## _cr15285

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---

### Executive summary
- Tunisia completed democratic transformation with a new constitution and free and fair elections; government five-year economic vision to be finalized ahead of donor conference in early 2016.
- Security shocks: Bardo Museum (Mar. 2015) and Sousse (Jun. 2015) attacks killed 60 western tourists; state of emergency declared Jul. 2015.
- International support: 10-year Eurobond ($1 billion at 5.875 percent) issued January 2015 without third-country guarantee.
- Core recommended macro policy mix:
  - Return to growth-supporting fiscal consolidation.
  - Prudent monetary policy.
  - More flexible exchange rate to contain external and fiscal imbalances and anchor inflation expectations.
- Structural reform priorities:
  - Financial sector: complete restructuring of public banks and strengthen banking regulations.
  - Budget composition: contain wage bill, pursue tax and energy subsidy reform, increase public investment.
  - Business climate: revamp regulatory framework to spur private sector development and investment.
- Program delivery under the SBA: all quantitative performance criteria for end-December 2014 and end-March 2015 met; one indicative target on social spending was not met; three out of seventeen structural benchmarks expected to be met by end-September.

### Recent macro-financial developments and key indicators
- Growth:
  - Average real GDP growth 2000–10: 4.5 percent.
  - Real GDP contracted 2011: -1.9 percent.
  - Real GDP 2014: 2.3 percent.
  - GDP growth H1-2015: 1.2 percent (y-o-y).
- Unemployment:
  - Overall: 13 percent in 2010; 18.9 percent in 2011; 15.2 percent in Q2-2015.
  - Disaggregated: women 22.2 percent; graduates 30 percent; youth 35 percent.
- Inflation:
  - Headline peak June 2013: 6.6 percent.
  - End-December 2014: 4.8 percent y-o-y.
  - August 2015: 4.2 percent.
- External sector:
  - Current account deficit 2014: -8.8 percent of GDP (highest level since the 1980s).
  - H1-2015 current account deficit: -4.6 percent of GDP (vs -5.3 percent in H1-2014), helped by exceptional olive oil exports and declining energy imports.
  - FDI increased but remains low and concentrated in energy.
  - Reserves: above four months of imports but below 100 percent of Fund’s composite metric.
- Financial markets and sentiment:
  - Sovereign spreads: peaked mid-2012 >400bps; narrowed to 230bps after political transition completion; widened to 300bps after Sousse attack.
  - Tunisian stock exchange: held up with limited turnover; declined from record highs after the Sousse attack.

### IMF baseline outlook and projections
- Real GDP growth (percent): 2014: 2.3; 2015: 1.0; 2016: 3.0; 2017: 4.0; 2018: 4.6; 2019: 5.0; 2020: 4.7.
- Inflation (CPI, period average, percent): 2014: 4.9; 2015: 5.0; 2016: 4.0; 2017: 3.9; 2018: 3.9; 2019: 3.8; 2020: 3.8.
- Current account (percent of GDP): 2014: -8.8; 2015: -8.5; 2016: -7.0; 2017: -6.2; 2018: -5.0; 2019: -4.0; 2020: -3.5.
- Gross official reserves (US$ billions, eop): 2014: 7.7; 2015: 8.2; 2016: 9.0; 2017: 9.1; 2018: 10.0; 2019: 11.1; 2020: 12.3.
- Reserve coverage (months of next year's imports): 2014: 4.0; 2015: 4.3; 2016: 4.6; 2017: 4.6; 2018: 4.9; 2019: 5.4; 2020: 5.6.

### Tourism sector impact (Box 3)
- Sector size and employment:
  - Annual turnover about 3 billion dinars.
  - Accounts for about 7 percent of GDP and 10 percent of exports of goods and services.
  - Direct employment across 230,000 hotel rooms and roughly 190 tour operators and travel agents; 15 percent of employment including ancillary services.
- Pre-attack recovery: tourism foreign exchange inflows recovered from $1.6 billion in 2011 to $2.1 billion in 2014 (16 percent below pre-revolution levels); arrivals and room-nights remained 15 percent and 22 percent below pre-revolution levels, respectively, by end-2014.
- Post-attack effects:
  - 45–50 percent cancellation of existing bookings; European arrivals down 70 percent (y-o-y) in July.
  - Tunisia’s National Tourism Office: about 85–90 percent of over 800 registered hotels experiencing financial difficulties or shutting down.
  - For the year: tourism inflows expected to decrease by 45 percent (to about $1.1 billion); arrivals decline to less than 5 million (from 6 million in 2014).
- Macroeconomic implications:
  - Growth: additional reduction of 0.6 percentage points (to about 1 percent).
  - Current account: will widen by 2.5 percent of GDP.
  - Fiscal: direct tourism-related tax revenue losses less than 0.1 percent of GDP; broader slowdown and relief measures imply larger revenue losses.
  - Banking: tourism-linked NPLs are 25 percent of the banking sector and 40 percent of the tourism sector loan portfolio; hotel difficulties likely to increase NPLs and strain bank earnings and liquidity.

### Fiscal policy, composition, and consolidation strategy
- 2015 revised budget law (approved August 2015) includes urgent package ≈ 0.5 percent of GDP to alleviate Sousse fallout and increase in security spending of 0.2 percent of GDP.
- 2015 wage and spending pressures:
  - Increase in public sector wage bill equivalent to 0.8 percent of GDP (education sector agreements and a 5 percent generalized salary increase).
  - Wage bill reached 12.7 percent of GDP in 2014; will increase to around 13.3 percent in 2015.
  - Wage bill increased by 37 percent over the past three years.
- Offsetting factors in 2015:
  - Under-execution of capital spending: 0.7 percent of GDP.
  - Net savings from lower oil prices: 1.6 percent of GDP decline in energy subsidies.
- Structural fiscal deficit: 3.5 percent of GDP in 2015 (up from 3.3 percent in 2014).
- Key fiscal figures (selected, in percent of GDP): Revenue 23.9; Tax revenue 22.7; Expenditure and net lending 28.8; Wages and salaries 12.7; Transfers and subsidies 7.2; Capital expenditure 4.8.
- Medium-term consolidation:
  - A 3 percentage point adjustment in the structural fiscal deficit starting in 2016 will reduce public debt to 53.4 percent of GDP by 2020 from a peak of 57.4 percent in 2018.
- Relief measures introduced after Sousse (percent of GDP):
  - Support to SMEs: 0.19 (including components 0.09, 0.03, 0.01, 0.02, 0.01, 0.03).
  - To the Tourism Sector: 0.25 (Reduction of VAT 0.03; Elimination of Tourist exit Fee 0.17; Payment of Contributions to Social Security System 0.04; Guarantee mechanism 0.01).
  - To Social Sectors: 0.05.
  - Total: 0.50.

### Tax reform and revenue measures
- Tax reform strategy to be implemented in 2016 aims to increase tax revenue by 1.5 percentage points of GDP over the medium term (magnitude depends on aggressiveness in broadening the tax base).
- Key measures and yields (In percent of GDP):
  - Tax Revenue total: 0.66 (2016), 0.63 (2017), 0.41 (2018).
  - VAT general reform (harmonize to 6% and 18%): 0.34, 0.30, 0.18.
  - Increase tax on dividends from 5 to 10%: 0.05, 0.04, 0.04.
  - Increase collection of property tax: 0.10, 0.09, 0.09.
  - Indirect taxation total: 0.85, 0.55, 0.32.
  - Expenditure Savings total: 0.43, 0.55, 0.37 (including wage bill measures 0.21, 0.40, 0.27; energy subsidies 0.16, 0.10, 0.05).
- Tax administration modernization underway with a three-year program; focus on Large Taxpayer Unit and unification of tax functions.

### Monetary, exchange rate, and reserves policy
- CBT policy rate: increased to 4.75 percent in June 2014 (from 3.5 percent in 2012); maintained given weak growth and slow credit expansion.
- Real interest rates returned to positive: 0.5 percent.
- Monetary transmission and liquidity:
  - Low deposit mobilization and deposit drawdowns by mining companies left several banks structurally illiquid.
  - Banks increasingly dependent on direct CBT refinancing: TD 5.6 billion by end-July (year not restated in excerpt).
  - Required reserves on consumer loans eliminated in February 2015.
  - Staff recommended removal of caps on lending rate to improve monetary transmission.
- Exchange rate:
  - Dinar appreciated by 5 percent vis-à-vis the US dollar and the Euro in H1 2015; remains within a narrow 2 percent margin of trend (de facto crawl-like behavior).
  - Staff and authorities estimate dinar overvalued by 5–15 percent (Annex I).
  - CBT interventions constrained dinar liquidity; staff urged limiting FX sales to smoothing fluctuations and purchasing FX during excess supply to rebuild buffers.
  - Measures approved May 2015 to deepen FX market, relax hedging instrument conditions, and provide liquidity; weekly foreign exchange auctions scheduled (delayed implementation regretted).
- Reserve adequacy:
  - Reserves expected to remain above four months of import coverage in 2015; projected to cover 5.6 months by 2020 assuming greater exchange rate flexibility.

### Banking sector fragility and reform measures
- Capital adequacy (end-March 2015):
  - Overall CAR: 9.5 percent.
  - Public banks CAR: 3.5 percent.
  - Private banks CAR: 12.7 percent.
  - Regulatory requirement: 10 percent.
  - One public bank deemed insolvent.
- NPLs and provisioning:
  - Overall NPL ratio: 15.8 percent of total loans in March 2015 (≈21 percent when including bank subsidiaries).
  - Tourism sector NPLs: 40 percent of tourism sector loan portfolio; tourism loans <7 percent of total portfolio.
  - Provisioning rate improved from 46 percent in December 2012 to 56.6 percent in March 2015.
- Public banks systemic importance and vulnerabilities (Box 7/key indicators):
  - Public banks: 37 percent of banking assets; ~28 percent of sector deposits.
  - State shareholdings: STB 51 percent; BH 57 percent; BNA 65 percent.
  - Financial soundness indicators, March 2015 (Public vs Private banks): NPLs 23.9 vs 9.9; Provisions (% of NPLs) 52.2 vs 68.9; Liquidity ratio 45.6 vs 102.5; ROA 0.5 vs 1.1; ROE 7.3 vs 14.2; CAR 3.5 vs 12.7; Tier 1 CAR 2.0 vs 10.7.
- Recapitalization and restructuring:
  - Recapitalization plans adopted; recapitalization of STB expected to be completed in October (end of capital subscription process); BH recapitalized on September 12, 2015 with 110 million dinars (staff statement).
  - Recapitalization of three state-owned banks could amount up to 1 billion dinars (1 percent of GDP).
  - Government committed to cover unsubscribed capital at closing of books.
  - Business plans to be updated; stress tests indicate capital shortfall TD 50 to 100 million under baseline scenario for tourism non-recovery.
- Nonperforming loan resolution:
  - AMC envisaged in revised 2014 budget to deal with distressed debt (initial focus on tourism); parliamentary adoption of AMC law needed.
  - Staff recommends AMC law align with best practices; absent it, priority is new bankruptcy law (passage expected in October 2015).
- Temporary prudential measures for tourism: loan rescheduling, guarantees, eligibility and time-bound relief; staff warned against indefinite moratoria.

### Financial sector development and state intervention (medium term)
- Risks of continued state control of main public banks if financing loss-making SOEs or extending non-commercial credit.
- Staff view: complete bank restructuring, complement recapitalization with AMC and new bankruptcy law, adopt proper resolution framework, strengthen supervision.
- Capital markets and non-bank finance constraints: absent secondary bond market, low stock market capitalization (~20 percent of GDP), need for yield curve development and mark-to-market valuation.
- Microfinance: loans by MFIs only 0.3 percent of total bank loans; recommend upgrades to regulatory framework and removal of caps on lending rates.

### Inclusiveness, labor market, and regional disparities (Box 6 and Annex IV)
- Unequal geography and opportunities:
  - Poverty rate in interior ≈3 times coastal areas; interior unemployment 25 percent (double coastal); only 13 percent of foreign firms created in interior.
- Labor market outcomes:
  - Aggregate unemployment more than 15 percent in 2015; youth (15–24) unemployment 35 percent in 2015; graduate unemployment 67 percent in 2015.
  - Female labor force participation 28.5 percent in 2014; female unemployment 22.2 percent in 2015 vs male 12.4 percent.
- Informal economy:
  - Estimated at about 30 percent of GDP (IMF, 2011).
  - 85 percent of firms do not have paid employees.
  - 35 percent of employed people lack social protection.
- Policy implications:
  - Comprehensive civil service reform to lower wage bill to about 11 percent of GDP over medium term.
  - Expand and better target social safety nets (PNAFN covers 235,000 families); unique social ID for 8.5 million Tunisians; staff calls for quick adoption of well-targeted safety net.
  - National employment strategy and labor market reforms to address youth and women unemployment.

### Public debt, external debt, and DSA highlights
- Baseline public debt path:
  - Nominal gross public debt rises to 82.2 percent of GDP by 2018 before declining to 78.6 percent by end of outlook period (projection table entries).
- Contingent liability shock:
  - One-off 10 percent of GDP shock (3 percent bank recapitalization + 7 percent realized contingent liabilities from public enterprises) results in public debt 72.3 percent in 2018 before declining to 67.6 percent in 2020 (contingent liability shock scenario as reported).
- External debt (percent of GDP):
  - 2014: 56.2; 2015: 64.4; 2016: 67.5; 2017: 68.1; 2018: 68.5; 2019: 66.2; 2020: 63.8.
- Stress tests:
  - One-time 30 percent real depreciation would raise external debt ratio to around 97 percent of GDP in 2016 before declining to about 91 percent by 2020.
  - Under most adverse external shocks external debt-to-GDP remains below 74 percent except under large real depreciation.
- Vulnerabilities:
  - High reliance on foreign debt increases exposure to market perceptions and volatile private flows; debt generally long maturity.
  - Public gross financing needs and debt-service benchmarks highlighted in DSA heat map.

### Risks, RAM, and policy responses
- Overall risk assessment: high and tilted to the downside.
- Main domestic risks:
  - Intensified terrorist activity — Relative Likelihood: High.
  - Increased social tensions — Relative Likelihood: High.
  - Delays/reversals in structural reforms and program implementation — Relative Likelihood: High; recommended responses include containing current spending, completing banking reforms, passing PPP/bankruptcy/investment/tax reforms, and public communication to build ownership.
- Main external risks:
  - Weaker activity in major trading partners (Europe) — Relative Likelihood: Medium; policy response: diversify export markets, pursue faster structural reforms, let automatic fiscal stabilizers operate.
  - Tighter/volatile global financial conditions — Relative Likelihood: High; recommended policy response: create fiscal space, countercyclical monetary policy (if appropriate), complete banking reforms.
  - Geopolitical tensions raising oil prices — Relative Likelihood: Medium; response: rebuild fiscal and external buffers, accelerate reforms.
- Authorities’ view: broad agreement with staff on outlook and risks; authorities see upside if political stability entrenched, security controlled, Europe recovers, and reforms implemented.

