approval in September 2014.
  - Legal framework prepared with World Bank technical assistance in line with international best practices.
- Other supervisory and resolution measures:
  - Completion of public bank audits (third bank audit timing adjusted to September 2014 due to auditor delays).
  - Steps to strengthen bank supervision, improve reporting of banking indicators, and strengthen banking crisis and resolution management mechanisms.

### Structural reforms and competitiveness
- Authorities prioritize deepening structural reforms to improve the business climate, attract private investment, and foster efficiency and competitiveness.
- Ongoing initiatives under review by the National Constituent Assembly include:
  - Investment code.
  - Competition law.
  - Law on public-private partnership.
- Labor market and enterprise reforms:
  - Measures to improve functioning of the labor market and reduce skill mismatch.
  - Support for small- and medium-sized enterprises.
  - Strengthened monitoring of public enterprises and preparation of a strategy to reform SOEs.
- Importance of consensus building and legislative approval; process expected to accelerate after upcoming legislative elections.

### Policy recommendations and priorities highlighted by IMF management
- Continue fiscal consolidation, combining short-term measures and structural reforms to anchor macroeconomic stabilization.
- Energy subsidy reform and strict control of the wage bill to improve budget composition.
- Comprehensive revenue reforms, strengthened public financial management, and reform of public enterprises to support fiscal consolidation and inclusive growth.
- A tighter monetary policy to counter inflationary pressures and reduce exchange rate pressures.
- Greater exchange rate flexibility to rebuild foreign reserve buffers, correct large external imbalances, and improve competitiveness.
- Rapid implementation of public bank restructuring plans and establishment of an AMC, adoption of the bankruptcy law, completion of public bank audits, and regulatory upgrades to reduce banking sector fragilities.
- Accelerated implementation of structural reforms (competition law, public-private partnership framework) to improve the investment climate and foster private sector development; the “Invest in Tunisia” conference expected to play an important role.

*IMF Press Release No. 14/400; August 29, 2014 — Fourth Review under the Stand-By Arrangement for Tunisia.*

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