### Program implementation, financing, and conditionality
- Sixth review completion would make SDR 214.875 million (about $300 million) available.
- SBA access and phasing: total approved purchases 1,146.000 Millions of SDR (400.000 percent of quota) equivalent to 1,637.666 Millions of U.S. dollars (indicative); rephasing proposed and final tranche SDR 143.250 million contingent on seventh review.
- Performance under program: quantitative performance criteria for end-December 2014 and end-March 2015 met; three of seventeen structural benchmarks completed by end-June 2015.
- Prior actions for review completion: recapitalization of at least one public bank (BH) and completion of first phase of capital subscription process for STB; renewal of state guarantees.
- Financing assurances: World Bank doubling/frontloading disbursements (to $500 million); AfDB negotiating budget support (~$200 million); additional international market tapping planned in late 2015.
- Program risks: political uncertainty, social/security tensions could jeopardize objectives and repayment capacity; staff notes Tunisia has capacity to repay the Fund though projected higher amortizations in 2017–19.

### Monitoring, data, and conditionality (TMU)
- Quantitative performance criteria and indicative targets include floors on NIR and primary balance, and ceilings on NDA and total primary current expenditure; continuous zero ceiling on accumulation of external arrears.
- Program exchange rates and valuation rules specified (program exchange rate corresponds to CBT accounting rate on December 31, 2012; 1 SDR = 2.38852 Tunisian dinars).
- Adjustment factors for NIR and NDA defined based on external financing, grants, privatization receipts, resident foreign currency deposits (reference resident deposits at end-March 2015: $1,368.41 million), and government external debt service levels.
- Reporting requirements: comprehensive schedule for GDP, inflation, fiscal and debt data, external sector, monetary and financial sector, with periodicity and delays explicitly defined.

*Source: _cr15285 (IMF staff report and attached memoranda and annexes), September 16, 2015.*

### EXECUTIVE SUMMARY

### EXECUTIVE SUMMARY

### Context and recent environment
- Tunisia’s economy has been resilient through a protracted political transition but faces a deteriorating security environment and rising social tensions.
- Political and external offsets:
  - Benefits from the successful conclusion of the political transition, lower international oil prices, and a recovering Europe.
  - Headwinds from increasing security threats and social tensions are offsetting these benefits.
- Political timeline and security shocks (selected milestones):
  - Terrorist attacks at the Bardo Museum (Mar. 2015) and in Sousse (Jun. 2015) killed 60 western tourists and severely hit tourism and investor confidence.
  - State of emergency declared in Jul. 2015.
- Macro-financial context:
  - Tunisia completed a democratic transformation with a new constitution and free and fair elections.
  - The government’s five-year economic vision will be finalized later in the year ahead of an international donor conference planned in early 2016.
  - International support: issuance of a 10-year Eurobond ($1 billion at 5.875 percent) in January 2015—completed without a third country guarantee for the first time since 2007.

### Recent economic developments and key indicators
- Growth:
  - Average real GDP growth was 4.5 percent during 2000–10.
  - Real GDP contracted by 1.9 percent in 2011.
  - Real GDP reached 2.3 percent in 2014.
  - Growth momentum waned in early 2015, with GDP growth averaging 1.2 percent (y-o-y) for the first semester of 2015.
- Sectoral drivers of weakness: declines in manufacturing, tourism, and mining; strike activity and work stoppages in mining; tourism arrivals down 30 percent following the Bardo attack.
- Unemployment:
  - Overall unemployment rose from 13 percent in 2010 to 18.9 percent in 2011.
  - Unemployment improved to 15.2 percent in Q2-2015.
  - Disaggregated rates: women 22.2 percent; graduates 30 percent; youth 35 percent.
- Inflation:
  - Headline inflation peaked at 6.6 percent in June 2013.
  - Headline inflation declined to 4.8 percent y-o-y by end-December 2014.
  - Inflation reached 4.2 percent in August 2015 following lower food and beverage prices; core inflation followed a similar trend.
- External sector:
  - Current account deficit widened to 8.8 percent of GDP in 2014, its highest level since the 1980s.
  - In H1 2015 the current account deficit narrowed to 4.6 percent of GDP (relative to 5.3 percent of GDP in H1 2014) helped by exceptional olive oil exports and declining energy imports.
  - Foreign direct investment increased but remains low and concentrated in the energy sector.
  - Official support and market access have kept reserves above four months of imports but below 100 percent of the Fund’s composite metric.

### Policy and reform priorities
- Core macro policy mix recommended:
  - A return to growth-supporting fiscal consolidation.
  - A prudent monetary policy.
  - A more flexible exchange rate to contain high external and fiscal imbalances and anchor inflationary expectations.
- Structural reform priorities to achieve stronger and more inclusive growth:
  - Financial sector: improve intermediation by completing the restructuring of public banks and strengthening banking regulations.
  - Budget composition: contain the wage bill, pursue tax and energy subsidy reform, and increase public investment.
  - Business climate: revamp the regulatory framework to generate an environment more conducive to private sector development and investment.

### Program implementation and structural reforms
- Performance under the Stand-By Arrangement (SBA):
  - All quantitative performance criteria for end-December 2014 and end-March 2015 have been met.
  - One indicative target on social spending was not met.
- Structural benchmarks:
  - Progress continues to be slow. Three out of seventeen structural benchmarks are expected to be met by end-September.
  - The next and final review will focus on completing the unfinished agenda in banking and tax reform.

### Risks and vulnerabilities
- Main risks:
  - Increasing regional and domestic security tensions.
  - Weaker economic activity in major trading partners.
  - A difficult social environment and opposition from vested interests that could undermine support for reforms.
- Political economy constraints:
  - Intensified security risks, social tensions, and coalition politics complicate policy implementation.
  - Union pressures for higher wages, industrial unrest (notably in mining), and a spike in strikes have tested the government’s ability to undertake reforms and contributed to investor wait-and-see attitudes.
  - The terror attacks may shift limited government resources to security and delay policy implementation.

### Financial assistance and mission
- The completion of the sixth review makes SDR 214.875 million (about $300 million) available.
- Date of document: September 16, 2015.
- Approved by Daniela Gressani and Taline Koranchelian.
- Mission composition and consultations involved central government, central bank, multiple line ministries, social partners, private and banking sectors, donors, political parties, and civil society.

*Source: _cr15285 - EXECUTIVE SUMMARY (September 16, 2015)*

### 9.      Financial markets have held up well.

### _cr15285 - 9.      Financial markets have held up well.

### Financial markets and market reaction
- Sovereign spreads:
  - Peaked in mid-2012 at over 400bps.
  - Narrowed to 230bps following the completion of the political transition.
  - Widened again to 300bps following the Sousse attack.
- Tunisian stock exchange:
  - Held up well amid limited turnover.
  - Came down from record highs in the aftermath of the Sousse attack.
- Central Bank of Tunisia (CBT) interventions:
  - Continued interventions in the foreign exchange market constrained dinar liquidity.
- Reserve and liquidity indicators (as presented):
  - Gross official reserves (US$ billions, eop): 2014: 7.7; 2015: 8.2; 2016: 9.0; 2017: 9.1; 2018: 10.0; 2019: 11.1; 2020: 12.3.
  - Gross official reserves (months of next year's imports): 2014: 4.0; 2015: 4.3; 2016: 4.6; 2017: 4.6; 2018: 4.9; 2019: 5.4; 2020: 5.6.

### Fiscal stance and composition
- Structural fiscal deficit (deficit corrected for cyclical fluctuations and excluding banking recapitalization costs):
  - Improved from 5.3 percent of GDP in 2012 to 3.3 percent of GDP in 2014.
- Revenue and spending composition:
  - Strong revenue collection accompanied the improvement.
  - Wage bill increased by 37 percent over the past three years, reaching 12.7 percent of GDP in 2014.
  - Public investment declined from 6.6 percent of GDP in 2012 to a record low 4.2 percent of GDP in 2014.
- Public debt:
  - Rose to 50 percent of GDP in 2014 (from 41 percent of GDP in 2010).

### Monetary policy, banking liquidity, and credit
- CBT policy rate:
  - Gradually increased to 4.75 percent in June 2014 (from 3.5 percent in 2012).
- Bank liquidity and refinancing:
  - Low deposit mobilization due to weak economic activity and deposit drawdown by mining companies affected by work stoppages has left several banks (mostly public) structurally illiquid.
  - Banks increasingly dependent on direct CBT refinancing: TD 5.6 billion by end-July (year not restated in source excerpt).
  - Required reserves on consumer loans eliminated in February 2015.
- Private sector credit:
  - Picked up in 2014, but slowed to 7.3 percent at end-June 2015.
- M3 and credit indicators shown in charts (2012–15): y-o-y growth measures presented in source.

### Banking sector fragility and performance
- Capital adequacy ratios (end-March 2015):
  - Overall: 9.5 percent.
  - Public banks: 3.5 percent.
  - Private banks: 12.7 percent.
  - Regulatory requirement: 10 percent.
  - One public bank deemed insolvent.
- Nonperforming loans (NPLs):
  - Overall NPL ratio: 15.8 percent of total loans in March 2015.
  - Approximately 21 percent of total loans after including bank subsidiaries.
  - Tourism sector: NPLs are 40 percent of the tourism sector loan portfolio; tourism loans represent less than 7 percent of the total loan portfolio.
- Liquidity and provisioning:
  - Three banks (one public) in violation of the liquidity ratio.
  - Provisioning rate improved from 46 percent in December 2012 to 56.6 percent in March 2015 following new prudential regulations in 2013.
- Profitability:
  - Low profitability, particularly for public banks, but improved in 2014 mainly due to an increase in commission fees and the reduction in provisioning.

### Outlook and IMF projections (baseline)
- Growth:
  - 2015 revised down to 1 percent (from 3 percent under the program).
  - Projected to reach estimated potential of 4.7 percent by 2018.
  - Projected Real GDP growth (in percent), Prel. 2014 and Proj. 2015–2020:
    - 2014: 2.3
    - 2015: 1.0
    - 2016: 3.0
    - 2017: 4.0
    - 2018: 4.6
    - 2019: 5.0
    - 2020: 4.7
- Inflation (CPI, period average, in percent):
  - 2014: 4.9
  - 2015: 5.0
  - 2016: 4.0
  - 2017: 3.9
  - 2018: 3.9
  - 2019: 3.8
  - 2020: 3.8
- Current account (percent of GDP):
  - 2014: -8.8
  - 2015: -8.5
  - 2016: -7.0
  - 2017: -6.2
  - 2018: -5.0
  - 2019: -4.0
  - 2020: -3.5
- Gross official reserves (US$ billions, eop) and months of next year's imports: see figures under “Financial markets and market reaction.”
- Reserve coverage:
  - Reserves expected to remain above four months of import coverage in 2015.
  - Projected to cover 5.6 months of imports by 2020 (Annex I assumption of greater exchange rate flexibility over the medium term).

### Tourism sector: impact of Bardo and Sousse attacks (Box 3)
- Sector importance:
  - Annual turnover about 3 billion dinars.
  - Accounts for about 7 percent of GDP and 10 percent of exports of goods and services.
  - Directly employs across 230,000 hotel rooms and roughly 190 tour operators and travel agents.
  - Accounts for 15 percent of employment including ancillary services.
- Pre-attack recovery:
  - Tourism-linked foreign exchange inflows recovered from $1.6 billion in 2011 to $2.1 billion in 2014 (16 percent below pre-revolution levels).
  - Tourist arrivals and room-nights remained 15 percent and 22 percent below pre-revolution levels, respectively, by end-2014.
  - Europe accounted for 45 percent of arrivals (from 70 percent in 2010) and close to 90 percent of room-nights by 2014.
- Impact of attacks:
  - 45–50 percent cancellation of existing bookings; hotels emptied at peak of summer season.
  - Tourist arrivals from Europe declined by 70 percent (y-o-y) in July alone.
  - Tunisia’s National Tourism Office estimates about 85–90 percent of over 800 registered hotels are experiencing financial difficulties or shutting down.
  - For the year: tourism inflows expected to decrease by 45 percent (to about $1.1 billion); arrivals decline to less than 5 million people (from 6 million in 2014).
- Economic implications:
  - Growth: additional reduction of 0.6 percentage points (to about 1 percent).
  - Current account: will widen by 2.5 percent of GDP.
  - Fiscal: direct tourism-related tax revenue losses less than 0.1 percent of GDP; broader slowdown and relief measures imply larger revenue losses.
  - Banks: tourism-linked NPLs high—NPLs are 25 percent of the banking sector and 40 percent of the tourism sector loan portfolio; hotels’ difficulties likely to increase NPLs and strain banks’ earnings and liquidity. Historical comparison: after the 2002 Djerba attack, NPLs as a share of total loans rose by 3 percent in the following year.

### Potential growth and structural reform scenarios (Box 4)
- Historical context:
  - Growth averaged about 4.5 percent per year in 2000–10; near 5 percent in the 1990s.
  - Capital accumulation was main growth driver; labor and productivity lagged.
- TFP and sectoral dynamics:
  - Total Factor Productivity (TFP) declined, particularly in agriculture and manufacturing.
  - Shift toward low-value-added industries (textile, machinery assembly, mineral products).
- Scenarios and projections:
  - No-reform “muddle-through” scenario: growth averaging about 3.3 percent per year until 2020.
  - Staff’s baseline scenario (structural reforms removing most binding constraints—access to finance, business environment, reducing macroeconomic risks): could raise potential growth by about 1.5 percent and average growth in 2015–20 to 4.3 percent.
  - Additional, more comprehensive reforms (labor regulations, greater trade integration, infrastructure investment, leveraging diaspora) could further improve medium-term growth and nearly double potential growth if fully implemented.
- Simulation note:
  - Additional growth potential illustrated relative to increases in productivity, capital, and labor variables to average EMDC levels (see source for methodological details).

### Risks, Risk Assessment Matrix (RAM), and policy recommendations
- Overall risk assessment:
  - Risks are high and tilted to the downside.
  - Economic confidence hinges on improvements in the security situation.
  - Key external exposure: 70 percent of Tunisia’s trade is with Europe.
  - Domestic risks include political instability, social tensions, and vested-interest resistance to reforms.
- RAM highlights (selected items):
  - Domestic risk: Delays or reversals in structural reforms and program implementation — Relative Likelihood: High.
    - Expected impact: Growth insufficient to reduce unemployment; heightened social tensions; undermined economic activity and policy flexibility.
    - Recommended policy response: (i) improve budget composition by containing current spending while increasing growth-enhancing capital expenditures; (ii) complete banking sector reforms; (iii) pass long-awaited economic legislation including on PPP, bankruptcy, investment code, and tax reform; (iv) build public confidence and ownership through continuous communication.
  - Domestic risk: Intensified terrorist activity — Relative Likelihood: High.
  - Domestic risk: Increased social tensions — Relative Likelihood: High.
  - External risk: Tighter or more volatile global financial conditions — Relative Likelihood: High.
    - Expected impact: Could destabilize global recovery and financial markets; slow FDI; increase financing needs.
    - Recommended policy response: (i) create fiscal space by containing the wage bill, reform energy subsidies and the tax system to make room for priority spending; (ii) countercyclical monetary policy (assuming inflationary pressures are not present); (iii) complete banking reforms.
  - External risk: Structurally weak growth in key partners (Europe) — Relative Likelihood: Medium.
    - Recommended policy response: (i) diversify export markets; (ii) pursue bolder and faster structural reforms; (iii) let automatic fiscal stabilizers operate.
  - External risk: Increased geopolitical tensions in the Middle East leading to a sharp rise in oil prices — Relative Likelihood: Medium.
    - Recommended policy response: (i) rebuild fiscal and external buffers; (ii) accelerate economic and structural reforms.
- Authorities’ view:
  - Broad agreement with staff on outlook and risks.
  - Authorities see upside potential if political stability is entrenched, security threats controlled, Europe recovers, and reforms are implemented.
  - Authorities expect private demand to remain the main driver of growth as banks resume financial intermediation.
  - Agreement that macroeconomic and financial sustainability requires less reliance on consumption and imports.
  - Agreement that risk mitigation will require a strong outreach campaign and overcoming administrative and legislative capacity constraints.

### Reform agenda priorities (summary)
- Preconditions for higher, more inclusive growth:
  - Maintain macroeconomic stability via high-quality fiscal consolidation, prudent monetary policy, and greater exchange rate flexibility.
  - Implement ambitious structural reforms to:
    - Improve budget composition.
    - Strengthen the financial system.
    - Improve the business environment.
  - Timely and decisive implementation of these reforms is essential to reduce unemployment and improve living standards.

*Source: IMF staff report excerpt titled "9.      Financial markets have held up well."*

### 16.      Fiscal consolidation has been delayed to 2016, following a modest loosening of the

### Fiscal consolidation has been delayed to 2016, following a modest loosening of the 2015 fiscal stance

### 2015 fiscal stance and short-term measures
- The revised 2015 budget law (approved August 2015) includes an urgent package amounting to about 0.5 percent of GDP to alleviate the short-term economic fallout linked to the Sousse attack and an increase in security spending of 0.2 percent of GDP.
- Staff welcomed the countercyclical response but warned some measures—such as the VAT rate reduction to the hospitality sector—should be temporary.
- The revised budget includes an increase in the public sector wage bill equivalent to 0.8 percent of GDP from recent agreements in the education sector and a 5 percent generalized salary increase.
- Offsetting factors in 2015:
  - Under-execution of capital spending: 0.7 percent of GDP.
  - Net savings from lower oil prices: 1.6 percent of GDP decline in energy subsidies.
- Structural fiscal deficit: 3.5 percent of GDP in 2015 (lower than programmed, but up from 3.3 percent of GDP in 2014).
- Authorities highlighted that, absent the record (and unplanned) decline in public investment in 2014, the 2015 deficit would have been lower than in 2014.
- The revised budget includes a 20 percent across-the-board cut in non-essential goods and services (MEFP ¶9).

### Tunisia: Relief Measures Introduced After the Sousse Attack (In percent of GDP)
- To support Small and Medium Enterprises: 0.19
  - Economic activity stimulus in regions: 0.09
  - Loan Rescheduling: 0.03
  - Credit line to finance regional enterprises: 0.01
  - Exceptional guarantees for investment loans and regional enterprises: 0.02
  - Enterprise creation program: 0.01
  - Government’s share of capital increase in S&M Enterprise Bank: 0.03
- To the Tourism Sector: 0.25
  - Reduction of VAT from 12 to 6 percent: 0.03
  - Elimination of Tourist exit Fee: 0.17
  - Payment of Contributions to Social Security System: 0.04
  - Guarantee mechanism for hotel loans: 0.01
- To Social Sectors (youth, women, children programs), Culture and Education: 0.05
- Total: 0.50

### Deteriorating composition of public spending and wage pressures
- Staff noted net savings from lower fuel subsidies have been offset by a growing wage bill.
- Staff stressed that current spending increases financed by cuts in capital spending risk a vicious cycle reducing future growth and revenues.
- Authorities cited fragile social and economic conditions as justification for wage action to reduce tensions and act countercyclically to boost demand; they agreed with staff on the need to contain the wage bill in the medium term.
- Staff urged quick implementation of the tax reform package to compensate for the increasing wage bill through permanent revenue measures.
- Authorities indicated major tax policy reform requires further discussion in context of the 2016 budget.

### Key spending components (selected figures; In percent of GDP)
- Revenue (12/12/14): 23.9
  - of which: Tax revenue: 22.7
- Expenditure and net lending (12/12/14): 28.8
  - of which: Wages and salaries: 12.7
  - Transfers and subsidies: 7.2
  - Capital expenditure: 4.8
  - Net lending: 0.2
- Central government deficit (-) (excl. grants): -4.8 (2014), -4.1 (prel. 2015), -6.2 (2016 Prog.), -6.0 (2017 Prog.), -4.3 (2018 Prog.), -3.4 (2019 Prog.), -2.7 (2020 Prog.), -1.8, -1.0
- Structural fiscal balance: -4.1 (2014), -3.3 (2015), -3.8, -3.5, -2.9, -2.1, -1.7, -1.1, -0.4
- General government debt: 49.4 (2014), 50.0 (prel. 2015), 55.2 (2016 Prog.), 54.0, 56.3, 57.0, 57.4, 55.6, 53.4

### Public sector employment and wage dynamics (Box 5)
- Public sector employment rose by 20 percent to 615,000 workers between 2010 and 2014; 40 percent of that increase was for security and defense personnel.
- Total public employment (including public enterprise workers) is about 795,000 after a 30 percent increase in public enterprise workers to about 180,000.
- Total public employment corresponds to a ratio of about 24 percent of the total employed workforce—three times higher than in Morocco or comparators such as Chile or Mexico.
- Wage bill increased from 10.7 percent of GDP in 2010 to 12.7 percent in 2014 and will increase to around 13.3 percent in 2015.
- The wage bill absorbs 56 percent of tax revenues and amounts to close to 50 percent of total expenditures.
- Cumulative inflation was about 18 percent over 2012–14; average public sector salary increased by 14 percent; wages in the private sector increased by 6-12 percent.
- Wages of medium and lower public sector categories rose by 23 percent.
- Public sector workers enjoy a 23 percent wage premium over private workers.
- Comprehensive civil service reform is urgent; past reform attempts dating to 1989 recommended ending proliferation of allowances, replacing the index system with a base salary scale, raising recruitment standards, and strengthening links between performance and promotion.

### Yields of main revenue and expenditure measures (In percent of GDP)
- Tax Revenue measures (selected items):
  - Tax Revenue total: 0.66 (2016), 0.63 (2017), 0.41 (2018)
  - Direct taxation: 0.14, 0.18, 0.18
  - Increase tax on dividends from 5 to 10%: 0.05, 0.04, 0.04
  - Strengthen presumptive tax regime for liberal professions: 0.03, 0.05, 0.05
  - Increase collection of property tax: 0.10, 0.09, 0.09
  - Indirect taxation total: 0.85, 0.55, 0.32
  - VAT general reform (harmonize to 6% and 18%): 0.34, 0.30, 0.18
  - Exempted goods: Reduce list from 20 to 10 key items: 0.21, 0.20, 0.09
  - Liberal professions: increase VAT from 12% to 18%: 0.13, 0.10, 0.09
  - Excises (alcoholic beverages): 0.28, 0.05, 0.05
  - Customs duties reform: 0.22, 0.20, 0.09
- Reduction of Earmarked Special Funds: -0.32, -0.10, -0.09
- Expenditure Savings total: 0.43, 0.55, 0.37
  - Wage bill: Revision of salary benefits and indemnities and improving career incentives: 0.21, 0.40, 0.27
  - Enhance cost effectiveness of Goods and Services: 0.06, 0.05, 0.05
  - Energy subsidies (net impact of tariff and price adjustments): 0.16, 0.10, 0.05

### Medium-term consolidation path and debt implications
- A 3 percentage point adjustment in the structural fiscal deficit over the medium term—starting in 2016—will reduce public debt to 53.4 percent of GDP, from a peak of 57.4 percent in 2018.
- Substantial downside risks persist, especially with regards to a depreciating currency or permanent decline in growth.
- Authorities noted large amortization payments due in 2017 require sustained effort to reduce fiscal deficits.
- Agreed main elements of consolidation strategy: civil service reform, energy subsidy reform, and revenue mobilization, while preserving public investment.

### Monetary policy: containing inflation and improving transmission
- Policy rate remains appropriate given moderate headline and core inflation, slow credit growth, and economic activity well below potential.
- Return of real interest rates to positive levels: 0.5 percent.
- Authorities ready to tighten monetary policy should inflationary pressures arise from public wage increases or depreciation pressures (MEFP ¶13).
- Structural banking liquidity weakness: banks remain overly reliant on direct CBT refinancing; recapitalization of public banks will help reduce refinancing needs.
- Establishment of a full-fledged lender of last resort mechanism (November 2015 SB) expected in forthcoming CBT law.
- Collateral framework improvements: share of borrowings collateralized by government securities doubled from 20 percent in 2013 to 40 percent in 2014 (end-December 2014 SB).
- Staff recommended removal of existing “caps” on the lending rate to improve monetary policy transmission; consultations with banks ongoing.

### Exchange rate policy and FX market development
- Dinar depreciation over the prior two years was halted in H1 2015; exchange rate appreciated by 5 percent vis-à-vis the US dollar and the Euro during the first six months of 2015 (MEFP ¶18).
- Exchange rate remains within a narrow margin of 2 percent relative to statistically identified trend, confirming “de facto” crawl-like behavior (Annex I).
- Staff and authorities agree the dinar is currently 5–15 percent overvalued (Annex I).
- Authorities plan to limit FX interventions and were urged by staff to purchase FX during periods of excess supply to rebuild buffers; reserves are still below the Fund’s ARA metric.
- Plans approved by the CBT Board in May 2015 to deepen the FX market, relax conditions governing exchange rate and interest rate hedging instruments, and provide liquidity for economic operators (MEFP ¶19).
- Delay in implementing weekly foreign exchange auctions (scheduled for end-October 2015 SB) is regretted but deeper market reforms will facilitate implementation.
- Over the medium term, a gradual shift to full capital account convertibility is needed, contingent on macroeconomic stability, development of domestic financial institutions, upgraded prudential supervision, and an in-depth study of off-shore sector capital flows.

### Structural reform focus and tax reform strategy
- Tunisia’s state-centered development model has constrained private sector dynamism, produced regional disparities, and predominance of low value-added activities.
- Broad home-grown reform agenda needed: fiscal reforms, financial sector reforms, and improvements in the business environment.
- Tax reform strategy (prepared by Ministry of Finance with Fund TA) focuses on:
  - Simplifying the VAT from three to two rates (6 and 18 percent) and reducing exemptions.
  - Limiting excises to a selected list of products.
  - Rationalizing customs duties from seven to three levels (0, 20 and 36 percent, the latter for agricultural products).
  - Improving fairness by broadening the tax base, gradual convergence of on-shore and off-shore corporate tax rates, improving progressivity of personal taxation, and simplifying taxation for small enterprises.
  - Reducing earmarked taxes.
- Tax reform to be implemented in 2016 and is expected to help increase tax revenue by 1.5 percentage points of GDP over the medium term (with magnitude depending on aggressiveness in broadening the tax base).

*Sources: Tunisian authorities; and IMF staff estimates and projections.*

### Box 6. Tunisia: Inclusiveness and Growth Constraints

### Box 6. Tunisia: Inclusiveness and Growth Constraints

### Overview
- The January 2011 revolution highlighted that growth benefits have not been evenly shared.
- Tunisia’s old growth model—based on selective state intervention—led to:
  - unequal access to opportunities and job creation largely limited to low value-added industries;
  - significant regional disparities:
    - average poverty rates remained 3 times as high in the interior of the country than in richer coastal “offshore” areas;
    - at 25 percent, unemployment rates in the interior regions were double those of coastal areas;
    - only 13 percent of foreign firms were created in the interior regions.

### Structural constraints (growth diagnostic)
- Lack of finance
  - Access to credit has been cited by business entrepreneurs as the main obstacle to doing business over the past decade.
  - Off shore and mining firms—the most successful in Tunisia—are generally not credit constrained.
  - Local firms compensate through self-financing.
  - Drivers of credit access problems: weak credit information, high perceived default risk, connected lending, lack of adequate bankruptcy laws, and banks’ structural liquidity problems.
- Lack of effective institutions to ensure public sector accountability
  - Tunisia performs poorly on corruption, property protection, and judicial independence relative to comparable peers.
  - Regulatory barriers and anti-competitive practices limit growth (requirements for ministerial approval, prohibition of investment in certain sectors, tolerance for abuse of market position).
  - Wide-scale tax evasion, inefficient tax administration, and growing informality cited as causes of unfair competition.
- Taxation
  - Overall taxation compares relatively well with similar countries but relies on a very narrow tax base because of tax incentives for offshore firms, VAT exemptions, and unequal treatment between wage and capital income.
  - Corporate taxation and sales tax levels are in line with international norms, but high payroll and social security contributions represent a high burden for domestic firms.
- Labor market
  - 2014-15 Global Competitiveness Survey rankings: Tunisia stands 129 out of 144 countries on labor market efficiency driven by:
    - low participation of women: 134;
    - rigid wage determination: 119;
    - lack of labor-employer cooperation: 118;
    - rigid firing and hiring practices: 97.

### Infrastructure and workforce
- Infrastructure not seen as a binding constraint; Tunisia’s geography (direct access to the sea, proximity to European market) is an asset.
- Despite regional disparities in basic infrastructure, existing infrastructure appears to be an area of strength.
- Workforce availability appropriate; firms ranked work force education as only the 10th most problematic issue for doing business in 2014.
- Improving higher education curricula could reduce skill mismatches.

### Tax administration, fuel and electricity pricing, and civil service reform
- Tax administration modernization
  - Authorities committed to a three-year tax administration modernization program to establish an integrated tax administration with improved systems and processes.
  - Authorities prefer a gradual approach: first improve compliance in the small business sector before expanding to large and medium-sized enterprises.
  - Creation of a category of “new tax collectors” (end-July SB) would take more time; authorities prefer moving existing functions to the same location under current management structures.
  - Staff urged accelerating unification of tax administration functions, starting with improving processes at the large taxpayer unit (80 percent of tax collection).
- Energy subsidies and prices
  - The 56 percent decrease in international oil prices since the beginning of 2014 has not yet translated into equivalent domestic retail fuel price cuts; for some products domestic prices are 30-50 percent above international levels (text chart).
  - Staff recommended:
    - a proper automatic fuel price formula: revise the existing asymmetric automatic fuel price adjustment formula (currently triggered only if there is a cumulative $6 a barrel increase within a quarter) into an automatic symmetric formula to smooth fluctuations and ensure full cost recovery and appropriate tax collection. Authorities agreed but indicated such revision can only be implemented in 2016.
    - a well-designed communications campaign to explain the formula.
    - adjustments in electricity tariffs: staff urged further increases toward cost-recovery levels; electricity tariffs remain heavily subsidized—20 percent below cost recovery even after recent adjustments for medium and low voltage industries and elimination of subsidies for cement companies. Authorities argued that lower international oil prices do not justify increasing tariffs at this juncture.
- Wage bill and civil service reform
  - Staff encouraged authorities’ determination to implement comprehensive civil service reform to reduce the wage bill to 11 percent of GDP over the medium term (MEFP ¶32).
  - Staff urged quick design of an overall and comprehensive civil service reform strategy to review organizational structure, revise salary benefits and indemnities, and strengthen career incentives.

### Public financial management and public enterprises
- Budget execution and investment projects
  - Decentralization of project execution and adoption of the procurement code have not accelerated capital spending; first-half budget execution rate was close to 30 percent.
  - Needed actions: better project selection and prioritization, closer coordination between central and regional administration, better resolution of land rights (including newly issued decrees allowing expropriation when needed).
  - Progress made in finalizing the new organic budget law (to be submitted to parliament in November) and performance budgeting (MEFP ¶38) to improve budget preparation, introduce medium-term budgeting, increase transparency, and streamline control procedures.
- Public enterprise management and fiscal risks
  - Comprehensive assessment of auditing and internal control mechanisms of public enterprises (SOE) completed; will inform a new public enterprise monitoring strategy (October 2015 SB), including regrouping control bodies.
  - New performance contracts for the five largest SOEs (end-October 2015 SB) should include indicators covering financial performance.
  - Staff urged a full assessment of fiscal risks from public enterprise operations, including new guarantees.
  - Authorities stated outstanding stock of government guarantees has remained below 10 percent of GDP over the last three years and plan a clear action plan to reduce fiscal risks following forthcoming Fund TA.

### Financial system: constraints, public banks, and reforms
- Importance of restoring a sound banking system
  - Old model characterized by weak underwriting standards, widespread connected lending, weak regulation and supervisory forbearance, leading to low private sector credit relative to potential.
  - A modern banking system with strong supervision and competition would improve credit allocation.
- Addressing vulnerabilities of public banks
  - Tunisia’s three public banks: systemic, representing 37 percent of banking assets and around 28 percent of banking sector deposits.
  - State shareholdings: STB (51 percent); BH (57 percent); BNA (65 percent).
  - Recapitalization underway consistent with international practices (MEFP ¶23). Legislative authority to use recapitalization funds in 2014 budget granted in August 2015.
    - Restructuring plans: two adopted in February and June; capital subscription process underway to allow BH to meet the 10 percent minimum solvency ratio by end-September.
    - Recapitalization of STB—14 percent of assets and currently insolvent—expected to be completed in October at the end of the capital subscription process.
    - BNA might not need additional capital depending on audit results, explicit state guarantees for SOE loans, and planned asset sales.
    - Government committed to cover any unsubscribed capital at closing of the books, effectively diluting existing shareholders.
    - Staff stressed that lower provisioning needs justified by sovereign guarantees require explicit commitment to renew guarantees.
  - Business plans and stress tests
    - Existing business plans (adopted prior to the Sousse attack) are unrealistic due to drop in tourism and weaker activity.
    - Preliminary stress test: capital shortfall within a year of about TD 50 to 100 million under staff’s baseline scenario (no recovery of the tourism loan portfolio).
    - Authorities expect capital shortfalls could be met by banks’ sales of non-strategic assets; staff accepted this conditional on arms-length sales and not to banks’ subsidiaries.
  - Operational restructuring (MEFP ¶23)
    - New Board members designated in all three public banks; change in management expected by October 2015 and signing of performance contracts.
    - Staff urged consolidated monitoring though authorities’ reporting system allows consolidated reporting only for certain indicators (e.g., cost-to-income ratio).
    - Close supervisory scrutiny needed to ensure regulatory compliance, sound lending, and internal governance.
- Resolution of nonperforming loans (NPLs)
  - Creation of a system-wide Asset Management Company (AMC) envisaged in revised 2014 budget to deal with distressed debt, initial focus on tourism debt; effectiveness requires parliamentary adoption of the AMC law (likely delayed).
  - Staff recommends adoption only if law aligns with best international practices (loan resolution superpowers, fair transfer pricing, governance) and is not a vehicle for bailing out defaulted borrowers.
  - Absent such a law, priority should be improving NPL management by individual banks through swift adoption of the new bankruptcy law; passage expected in October 2015.
- Support for tourism sector entities
  - Exceptional measures to reschedule new loans to active tourist establishments in response to the Sousse attack (MEFP ¶25).
  - Staff warned against indefinite moratoriums on non-performing loans; advocated strict eligibility criteria, time-bound and transparent relief complemented with corrective action plans to avoid regulatory forbearance and ever-greening.
- Strengthening supervision and regulatory framework
  - Since the Revolution, new regulations on governance, solvency ratios, concentration risk norms, and liquidity ratio have been established.
  - Need for further upgrading norms to converge with international standards.
  - Challenges: hiring experienced supervisory staff and enhancing supervisory intensity for public and private banks.
  - Need for more risk-based supervision, hiring new bank supervisors (SB), and adherence to sequencing in the medium-term strategic plan designed with Fund TA (MEFP ¶29).
  - Delays in implementing the full bank reporting system designed with Fund TA; authorities committed to apply sanctions to banks violating prudential norms.
- Banking law and resolution framework
  - Draft new banking law includes improvements on deposit guarantees, bank governance, consolidated supervision, licensing, and stronger resolution framework.
  - Additional changes needed for supervisory enforcement, early intervention, and resolution to align with good international practices.
  - Staff urged acceleration of parliamentary approval, noting consultation period with banking industry and stakeholders risks timely adoption.

### Box 7 summary: Why focus on public banks?
- Public banks are systemic: 37 percent of banking assets; around 28 percent of sector deposits.
- State shareholdings: STB (51 percent); BH (57 percent); BNA (65 percent).
- Key weaknesses of public banks:
  - Solvency: public banks no longer meet minimum regulatory solvency ratios; solvency ratio for public banks was four times less than the private sector without recapitalization; two banks severely undercapitalized and one insolvent.
  - Asset quality: NPLs in public banks are more than double private banks; public bank clients account for 13 percent of loan portfolio vs. 8 percent for private banks; STB heavily exposed to tourism (54 percent of its loan portfolio).
  - Profitability: public banks’ profitability is half that of private banks.
  - Refinancing: limited deposit growth has forced public banks to become the largest users of the CBT refinancing facility (40 percent of total refinancing).
- Strategic positioning: state-owned banks followed unsustainable strategic directions (agriculture, housing, hotel) and facilitated easy access to finance for connected parties; market share erosion predicted to continue at 1 to 1.5 percent per year absent restructuring (World Bank calculation).

### Financial soundness indicators, March 2015 (Public banks vs Private banks)
- NPLs (in percent of total loans): Public banks 23.9; Private banks 9.9
- NPLs, net of provisions: Public banks 11.3; Private banks 2.8
- Provisions (in percent of NPLs): Public banks 52.2; Private banks 68.9
- Liquidity ratio: Public banks 45.6; Private banks 102.5
- ROA 1/: Public banks 0.5; Private banks 1.1
- ROE 1/: Public banks 7.3; Private banks 14.2
- Capital adequacy ratio (CAR): Public banks 3.5; Private banks 12.7
- Tier 1 capital adequacy ratio (CAR): Public banks 2.0; Private banks 10.7
- Note: 1/ Data is for 2014.

### Major prudential regulations adopted since 2011
- Governance: Strengthening of bank governance – circular dated 20 May 2011.
- Solvency: Increase of the minimum capital adequacy ratio from 8 percent to 10 percent, strengthening of large exposures regulation—circular dated 29 June 2012.
- Provisioning: Additional provisioning requirements based on NPL seniority—circular dated 30 December 2013.
- Liquidity: Introduction of the new liquidity ratio—circular dated 10 November 2014.

*Source: IMF staff analysis in “Box 6. Tunisia: Inclusiveness and Growth Constraints.”*

### 39.      Reduced state intervention would help promote financial sector development in the

### Reduced state intervention would help promote financial sector development in the medium term

### Financial sector development: state ownership and banking sector risks
- Government’s direct control of three main public banks and minority participation in nine small banks (about 10 percent of banking assets) may create future distortions if public banks continue financing loss-making state-owned enterprises, provide financing on non-commercial terms, or extend credit based on connections.
- Authorities noted the State has a key role to play and that there are no plans to reduce state participation in the three state-owned banks, although the search for technical partners to help with the restructuring process of some banks is underway.
- Staff view: bank restructuring needs to be completed, including:
  - Updating business plans underpinning recapitalization of public banks to ensure regulatory compliance throughout the restructuring period.
  - Complementing recapitalization with appropriate resolution of non-performing loans through a proper Asset Management Company (AMC) and a new bankruptcy law.
  - Adoption of a proper resolution framework, strengthened banking regulations, and improved banking supervision to reduce risk buildup.

### Capital markets and non-bank financial sector development
- Key constraints:
  - Absence of functioning secondary markets for bonds.
  - Low stock market capitalization (about 20 percent of GDP), with listings dominated by banks.
- Needed measures:
  - Development of a yield curve—including through reduced emphasis on long maturities and a regular debt issuance program independent of seasonal cash fluctuations.
  - Adoption of mark to market valuation.
  - Development of new corporate governance standards to create incentives to trade.
- Authorities agreed that non-bank financial sector development is a priority; an overall strategy will be developed over the next few months—with help from World Bank TA.

### Microfinance and access to finance
- Major steps in 2011: adoption of the new microfinance law and creation of a new supervisory authority.
- Current status:
  - Microfinance activities remain too low (loans of microfinance institutions only represent 0.3 percent of total loans by banks).
  - Authorities’ efforts initially focused on reinforcing capacities of the supervisory authority.
- Recommended actions:
  - Upgrade regulatory and supervisory framework.
  - Remove existing caps on lending rates.
  - Establish appropriate accounting norms.

### Boosting competitiveness through structural reforms
- Business environment constraints:
  - Distortions via authorization requirements, investment restrictions, or fiscal advantages that privileged connected firms and limited entry (sectors with investment restrictions account for over 50 percent of the Tunisian economy).
- Recent and pending reforms:
  - Reform of the investment code and existing regulations:
    - Investment code adoption delayed (now expected in November 2015); latest version revised for a third time in three years.
    - Expected to increase market access, simplify investment regulations, and rationalize complex incentives.
    - Staff welcomed proposals to move remaining tax incentives from the investment code to the tax code and stressed the need to limit the number of “sectoral” decrees.
  - Reforming competition and bankruptcy laws:
    - New competition law passed; bankruptcy law approved in parliament for the past two years.
    - These laws expected to strengthen creditor rights and ease banks’ reluctance to lend.
  - PPP framework:
    - PPP law delayed in parliament; framework would mobilize significant private resources for public infrastructure investment.
    - Authorities stressed need for larger consultations to increase reform ownership and avoid misconceptions of “privatization.”

### Labor market reforms
- Tunisia faces structural unemployment and skills mismatches requiring changes in labor rules to balance worker protection and firm flexibility.
- Progress to date: scaling up training programs and SME support; tri-partite dialogue started in 2013 but has yet to agree on a comprehensive National Employment Strategy (NES) framed into a five-year horizon (MEFP ¶42).
- Staff recommendation: speed up completion of the NES and identify specific labor market reform measures, including reviewing hiring-firing policies, worker protection system, and public/private sector compensation.

### Data transparency and AML/CFT
- Staff urged authorities to bring the AML/CFT regime in line with the 2012 FATF standards, notably implementing targeted financial sanctions.
- Welcomed steps to strengthen the institutional framework for statistics, including imminent adoption of the Ethics Charter for Statistics.
- Fund TA will continue to support strengthening national accounts, fiscal, and balance of payments statistics.

### Protecting the most vulnerable: social safety nets and pensions
- Social safety nets:
  - PNAFN expansion: covers 235,000 families (twice the level of 2010 and close to 60 percent of the estimated poor).
  - Average transfer has tripled to about 80 dollars per month.
  - Evaluation identified fewer inclusion errors than previously estimated.
  - Unique social identification number available for 8.5 million Tunisians.
  - Staff called for quick adoption of a well-targeted social safety net (improving on the existing PNAFN) that could be fully functional by the end of the year.
- Pensions:
  - The public sector retirement and social security Fund (CNRPS) ran deficits and depleted cash balances by 2011; budget transfers—about 0.4 percent of GDP in 2015—have been alleviating short-term cash needs to pay pensions.
  - Discussions on comprehensive reform have started but not concluded; authorities announced a one-off voluntary increase in the retirement age to help short-term pressures.
  - Staff stressed a sustainable long-term solution needs changes in contribution parameters and pension benefits.

### Program implementation, conditionality, and financing
- Performance and criteria:
  - All quantitative performance criteria for end-December and end-March have been met (LOI, ¶3).
  - Fiscal: floor on the primary balance for end-December 2014 and end-March 2015 met by a wide margin (mostly because of capital budget under-execution); indicative ceiling on current expenditure met; indicative floor on social spending missed due to lower-than-programmed transfers to vulnerable households.
  - Reserves: floor on NIRs at end-December 2014 and end-March 2015 met by comfortable margins, mainly from successful issuance of international bonds.
  - Monetary: end-December 2014 and end-March 2015 PCs on NDA met by comfortable margins, mainly driven by lower credit to government.
- Structural benchmarks and conditionality:
  - Only three out of seventeen structural benchmarks expected by end-June 2015 completed.
  - Slow progress reflected need to build consensus, establishment of new government and parliament, and need for further technical analysis.
  - Actions to complete remaining benchmarks initiated (drafting/submission of laws, ongoing banking recapitalization).
  - New QPCs proposed for end-September to account for weaker activity; indicative ceiling on current primary expenditures modified into a QPC.
  - Prior actions to conclude review: (i) recapitalization of at least one public bank (BH) and completion of first phase of capital subscription process for a second bank (STB); and (ii) renewal of state guarantees justifying lower recapitalization needs.
- Rephasing and financing:
  - Purchases under the arrangement to be rephased; final purchase rephased and contingent on completing the seventh and final review.
  - Critical elements for completion: parliamentary adoption of the 2016 budget in line with program understanding (including new tax reform that promotes equity and efficiency and introduces permanent revenue measures that compensate for the wage increase), update of business plans of all three public banks, and their effective recapitalization.
  - Program is fully financed. Financing assurances provided by multilateral and bilateral partners for remaining program period.
  - Multilateral support: World Bank doubling and frontloading its disbursement (to $500 million); AfDB negotiating with the authorities to provide new budget support (about $200 million) this year.
  - Additional tapping of international markets with or without sovereign guarantees planned during the last quarter of 2015.
- Repayment capacity and risks:
  - Tunisia has the capacity to repay the Fund; strong records of payments to the Fund and standard indicators of Fund exposure will remain low (Table 10).
  - Indicators do not take into account higher projected amortization payments in 2017–19.
  - Program risks remain significant: political uncertainty, increasing social or security tensions could jeopardize objectives and repayment capacity.
  - Program implementation risks are reduced by government commitment to reform supported by a broad spectrum of political parties and renewed international support following recent attacks.
  - A prolonged period of low international oil prices would help increase external buffers.

### Staff appraisal: macroeconomic outlook, policy priorities, and risks
- Economic conditions:
  - Economic environment difficult given security risks and social tensions; economy resilient amid protracted political transition and difficult international environment.
  - Growth is weak, external imbalances persist, budget composition is worsening, banking vulnerabilities are high, and job creation is low.
- Reform urgency:
  - Successful end of political transition and favorable external developments offer an opportunity to accelerate reforms; inaction risks a low growth path that impedes job creation.
- Fiscal stance and composition:
  - Staff welcomes authorities’ commitment to maintain an appropriate fiscal stance; modest fiscal loosening in 2015 responds to weaker activity.
  - Fiscal consolidation needed going forward to reduce external imbalances, restore private sector confidence, and ensure debt sustainability.
  - Fiscal adjustment must be accompanied by better budget composition:
    - Contain wage bill through civil service reform.
    - Reduce energy subsidies sustainably by implementing a new automatic fuel price formula.
    - Resolve capacity absorption problems (including land rights) to accelerate capital investment, which has reached record lows.
- Tax policy and administration:
  - Tax reform needed for fiscal consolidation and equity; authorities plan to adopt as part of the 2016 budget a tax reform strategy including permanent base broadening measures.
  - Improve tax administration, including unifying tax functions within a single administration.
- Reserves and exchange rate policy:
  - Reserve buffers should be strengthened.
  - Foreign exchange interventions should be limited to smoothing large fluctuations.
  - Move toward a weekly auction system and deeper FX markets to promote greater exchange rate flexibility and improve banks’ liquidity.
- Monetary policy:
  - Monetary policy should remain prudent; recent move toward positive real interest rates welcomed.
  - Authorities ready to raise interest rates should inflationary pressures increase.
  - Monetary transmission would be enhanced by removing the cap on lending rates and establishing a lender of last resort mechanism.
- Banking sector and tourism measures:
  - Regret over delays in recapitalizing public banks, which would have reduced financial stability risks.
  - Newly introduced measures to help the tourism sector should be strictly time-bound, transparent, and complemented with corrective action plans; prudential treatment in banks should be closely monitored.
- Business environment and employment:
  - Better business environment urgently needed to bolster growth and job creation.
  - Adoption of long-standing legislation on the investment code and public-private partnerships critical for private sector development and a level-playing field.
  - A national employment strategy should be urgently designed and implemented to address labor market inefficiencies constraining youth and women unemployment.
- Risks:
  - Significant risks: spillovers from regional conflicts, security threats, lack of consensus among coalition government, and opposition by vested interests.
  - Mitigation: strong outreach campaign and greater involvement of all stakeholders in designing and implementing key reforms.

*Source: IMF staff.*

### 65.      On the basis of Tunisia’s performance under the SBA under its unusual and challenging

### On the basis of Tunisia’s performance under the SBA under its unusual and challenging operating environment

### IMF program decision and near-term conditionality
- Staff supports the completion of the sixth Review.
- Staff supports: (i) rephasing of access in line with the program extension; and (ii) the setting of a new performance criterion on current primary spending and new end-September 2015 QPCs.
- Staff proposes that the next Article IV consultation take place in accordance with the Decision on Article IV Consultation Cycles (Decision No. 14747(10/96), as amended).

### Recent economic developments (2007–15): growth, activity, labor market, inflation, fiscal
- Real GDP growth: series highlights include -1.9 (2011), 3.7 (2012), 2.3 (2013), 2.4 (2014), prelim. 2.3 and proj. 3.0 for 2015 (Table listings and Figure 1).
- Contribution to growth components shown through 2015 (private consumption, public consumption, investment, net exports); industrial production remained weak despite some recovery in energy production.
- Tourism receipts are declining significantly while exports continue to be weak.
- Unemployment: after a sharp increase in 2011, unemployment has been contained, but declining economic activity in 2015 could weaken job creation; unemployment rate series shown with overall and graduates (Figure 1).
- Inflation: CPI average series—3.5 (2011), 5.1 (2012), 5.8 (2013), 5.6 (2014), prelim. 4.9 and proj. 5.0 for 2015; CPI end of period series—3.9 (2011), 5.9 (2012), 5.7 (2013), 5.5 (2014), prelim. 4.8 and proj. 4.5 for 2015 (Table 1). After picking up in early 2015, inflation decreased substantially in July due to lower food prices.
- Fiscal stance and public debt: fiscal stance improved in 2014 but at the expense of budget composition and public debt is on the rise. Central government balance (excluding grants) series: -3.5 (2011), -5.7 (2012), -6.2 (2013), -4.8 (2014), -4.1 (2015 prog.), -6.2 (2016 prog.), -6.0 (2017 prog.), -4.3 (2018 prog.) (Table 1). Central government debt (foreign and domestic) series: 44.5, 44.5, 44.3, 49.4, 50.0, 55.2, 54.0, 56.3 (2011–2018 series, Table 1).
- Key fiscal flows (central government, 2014 prelim. and 2015 proj. highlights, Table 4a): total revenue and grants 21,265 (2014), proj. 21,762 (2015); total expenditure and net lending 26,595 (2014), proj. 25,534 (2015); central government deficit (excluding grants) -5,541 (2014), proj. -3,978 (2015).

### External position and financing (2007–15; projections to 2020)
- Current account deficit remains high and will only marginally improve in 2015 with declining tourism revenues and still weak FDI inflows. Current account (in percent of GDP) series: -7.5 (2011), -8.2 (2012), -8.3 (2013), -7.9 (2014), -8.8 (2015 proj.), -6.4 (2016 proj.), -8.5 (2017 proj.), -7.0 (2018 proj.) (Table 1 and Table 2).
- Balance of payments headline (millions of U.S. dollars, Table 2): Current account -3,430 (2011), -3,722 (2012), -3,879 (2013), -3,866 (2014), -4,302 (2015 prog.); quarterly 2015 Q1–Q4 shown as -736, -1,299, -895, -822 respectively, annual -3,132 (prel. 2015) and projections for 2016–2020 shown (e.g., -3,752, -3,133, -2,806, -2,332, -2,007, -1,882).
- Trade balance (millions of U.S. dollars): -4,799 (2011), -6,105 (2012), -5,931 (2013), -6,285 (2014), -6,670 (2015 prog.); quarterly 2015 Q1–Q4: -992, -1,573, -1,424, -1,040; annual 2015 prel. -5,832 and projections through 2020 shown.
- Exports (total and components, Table 2): total exports 15,516 (2011), 16,997 (2012), 17,050 (2013), 17,236 (2014), 16,733 (2015 prog.); energy exports and non-energy exports series provided (e.g., energy 2,592 (2011) to 2,204 (2015 prog.); non-energy 15,231 (2011) to 14,529 (2015 prog.)).
- Gross official reserves (US$ billions, e.o.p): 7.5 (2011), 8.7 (2012), 7.7 (2013), 7.8 (2014), 7.7 (prel. 2015), reserves projections: 10.1 (2016 prog.), 8.2 (2017 proj.), 9.0 (2018 proj.) (Table 1 and Table 2).
- Reserves in months of next year's imports: 3.4 (2011), 3.9 (2012), 3.4 (2013), 3.4 (2014), 4.0 (2015 prog.), and projections through 2020 up to 5.6 (Table 1 and Table 2).
- External debt and debt service: External debt (US$ billions) 22.1 (2011), 24.3 (2012), 25.4 (2013), 26.6 (2014), 27.4 (2015 prog.), 29.8 (2016 prog.), 28.5 (2017 prog.), 30.1 (2018 proj.) (Table 1). Debt service ratio (percent of exports of GNFS) series: 11.9 (2011), 12.0 (2012), 9.6 (2013), 9.2 (2014), 10.1 (2015 prog.), 7.1 (2016 prog.), 11.3 (2017 prog.), 9.3 (2018 proj.) (Table 1).
- External financing needs and sources (Table 3 and related tables): total financing requirements and sources shown for 2013–20 with annual totals (e.g., Total financing requirements 10,881 (2013), 11,613 (2014), 12,520 (2015 prog.); Total financing sources matched to requirements with direct investment and portfolio, disbursements, short-term debt, and other flows).
- Illustrative medium-term growth scenario (Table 9): Real GDP growth path in the scenario—-1.9 (2011), 3.7 (2012), 2.3 (2013), 2.3 (2014), 1.0 (2015), 3.0 (2016), 4.0 (2017), 4.6 (2018), 5.0 (2019), 4.7 (2020). Savings-investment gap in percent of GDP: -7.5 (2011), -8.2 (2012), -8.3 (2013), -8.8 (2014), -8.5 (2015), -7.0 (2016), -6.2 (2017), -5.0 (2018), -4.0 (2019), -3.5 (2020).

### Financial sector and monetary developments
- Credit and money growth: Credit to the economy (percent change) 13.4 (2011), 8.8 (2012), 6.8 (2013), 7.2 (2014), 9.4 (2015 prog.), 6.9 (2016 prog.), 6.5 (2017 proj.), 7.6 (2018 proj.) (Table 1). Broad money (M3) growth series 9.1 (2011), 8.4 (2012), 6.6 (2013), 8.7 (2014), 7.8 (2015 proj.), 10.5 (2016 proj.), 6.9 (2017 proj.), 7.6 (2018 proj.) (Table 1).
- Central bank policy and interest rates: Central Bank policy rate remained stable after the last increase to 4.75 percent in June 2015 (Figure 2). Reference series for deposit, lending, money market rates shown (e.g., reference rate and deposit/lending rates across Sep-12 to Sep-15).
- Banking sector soundness indicators (Table 7 highlights): Nonperforming Loans (NPLs) to total loans 15.5 (2008), 13.2 (2009), 13.0 (2010), 13.3 (2011), 14.9 (2012), 16.5 (2013), 15.7 (2014), 15.8 (prel. 2015). Capital to assets 8.1 (2008), 8.5 (2009), 8.4 (2010), 8.5 (2011), 7.8 (2012), 5.6 (2013), 6.2 (2014), 6.3 (prel. 2015). Regulatory capital to risk-weighted assets 11.7 (2008) down to 9.5 (prel. 2015).
- Monetary accounts (Table 5, selected levels in millions of dinars): Net foreign assets 9,078 (2010), 5,749 (2011), 7,054 (2012), 3,865 (2013), 2,173 (2014), 3,247 (2015 Q1), 1,951 (2015 Q2), 2,486 (2015 Q3), 2,429 (2015 Q4), 3,857 (2016 proj.). Broad money (M3) 43,267 (2010), 47,203 (2011), 51,168 (2012), 54,549 (2013), 58,802 (2014), 59,380 (2015 prelim.), 59,218 (2015 Q1), 61,845 (2015 Q2), 62,859 (2015 Q3), 67,660 (2016 proj.).
- Central Bank balance sheet (Table 6 highlights): Reserve money and net foreign assets series with detailed quarterly entries for 2014–2016; net foreign assets assets and liabilities levels are presented in millions of dinars.

### Program financing under the Stand-By Arrangement and IMF credit indicators
- Access and phasing under the SBA (Table 8): total approved purchases under the SBA 1,146.000 Millions of SDR (400.000 percent of quota) equivalent to 1,637.666 Millions of U.S. dollars (indicative). Rephasing approved Dec-12-2014 altered schedule and proposed rephasing shows Seventh Review November 15, 2015 observance of end-September 2015 performance criteria, completion of the seventh review with 143.250 Millions of SDR (50.000 percent of quota), indicative $201.029 million (Table 8).
- Indicators of Fund credit (Table 10): existing and prospective Fund credit disbursement and stock series in Millions of SDR and percent of quota/GDP/exports/gross reserves for 2012–20; stock series examples: Stock 0 (2012), 99 (2013), 788 (2014), 1,146 (2015), 1,121 (2016), and obligations and repurchases schedule also tabulated.

*Sources: Tunisian authorities; and IMF staff estimates and projections.*

### Annex I. Tunisia: External Sector Assessment

### Annex I. Tunisia: External Sector Assessment

### Key findings and policy implication
- The Tunisian dinar remains overvalued by about 5-15 percent.
- Reserves are expected to cover 4 months of imports, but remain below the IMF’s suggested adequacy range under the ARA metric.
- Tunisia’s international competitiveness is deteriorating relative to regional peers.
- Policy implication: enhance exchange rate flexibility and revitalize structural reforms to increase competitiveness.

### Exchange rate assessment
- Long-term movements:
  - Since 2005, the nominal and real effective exchange rates (weighed by trade partners) have depreciated by 27 and 10 percent, respectively.
  - From August 2014 the currency appreciated in real and effective terms by 3 and 6 percent, respectively, driven by the strengthening US dollar vis-à-vis the euro (the main currency in Tunisia’s basket).
- Overvaluation estimates (CGER and EBA methodologies):
  - Standard CGER methodologies suggest an average overvaluation of about 7 percent, with variance across approaches:
    - EREER approach (2015 fundamentals): REER overvalued by about 9 percent.
    - Macro balance (MB) approach (using projected 2020 data): overvaluation of about 7 percent.
    - External sustainability (ES) approach: indicates a slight adjustment of about 5 percent is necessary to stabilize NFA/GDP at its 2010 level.
  - The EBA methodology suggests a higher overvaluation of about 15 percent.
    - Macro balance decomposition under EBA: CA Projected 2015 = -8.5; CA Gap = -6.3; CA Norm = -2.3; Contribution of identified Policy Gaps = 1.8; Unexplained residual = -7.5; CA Fitted = -4.1; REER misalignment = 15.7 (Overvaluation +).
  - Note: CGER MB and ES approaches find a more moderate overvaluation relative to the EREER approach because MB/ES use 2020 data (implicitly assuming variables move toward medium-term equilibrium), while EREER uses 2015 data.

### Assessment of reserve adequacy
- Traditional coverage indicators:
  - Reserves exceed common traditional benchmarks: coverage of three months of imports, 100 percent of short-term debt, and 20 percent of money supply.
  - In 2015 reserves are expected to be above 4 months of imports for the first time since 2010, yet remain relatively low compared to most emerging economies.
- ARA composite metric:
  - The IMF composite ARA metric shows gross reserves in 2015 would cover about 75 percent of Tunisia’s “risk weighted liability stock”, while the suggested adequacy range is between 100-150 percent.
  - Scenario analysis (2015) suggests:
    - Reserves could cover around 115 percent of short-term debt at remaining maturity.
    - Reserves could cover more than four months of next year’s imports of goods and services.
  - Risks of significant capital flight remain limited due to existing capital controls.
- ARA metric computation (given Tunisia’s de facto crawl-like arrangement):
  - ARA Metric = (10% × Exports) + (10% × Broad Money) + (30% × Short-term Debt) + (20% × Other Liabilities).
- Traditional metrics and charted observations:
  - Tunisia’s reserves relative to 3-month imports are low compared with a cross-country sample (chart includes Egypt, Armenia, Pakistan, Poland, Morocco, Mexico, South Africa, Chile, Turkey, Romania, Angola, Thailand, Bulgaria, Indonesia, Bolivia, Brazil).
  - Time series indicators charted include Reserves, 3 months of imports, 100% short-term debt, 20% M3 from 2009–2020 (projections).

### Assessment of international competitiveness
- Cross-sectional position:
  - Tunisia’s overall competitiveness is comparable to similar emerging economies and relatively well positioned within the MENA region, but relatively low compared to other emerging and advanced market economies.
- Time trend and deterioration:
  - Tunisia’s rank in the Global Competitiveness Index (GCI) has been declining and recently dropped below comparator levels.
  - Areas requiring urgent reform: financial market development, technological readiness, and innovation.
- Trade-related competitiveness:
  - “Trading across borders” indicators (World Bank Doing Business) rank Tunisia slightly above the MENA average.
  - Tunisia fares relatively well compared to OECD countries on costs to export and import, though number of documents and days to export/import are lower in OECD countries.
  - Over time Tunisia’s performance has stagnated while other countries have improved more rapidly, narrowing the gap to frontier economies.
- Quantified impact of relative competitiveness losses (Behar and Calani, 2015, forthcoming):
  - A typical small open economy can lose up to about 17 percent of its exports if it does not reduce its number of export documents while all other countries reduce it by one document.
  - A country can lose about 9 percent of its exports if it does nothing in terms of cost to export while all other countries reduce it by $100.
  - A country can lose about 3 percent of its exports if it does nothing in terms of time to export while all other countries reduce it by one day.
- Cross-country component shares (selected areas for Tunisia):
  - Reported shares (table): Labor 11%; Corruption 42%; Bureaucracy 23%; Infrastructure 45%; Trade 9%; Education 46%; Legal 48%; Finance 38%; Regulations 40%.

### Policy recommendations and implications
- Exchange rate policy:
  - Enhance exchange rate flexibility to mitigate overvaluation pressures and restore external competitiveness.
- Structural reforms (need to be bolder and faster):
  - Simplify the ease of doing business.
  - Encourage innovation and technology adoption.
  - Upgrade logistics and customs procedures.
  - Prioritize reforms in financial market development, technological readiness, and innovation to bolster productivity and reverse competitiveness losses.
- Reserve and external financing management:
  - Continue to build reserves via multilateral and bilateral disbursements and prudent external borrowing to move toward the ARA suggested adequacy range of 100-150 percent of the risk-weighted liability stock.
  - Maintain capital controls as a mitigating factor for risks of capital flight while advancing structural adjustments that improve investor confidence.

*Prepared by Amr Hosny, SPR. (Annex I. Tunisia: External Sector Assessment)*

### 82.2 percent of GDP by 2018 before declining to 78.6 percent by the end of the outlook while

### _cr15285 - 82.2 percent of GDP by 2018 before declining to 78.6 percent by the end of the outlook while

### Public debt dynamics — baseline and drivers
- Baseline projection: nominal gross public debt rises to 82.2 percent of GDP by 2018 before declining to 78.6 percent by the end of the outlook period.
- Contribution to change in gross public sector debt (selected items, in percent of GDP, projections shown for 2015–2020 where available):
  - Change in gross public sector debt: 3.8 (cumulative noted in table).
  - Identified debt-creating flows: primary deficit, automatic debt dynamics, other identified debt-creating flows, and residuals are reported; cumulative identified debt-creating flows total 142.0 for revenue and 150.4 for expenditure over projection horizon (table entries: Primary (noninterest) revenue and grants 22.9 23.7 24.4 22.8 23.3 23.6 24.0 24.1 24.1 142.0; Primary (noninterest) expenditure 23.2 27.9 26.8 26.4 25.5 25.3 25.1 24.4 23.7 150.4).
  - Primary deficit path (in percent of GDP): 0.3 (2004-2012 actual aggregate), projections: 0.3? (table shows Primary deficit 0.3 4.2 2.3 3.7 2.2 1.7 1.1 0.2 -0.4 8.4 in identified flows row — preserve as shown).
- Automatic debt dynamics and interest-rate/growth differential contributions are reported explicitly:
  - Automatic debt dynamics (series in table): -0.7 0.2 2.0 -0.8 -1.5 -2.2 -2.5 -3.1 -3.2 -13.3
  - Interest rate/growth differential (series): -1.5 -1.5 -1.5 -0.8 -1.5 -2.2 -2.5 -3.1 -3.2 -13.3
  - Real interest rate component: 0.3 -0.5 -0.6 -0.3 0.0 -0.1 -0.1 -0.5 -0.8 -1.8
  - Real GDP growth component: -1.8 -0.9 -0.9 -0.5 -1.5 -2.1 -2.4 -2.6 -2.4 -11.5

### Contingent liabilities and stress scenario
- One-off contingent liability shock considered: a 10 percent of GDP shock.
  - This 10 percent of GDP shock reflects:
    - an additional 3 percent of GDP in bank recapitalization costs, and
    - the realization of about 7 percent of GDP of government’s contingent liabilities from public enterprises (these represent about 70 percent of government’s existing contingent liabilities).
- Under a contingent liability shock in the public-sector DSA:
  - Public debt would be 72.3 percent in 2018 before declining to 67.6 percent in 2020 (as reported for the contingent liability shock scenario in the summary sentence).
- Risk assessment notes:
  - The emergence of important contingent liabilities could increase financing needs significantly and above the high early warning threshold.

### Composition of public debt and vulnerabilities
- Tunisia’s relatively high reliance on foreign debt is highlighted as a weakness, making it more vulnerable to market perceptions and volatile private sector flows.
- On the upside, public debt is generally of long maturity.
- Key market and debt profile indicators (2014–projection highlights):
  - Public gross financing needs (in percent of GDP): series includes 6.3 9.9 8.2 9.2 8.2 8.1 8.1 5.9 5.9 (table headings).
  - Net public debt series (in percent of GDP): 42.9 41.9 48.0 52.3 55.2 57.0 57.4 55.6 53.4 (as shown in table).
  - Public debt (in percent of potential GDP) series: 46.3 44.4 50.2 53.5 56.2 57.1 57.5 55.5 53.3.
  - Sovereign spreads reported: EMBIG (bp) 267 (as reported in the tabular header), 5Y CDS (bp) 293 (as reported).
- Debt-service and financing needs vulnerability benchmarks (from Heat Map):
  - Bond spread benchmarks: 200 and 600 basis points.
  - External financing requirement benchmarks: 5 and 15 percent of GDP.
  - Change in share of short-term debt benchmarks: 0.5 and 1 percent.
  - Public debt held by non-residents benchmarks: 15 and 45 percent.
  - Share of foreign-currency denominated debt benchmarks: 20 and 60 percent.

### External debt — trends, baseline projections, and stress tests
- Historical and baseline projections (Table 1, external debt-to-GDP, in percent):
  - 2014: 56.2 percent
  - 2015: 64.4 percent (driven by January 2015 issuance of a $1 billion Eurobond and external official financing)
  - 2016: 67.5 percent
  - 2017: 68.1 percent
  - 2018: 68.5 percent (peak under baseline)
  - 2019: 66.2 percent
  - 2020: 63.8 percent
- Change in external debt (selected years, in percent of GDP): 2015: 8.1; 2016: 3.2; 2017: 0.6; 2018: 0.4; 2019: -2.2; 2020: -2.5.
- Identified external debt-creating flows (selected components, in percent of GDP):
  - Current account deficit, excluding interest payments (2015–2020 series shown): 7.2 5.8 5.0 4.0 3.2 2.8 (table: 2015 7.2, 2016 5.8, 2017 5.0, 2018 4.0, 2019 3.2, 2020 2.8).
  - Net non-debt creating capital inflows (negative): 2015: -4.3; 2016: -5.2; 2017: -6.1; 2018: -6.7; 2019: -6.8; 2020: -6.7.
  - Automatic debt dynamics contributions (2015–2020 series): 0.7 -0.6 -1.5 -2.1 -2.4 -2.2 (as tabulated).
- External debt ratios and resilience to shocks:
  - Under most adverse external shocks the external debt-to-GDP ratio remains below 74 percent of GDP throughout the projection period, except under a large real exchange rate depreciation shock.
  - Growth or current account permanent negative shocks raise the external debt ratio to 71–73 percent of GDP.
  - A sharp real depreciation (one-time 30 percent) relative to baseline would raise the external debt ratio to around 97 percent of GDP in 2016 before declining to about 91 percent by 2020.
- External debt-to-exports ratio (selected series, in percent):
  - 2014: 126.1
  - 2015: 156.4
  - 2016: 157.2
  - 2017: 154.9
  - 2018: 153.7
  - 2019: 152.8
  - 2020: 153.5
- Gross external financing need (in billions of US dollars; table shows series):
  - 2014: 12.5
  - 2015: 12.1
  - 2016: 10.3
  - 2017: 11.3
  - 2018: 10.9
  - 2019: 10.8
  - 2020: 10.7
  - In percent of GDP: 2014: 25.7; 2015: (table shows mixed entries; nominal series and percent entries preserved in table context).

### Stress-test scenarios summarized
- Bound tests and alternative scenarios (selected outcomes, external debt-to-GDP, percent):
  - Baseline 2015–2020 peak and path: baseline around 64.4 (2015) rising to 68.5 (2018) then declining to 63.8 (2020) as tabulated.
  - Scenario with key variables at historical averages: external debt rises to 77.0 (later years shown in scenario table).
  - B1 (nominal interest rate at historical average plus one standard deviation): e.g., 2018 scenario numbers indicate 67.7 68.5 69.1 67.0 64.7 (table excerpt).
  - B2 (real GDP growth at historical average minus one standard deviation): external debt reported 68.6 70.2 71.5 70.1 68.3 (table excerpt).
  - B3 (non-interest current account at historical average minus one standard deviation): external debt reported 69.2 71.4 73.4 72.6 71.4 (table excerpt).
  - B5 (one-time 30 percent real depreciation in 2006/2015 depending on table context): external debt reported 96.0 96.8 97.3 94.1 90.6 (table excerpt; peak around 97 percent).
- Combined shocks and individual macro-fiscal stress tests are presented in the DSA figures and tables with Gross Nominal Public Debt and Public Gross Financing Needs under baseline and shocks for 2015–2020.

### Key policy-relevant observations (as stated in the source)
- Tunisia’s high reliance on foreign debt increases vulnerability to market perceptions and volatile private sector flows.
- The emergence of important contingent liabilities could increase financing needs significantly and push debt above high early warning thresholds.
- On the upside, public debt is generally of long maturity; provided fiscal consolidation continues as envisaged, debt dynamics will remain favorable.

*Source: IMF staff (Tunisia Public Sector Debt Sustainability Analysis and Annex III: External Debt Sustainability Analysis, as reported in the provided content).*

### Annex IV. Tunisia’s Inclusiveness Issues

### Annex IV. Tunisia’s Inclusiveness Issues

### Overview
- Tunisia achieved strong GDP growth that helped reduce poverty and raise living standards:
  - "4.4 percent growth rate over the 1980-2010 period" helped halve the poverty rate from "19.7 percent in the 1990s" to "10 percent in 2010" (international poverty line of $2 a day).
  - Sizable middle class: "about 80 percent of the population".
  - Widespread access to education and health; very low multidimensional poverty index (multidimensional poverty index includes 10 indicators across education, health and living standards).

### Poverty, middle class, and inequality
- Improvements:
  - Poverty incidence fell from "19.7 percent in the 1990s" to "10 percent in 2010".
  - A sizable middle class emerged: "about 80 percent of the population".
  - Income inequality improved over the same period, though it "remains higher than the MENA average".
- Distributional point on VAT exemptions:
  - VAT tax expenditures benefit the rich: top quintile receives "about 40 percent" of benefits from tax exemption vs "less than 10 percent" for the bottom quintile.
  - The poorest have "less than 10 percent" of final consumption of exempted goods, while the "20 percent richest households consume 40–50 percent" of final consumption of these exempted goods.

### Labor market outcomes and exclusion
- Aggregate unemployment:
  - Unemployment "was in double digits during the past twenty years", averaging "more than 15 percent in 2015" (after increasing to "19 percent in the immediate aftermath of the revolution").
- Youth:
  - Unemployment rate for persons aged "15-24 averaged 35 percent in 2015", about double the overall average.
  - Young graduates: "67 percent in 2015" unemployment.
  - Structural mismatch noted between an increasingly educated labor force and demand for low-skilled labor; economy concentrated in low value-added activities facilitating informal economy growth.
- Women:
  - Female labor force participation: "28.5 percent in 2014".
  - Female unemployment: "22.2 percent in 2015" compared to "12.4 percent for men".
  - Contributing factors: high reservation wages, high costs of outsourcing domestic work, lack of good job opportunities, and social preferences.
- Regions:
  - Economic activity concentrated in coastal areas; unemployment in center-west and south regions is "three times the coastal one".
  - Poverty rate in interior regions is "three times higher than in the coast".
  - Illiteracy rate in interior regions is "more than double the 12.5 percent rate registered in urban areas".
  - Access to improved water source: "six out of every ten households in interior regions" vs "almost universal coverage for the Tunis area".
  - Financial access disparity: "the Tunis area has 6 times more bank branches per 100,000 adults than in the poorest and marginalized regions".
  - Causes of regional disparities: excessive tax and regulatory burden in interior regions; tax incentives concentrated in coastal offshore sector; lack of infrastructure; labor rigidity.

### Informal economy
- Size and measures:
  - Using a MIMIC model, the Tunisian informal economy is estimated at "about 30 percent as a share of GDP (IMF, 2011)".
  - Informality confirmed by widespread self-employment: "85 percent of firms do not have paid employees".
  - Lack of social protection: "35 percent of the employed people do not have one", with lack of protection most prevalent in agriculture and construction sectors.
  - Informal sector activities are higher in interior regions.
- MIMIC model inputs (as described):
  - Uses currency as a fraction of broad money and self-employment as a fraction of total employment; measurable drivers include indices capturing the tax burden, the regulatory burden in financial and product markets, labor rigidity, and institutional quality.

### Regional inclusiveness indicators (selected measures reported)
- Unemployment: national average "more than 15 percent in 2015"; "19 percent" post-revolution spike.
- Youth unemployment (15–24): "35 percent in 2015".
- Graduate unemployment: "67 percent in 2015".
- Female participation: "28.5 percent in 2014".
- Female unemployment: "22.2 percent in 2015"; male unemployment "12.4 percent".
- Informal economy estimate: "about 30 percent" of GDP.
- Firm structure: "85 percent of firms do not have paid employees".
- Social protection gap: "35 percent of the employed people do not have one".
- Interior region service gaps: "six out of every ten households" with improved water source vs almost universal in Tunis; illiteracy in interior more than double "12.5 percent" urban rate; Tunis has "6 times more bank branches per 100,000 adults" than poorest regions.

*Prepared by Giorgia Albertin and Adnen Lassoued (Resident Representative’s Office); IMF staff calculations and sources as cited in the original annex.*

### 1.      Tunisia has successfully completed its political transition toward democracy and is now

### _cr15285 - 1.      Tunisia has successfully completed its political transition toward democracy and is now

### Political transition and government priorities
- Tunisia completed its political transition with historic elections at the end of 2014 and a government appointed in February 2015 with the support of a vast majority in parliament.
- Government priorities set rapidly: improved security and anti-terrorism efforts, and a list of 100 economic priorities under a new economic development model to be finalized within a medium-term strategic vision ahead of the international investment conference scheduled for early 2016.
- The vision aims to reduce vulnerabilities and promote inclusive growth and is stated to be fully consistent with the economic program and reforms supported by the IMF.

### IMF program status, requests, and financing
- The IMF Executive Board approved an extension of the Stand-By Arrangement (SBA) providing flexibility to complete the reform program.
- The government requests completion of the sixth review under the Stand-By Arrangement and the disbursement of SDR 214.875 million.
- The government requests a rephasing of disbursements, with the final tranche of SDR 143.250 million to be made available on November 15, 2015, subject to completion of the seventh review based on end-September 2015 performance criteria.
- The government agrees to proposed new performance criteria for NIR, NDA, primary balance and on primary current expenditure at end-September 2015, and to a new timetable of prior actions and structural benchmarks described in the attached MEFP and TMU.

### Program performance and structural reform progress
- Overall assessment: Performance under the IMF-supported program is described as broadly satisfactory under difficult national, regional, and international conditions.
- Quantitative performance:
  - Performance criteria and indicative targets for Net International Reserves (NIR), Net Domestic Assets (NDA), and the central government primary balance (cash basis) at end-December 2014 and end-March 2015 have been met.
  - Continuous zero ceiling on accumulation of external arrears and continuous indicative target on non-accumulation of domestic arrears were adhered to.
  - The ceiling on current expenditure at end-December 2014 and end-March 2015 was met.
  - The floor on social spending was not met, primarily because of administrative delays in executing transfers for vulnerable families.
- Structural benchmarks:
  - Three of the seventeen structural benchmarks to be implemented by end-June 2015 were met: adoption of the 2015 budget; reduction of risks related to bank refinancing operations; appointment of new board members of the state-owned banks.
  - Banking restructuring plans adopted to recapitalize one state-owned bank by end-September 2015 and a second one in October 2015; aim to ensure all public banks meet prudential regulatory norms by no later than end-2015.
  - Intent to complete reforms in taxation and public enterprises, the investment code, the banking law, the lender-of-last-resort mechanism, banking supervision, and weekly auctions by end-2015 in the context of the seventh and last review of the program.

### Recent developments and macroeconomic outlook
- Growth and activity:
  - Growth: 1.2 percent for the first semester of the year (year on year).
  - Tourism flows: 50 percent lower than in 2014.
  - Projected annual growth for 2015: about 1 percent, provided social tensions decline.
  - Short-term risks: significant, especially if security and social tensions increase or if outlook for Tunisia’s main trading partners is revised downward.
- Inflation:
  - Core inflation rose earlier in the year; headline inflation was 5.7 percent year-on-year in the early months of the year and settled at 4.2 percent in August 2015 due mainly to decelerating food prices.
  - End-of-year inflation projection: 4.4 percent.
  - Factors supporting contained inflation: favorable base effects, prudent monetary policy, planned freezing of administered prices for the year, and a drop in demand.
- Current account and reserves:
  - Current account deficit: 8.8 percent of GDP in 2014 (program target was 7.9 percent).
  - Expected current account deficit for 2015: 8.5 percent of GDP.
  - Contributing factors: decline in world oil prices and weak growth lower imports significantly but tourism revenue reduction and declines in phosphate and oil production limit improvement.
  - Gross reserves expected to be more than four months of imports by end-2015.
- External financing and bond issuance:
  - January 2015 international bond issuance: $1 billion over 10 years (no third country guarantee).
  - External financing identified for remainder of year: mainly multilateral budget loans totaling $1.5 billion, of which $216 million from the European Union.
  - Additional bilateral support noted: planned debt conversion (Italy, France), budget support from Algeria ($150 million), and project financing.
  - Plans mentioned for an additional bond issuance through sukuks or with the U.S. guarantee.

### Fiscal policy, budget revisions, and medium-term outlook
- 2014 fiscal performance:
  - Public investment spending fell to 4.2 percent of GDP in 2014.
  - Structural deficit (excluding cyclical effects and bank recapitalization costs) stood at 3.3 percent of GDP in 2014 (program target was 4.1 percent of GDP).
- 2015 supplementary budget law (approved August 2015):
  - Aims to support growth through stimulus measures while preserving the fiscal balance as initially planned.
  - Takes into account: expected decline in economic activity; depreciation of the exchange rate; spillovers from world oil price drop (savings of about 1.6 percent of GDP due to reduction in energy subsidies); revenue loss due to oil production fall (0.7 percent of GDP); reduction in gas royalty from the Italy-Algeria pipeline (0.2 percent GDP).
  - Planned increase of the structural fiscal deficit by 0.2 percent of GDP, corresponding to a 3.5 percent of GDP structural fiscal deficit in 2015 (equivalent to an overall fiscal deficit of 6 percent of GDP).
- Specific fiscal measures and impacts (2015):
  - Emergency measures net cost: 0.7 percent of GDP, including:
    - Additional security spending: 0.2 percent of GDP (in addition to an increase of 0.3 percent of GDP already planned).
    - Support for tourism sector: 0.2 percent of GDP (including payment of social contributions to CNSS and unemployment “benefits”).
    - Stimulus program for SMEs: 0.3 percent of GDP.
  - Revision of the wage bill: net cost of 0.8 percent of GDP.
    - General increase of 5 percent granted for civil servants’ purchasing power; projected wage bill increase reduced to 0.8 percent of GDP (as opposed to 1 percent) by postponing recruitments and implementation of specific wage increases.
  - Reduction of non-essential non-wage expenditures: savings of 0.1 percent of GDP via a 20 percent cut of available but not yet authorized credits in July 2015 to all ministry departments (except security-related).
  - Capital expenditures:
    - Revised budget shows a savings on capital expenditures of 0.5 percent of GDP compared to the budget law, reflecting an update of execution rate to 30 percent at end-June.
    - Targeted investment expenditures: 4.5 percent of GDP in 2015 (compared to 4.2 percent of GDP in 2014).
    - Measures to speed execution include redirecting non-initiated capital expenditures to priority projects, strengthening coordination between governorates and central government, implementing application decrees for new public procurement procedures, recruiting land experts and revising laws, and prioritizing projects aligned with the medium-term vision.
- Medium-term debt and fiscal consolidation:
  - Public debt projection: contain public debt at 53.4 percent of GDP by 2020 after peaking at 57.4 percent of GDP in 2018.
  - Fiscal policy aim: achieve a primary balance in the medium term, preserve fiscal sustainability, reduce external imbalances, and release fiscal space for increased social spending and public investment.
- Commitment to corrective measures:
  - Additional measures will be taken to correct any slippage from the program’s fiscal objective, including reducing primary current spending (to be capped by a new performance criterion in the TMU).
  - Investment and social spending (excluding subsidies) will be preserved.

### Banking sector and monetary policy
- Banking sector vulnerabilities and recapitalization:
  - Adopted banking restructuring plans to recapitalize state-owned banks (recapitalization timing: one bank by end-September 2015; a second in October 2015).
  - Efforts to ensure all public banks meet prudential regulatory norms by end-2015.
  - Reforms planned: banking law, lender-of-last-resort mechanism, banking supervision, weekly auctions, and reduction of risks related to bank refinancing operations.
- Monetary aggregates and liquidity:
  - Net domestic assets criterion met at end-March 2015 and exceeded program objective due to a significant increase in the net position of the government.
  - Central Bank of Tunisia (CBT) interventions and Treasury issuance increased overall refinancing:
    - Refinancing rose to about 5.5 billion dinars at end-June 2015 (as opposed to 3.4 billion in February 2015).
  - Money supply change was lower than expected because of a decline in deposits during the first semester (cash withdrawals from firms in phosphate and petroleum sectors).
  - Credit to the private sector: 7.3 percent year-on-year at end-June 2015 (as opposed to 8.7 percent in March 2015).
- Monetary policy stance and objectives:
  - Policy objective: control inflation and maintain a positive real interest rate to anchor inflation expectations.
  - Interbank rate remained close to the policy rate after CBT interventions.
  - Policy rate was raised to 4.75 percent in June 2014 and was maintained at that level by the CBT Board of Directors given lackluster growth and limited increase of credit.
  - Authorities stand ready to increase the policy rate to prevent a resurgence of inflationary pressures in case of steady core inflation increases due to wage rises or dinar depreciation.
  - A better communication strategy is planned to provide an anchor for inflationary expectations.

### Social protection and inclusiveness
- Protecting vulnerable groups:
  - Strengthening social protection systems and systematically evaluating social impacts of planned reforms are priorities.
  - The government acknowledges administrative delays led to non-compliance with the floor on social spending and intends to reduce these delays during the remainder of the year.
- Civil service reform:
  - Wage agreements granted to prevent strikes; reactivation and reform of civil service compensation will be part of a broader general reform of the civil service.

*Source: Attachment I: Memorandum on Economic and Financial Policies and Letter of Intent.*

### 15.      The reform of the monetary policy framework continues. We increased the minimum

### _cr15285 - 15.      The reform of the monetary policy framework continues. We increased the minimum

### Monetary policy framework reforms
- Increased the minimum proportion of government securities used as collateral for CBT refinancing from 20 percent to 40 percent (structural benchmark at end-December 2014) to reduce CBT risk in refinancing operations.
- Intend to enhance the haircut framework on debt eligible for CBT refinancing (introduced in July 2014) by using rating instruments, with IMF technical assistance.
- Since May 2015, committed to a second twinning project (with the Bank of France as the main partner) to modernize the operational framework for monetary policy, with priorities to:
  - Improve the quality of liquidity forecasts.
  - Deepen the interbank market, including introduction of a more mature repo and auction system that would give rise to a yield curve in the short run.
  - Revamp the regulatory framework governing the market for private negotiable securities and revise collateral conditions.

- Plan to strengthen monetary policy transmission and access to financing by changing the system of excessive bank lending rates indexed to the TEG.
  - The increase of the money market rate (TMM) over the previous year pushed up the TEG, easing TEG-related credit constraints in the short run.
  - A CBT inspection mission launched in July 2015 to prepare a review of the regulations, which could:
    - Eventually result in the removal of the cap on the lending rate to enterprises.
    - Result in a gradual increase of consumer cap lending rates.
  - The review will take into account the World Bank’s recommendations and aims to improve bank competition, monetary policy transmission channels, and access to credit for small and medium enterprises.

- Finalization of the Central Bank draft law:
  - Draft law on amending statutes of the Central Bank submitted to the Board of Directors in June 2015 (prepared with IMF technical assistance).
  - Objectives: provide greater autonomy (institutional, functional, personnel, financial), better define mandate by adding goal of contributing to financial stability to primary objective of ensuring price stability, and improve governance, transparency, and accountability.
  - Draft to be approved by the government and presented to parliament in October 2015 for adoption.

### Foreign exchange policy
- Exchange rate flexibility policy aims to reduce external imbalances, build foreign exchange reserves, and reduce overvaluation of the dinar.
  - Continued to limit interventions to smoothing excessive fluctuations.
  - Interventions doubled in March-April 2015 compared with a monthly average of $200 million since last October, to alleviate market pressure after the Bardo attack and closure of foreign-exchange positions by some foreign banks.
  - These interventions and the low exchange rate against the euro-dollar led to appreciation of the real exchange rate, which remains overvalued by 5-15 percent.
  - Commitment to restrict monthly foreign-exchange sales to no more than $200 million net and less than 20 percent of total market transactions, and to strictly limit interventions to smoothing excessive fluctuations.
  - Intend to intervene by purchasing foreign exchange whenever the opportunity arises.

- Reforms to establish a more flexible FX policy and deeper FX market (CBT Board measures adopted May 2015):
  - Introduce foreign exchange auctions to increase market role in setting dinar value.
  - Remove requirement for banks to back interbank FX transactions with commercial and financial operations from firms.
  - Relax conditions governing exchange rate and interest rate hedging instruments (forward contracts, swaps, foreign exchange options).
  - These reforms, introduced in summer 2015, aim to facilitate effective implementation of weekly foreign exchange auctions in October 2015 (structural benchmark).

- Trade policy stance:
  - Development strategy remains open and based on free foreign trade.
  - In accordance with WTO rules, import restrictions and surtaxes only as last resort, after exhausting market solutions that preserve proper incentives, and only with very clear and preannounced withdrawal criteria.

### Financial sector policies — laying foundations for inclusive growth
- Banking system fragility (as of end-March 2015):
  - Overall solvency ratio: 9.5 percent, below regulatory 10 percent.
  - Private banks solvency ratio: 12.7 percent (one private bank, the BFT, falls below regulatory threshold).
  - State-owned banks solvency ratio: 3.5 percent.
  - Nonperforming loans (NPLs): deteriorated slightly from 15.7 percent in December 2014 to 15.8 percent of total loans at end-March 2015 (about 21 percent after including loans transferred to asset recovery agencies affiliated with banks).
  - Average provisioning rate for NPLs improved from 45.7 percent to 56.6 percent between December 2012 and March 2015.
  - Three banks (including one state-owned bank) still fail to comply with new liquidity standards.
  - Reduction by half in provisioning efforts compared with FY 2013 and an increase of commission fees contributed to banks generating profits.

- Reform priorities (three areas):
  - Recapitalization and operational restructuring of state-owned banks.
  - Overhaul of legislative framework to introduce bank resolution framework and lender-of-last-resort mechanism.
  - Strengthening banking supervision.
  - Legislative debate for some reforms started in August 2015.

- Recapitalization and restructuring actions (February–June 2015 developments and timetable):
  - General shareholders’ meetings of two state-owned banks (STB and BH) adopted recapitalization and restructuring plans consistent with international good practices, including one-time recapitalization to meet prudential rules as of closing accounts of March 31, 2015, fully taking into account independent audits of 2013 and 2014.
  - Capital subscription process initiated after August 2015 parliamentary approval of law authorizing use of allocated public funds for recapitalization.
  - Recapitalization of three state-owned banks (STB, BH, BNA) could amount up to 1 billion dinars (1 percent of GDP).
  - Dilution of existing private shareholders who do not subscribe: dilution of 84 percent taking into account issuance premium amounts and preferential subscription rights.
  - State committed to provide amounts to complete recapitalization if private shareholders do not subscribe.
  - Projected timetable:
    - Effective recapitalization of BH and first phase of capital subscription of STB to be completed in September 2015 (prior actions).
    - Effective recapitalization of STB and BNA to be completed in October 2015.
  - Complementary measures during recapitalization:
    - Government will renew, in 2015, and issue guarantees on BH’s and STB’s loans to public borrowers which needed provisioning according to audit conclusions (prior action). Guarantees provided up to amount enabling banks to meet prudential standards and in line with loan outstanding amount. Guarantees to be provided to BNA once restructuring plan finalized. Government committed to renewing guarantees throughout restructuring period.
    - Banks plan to build additional capital buffer by selling non-strategic assets; sale initiated by end of the year.
    - Boards to update and adopt business plans by November 2015 to account for weaker economic environment.
    - 2015 revised budget law granted greater authority for boards of public banks to forgive tourism-related debt.
  - Governance and operational restructuring:
    - Revamping governance initiated with appointment of new board members representing the government (structural benchmark at June 2015) and separation of Chair of the Board from Managing Director.
    - From June 2015, intend to define roles of Board, affiliated committees, and executive management, and appoint new heads for risk, finance, compliance, auditing.
    - Tenders in last quarter of 2015 to select an investment bank to lead acquisition of a technical/strategic partner to invest in banks’ capital.
  - Monitoring and performance contracts:
    - State-owned banks under restructuring to be subject to enhanced supervision by the DGSB to monitor implementation, account conditions, and compliance with prudential requirements.
    - Signing performance contracts (structural benchmark at end-November 2015) targeting convergence of performance indicators for state-owned banks toward private sector by 2016, and on a consolidated basis for certain indicators (e.g., cost-to-income ratio).

- Addressing nonperforming loans and insolvency framework:
  - Priority to continue and accelerate review of bankruptcy law (Law 95-34) to make it more balanced for creditors.
    - Draft law submitted to National Constituent Assembly in October 2014; now a priority of new parliament and expected to be adopted by October 2015.
  - Alternatives being explored with regard to Asset Management Company (AMC) established under Supplementary Budget law of 2014.
    - Effective establishment and operational startup of AMC to be completed when law on AMC adopted by parliament (structural benchmark at November 2015), aligned with international practices on governance, superpowers, loan transfer price setting, and financing plans.

- Temporary prudential measures to support tourism sector after Sousse attack:
  - Support for hotel units with no overdue loan repayments as of December 31, 2014, who risk financial difficulties for 2015–2016, including:
    - Guarantee from SOTUGAR for any exceptional loan from a domestic bank financing hotels’ operations for 2015 and 2016.
    - Postponing for two years the payments on outstanding loans due by hotel units in 2015 and 2016.
  - Measures are not compulsory; banks may decide whether to request guarantee or postpone repayments.
  - Banks that provide exceptional loans eligible for Central Bank refinancing and could freeze classification of those loans through 2016 to avoid two years of provisioning costs.
  - To enhance transparency and monitoring, banks will specify in published documents the share of loans subject to freeze in classification and prudential ratios in absence of such measures.
  - Plan to ensure prudential rules are enforced at end-2016 once these measures expire.

- Prudential compliance and exceptions:
  - After recapitalization of BH (September 2015), and STB and BNA (both in October 2015), and regularization of one private bank, all banks expected to be compliant with solvency ratio.
  - Exception: BFT is in litigation.
  - Any bank, apart from BFT, failing to comply with prudential rules shall be required to regularize and be subject to appropriate sanctions.

- Bank resolution framework and deposit guarantee:
  - Draft banking law including provisions for bank resolution and deposit guarantee fund submitted in May 2015 for broad consultation with Ministry of Justice, banking industry, and accountants association.
  - Draft to be discussed within the Council of Ministers with a view to approval by parliament in October 2015 (structural benchmark).
  - Law to align with international practices regarding institutional framework, clarity of criteria for starting resolution, and powers of the Resolution Committee, including possibility of bail-in of subordinated debts and unsecured ones granted to legal entities.

- Lender-of-last-resort mechanism:
  - Finalization tied to adoption of Central Bank law; broad guidelines reiterated in draft law to be submitted to parliament in October 2015.
  - Guidelines consistent with international good practices, regarding scope of institutions eligible and eligibility requirements.
  - Operational procedures to be clarified and documented for implementation by November 2015 (structural benchmark).

- Strengthening banking supervision:
  - Three-year plan adopted in June 2014 (with IMF technical assistance) to promote risk-based supervision on individual and consolidated basis; updated June 2015 by CBT through 2020.
  - Priorities:
    - Increase human resources at DGSB, recruiting 20 new supervisors by November 2015 (structural benchmark at end-November 2014).
    - Implementation of new reporting system for accounting, financial, and institutional data (structural benchmark at end-December 2014); design completed early 2015 but implementation postponed until end-November 2015 with publication of circular setting new reporting procedures.
    - Effective use of system for rating risk profile of institutions and related indicators dashboard.
    - Publication of a circular on liquidity risk management to complement recent introduction of new liquidity ratio.

- Anti-money laundering and countering financing of terrorism (AML/CFT):
  - Continued efforts to improve mechanisms.
  - Reference guide on risk management (circulated beginning of 2015) includes additional AML/CFT information.
  - Specific methodological guide prepared for on-site inspections.
  - Several institutions’ frameworks assessed in 2014; cross-cutting survey scheduled in 2015.
  - Banking draft law includes provisions to strengthen CBT authority by establishing internal control and governance norms and giving normative and sanctions power for noncompliance.

### Fiscal reform
- Medium-term fiscal consolidation strategy accompanied by fiscal reforms to support inclusive growth, targeting:
  - Civil service reform.
  - Tax policy and tax administration modernization.
  - Improvements to governance of public enterprises, public expenditure management, and public investment effectiveness.

- Civil service reform objectives:
  - Government to establish a strategy for reforming the civil service to be discussed and agreed in the context of the National Council on Social Dialogue.
  - Reform based on organizational audits, study on redeployment of staff among ministries and to regions, review of wage structure and “other compensations”, and career mobility.
  - Aim to reduce the wage bill in the long term to about 11 percent of GDP (less than 35 percent of total expenditures) to create fiscal space for priority spending and maintain debt sustainability.

*Source: _cr15285 - 15.      The reform of the monetary policy framework continues. We increased the minimum*

### 33.      An ambitious tax policy reform is being finalized. This reform—which was designed

### _cr15285 - 33.      An ambitious tax policy reform is being finalized. This reform—which was designed

### Tax policy reform: scope and timetable
- Reform objectives: simplify existing system while improving revenue mobilization, equity, and transparency.
- Key measures:
  - Reduction in the number of customs tariffs (from 7 to 3).
  - Harmonization of VAT rates (from 3 to 2).
  - Reduction in exemptions.
  - Lower and more progressive income tax rate following modifications in rebates and deductions.
- Approval and publication:
  - Strategy to be approved by the Council of Ministers in October 2015 (structural benchmark).
  - Will be published so that economic stakeholders can be informed of the government’s strategy; will be effective in 2016.
- Onshore/offshore regimes:
  - Streamlining of onshore and offshore regimes, including gradual convergence toward a single corporate tax rate with a neutral impact on revenue.
  - Announcement with a clear timetable by end-October (structural benchmark).

### Tax administration modernization
- Modernization plan:
  - Adopted in August 2014 and updated in May 2015.
  - Seeks to implement a unified tax administration and strengthen control and assessment mechanisms.
- First phase of implementation:
  - Creation of a collection unit within the Large Taxpayer Unit (substituting for initial project to create a new category “tax collectors”).
  - Structural benchmark at end-September 2014 was not met.
- Additional measures:
  - Regularly updating taxpayer rolls.
  - Improving tax supervision by developing surveys and reports.
  - Systematically mining data collected as part of a risk analysis system.

### Energy subsidy reform and fuel pricing
- Opportunity from drop in international crude oil prices to hasten energy subsidy reform and improve purchasing power.
- 2016 budget law measure:
  - Reduction of domestic gasoline and diesel retail prices to the international level, effective from January 1, 2016.
- Accompanying mechanism:
  - Implementation of a symmetric automatic fuel price formula with a smoothing mechanism for large international price fluctuations.
  - This mechanism would replace the asymmetric formula introduced in January 2014.

### Monitoring and reform of public enterprises
- Institutional framework:
  - Strategy for better monitoring of public enterprises, including bringing all responsible entities under a new agency, to be completed in October 2015 (structural benchmark).
  - Strategy will include recommendations from the recent evaluation of internal controls in public enterprises.
- Performance contracts:
  - Performance contracts on management of the five largest public enterprises (STEG, STIR, Cereals Office, Tunisair, and the National Tobacco Authority) are being prepared and will be followed by performance contracts with financial indicators (structural benchmark at end-October 2015).
- Audits and restructuring:
  - Based on financial performance, a clear timetable of audits of loss-making public enterprises will be drawn up and, if necessary, followed by restructuring and recovery plans.

### Fiscal risks and guarantees
- Continuous assessment and monitoring of fiscal risks, including guarantees and supporting measures for tourism sector.
- Specific assessments:
  - Impact of discounts in Tunis Air flights and guarantees granted by SOTUGAR for exceptional loans to viable tourism establishments will be assessed for budget risks.
- Guarantees ceiling:
  - Ceiling for state guarantees—including those given to banks—will be limited to TD3 billion in 2015.
- Public enterprise fiscal risk evaluation:
  - Comprehensive evaluation ongoing with IMF technical assistance, to result in a clear action plan for reducing risk from public enterprises.

### Public expenditure management reforms
- Draft organic budget law:
  - Prepared with technical assistance from the European Union and France.
  - To be submitted to parliament in November 2015.
  - Proposes progress in: budget design, budget reporting (new functional classification), expenditure control, execution, and supervision.
- Performance-based budgeting:
  - 18 ministries (85 percent of the budget) have prepared their budgets using the new program classification and a multiyear framework.
- Coordination:
  - Better coordination between the Debt General Directorate and the Treasury to improve government cash flow management.

### Structural reforms and private sector development
- New comprehensive economic vision:
  - Five-year economic vision of social and economic development (2016-2020) to be presented at an international conference in early 2016.
- Recent and planned legislative reforms:
  - Law on Competition adopted in September 2015.
  - Bankruptcy Law (Law 95-34 on recovery of enterprises in economic distress): draft validated by parliamentary committee; anticipated adoption in October 2015 after plenary discussions.
  - Law on public-private partnerships: draft submitted to parliament, expected to be adopted by December 2015.
- Investment code overhaul:
  - Draft Investment Code to be presented to the Council of Ministers in September 2015, submitted to parliament in October 2015, and adopted by November 2015 (structural benchmark).
  - Objectives: simpler and more transparent regulatory framework, increase investor protection and market access, streamline tax incentives (reference to tax code).
- Administrative simplification:
  - Streamlined procedures already in transport, customs, and export sectors.
  - Commitment to further simplification based on results of the regulatory “guillotine.”

### Labor market and social programs
- Five-year vision for the labor market (broad-based dialogue since 2013 within social contract) targeting:
  - (i) improvement in employability of job seekers;
  - (ii) development of an entrepreneurial culture;
  - (iii) stimulation of labor demand;
  - (iv) public service intermediation;
  - (v) reform of vocational training to serve business.
- National employment strategy to be included in the vision.
- Existing programs:
  - Programs for youth and underprivileged regions (including vocational training).
  - Support to SMEs and microprojects (including microfinance).
  - Creation of social enterprises for young graduates in underprivileged areas.

### Statistics and data improvements
- Comprehensive diagnosis of statistical system finalized by Eurostat.
- Strengthening of national account statistics (annual and quarterly) as well as monetary and balance of payments statistics with IMF technical assistance.
- “National Statistical Charter” prepared by the National Council of Statistics promoting good statistical practices, being reviewed and to be adopted by the government by the end of 2015.
- Commitment to reduce lag time for publishing statistics (employment, industrial production, annual national accounts).
- April 2015 publication of preliminary results of the 2014 population and housing census.
- Commitment to meet deadline for executing and publishing the five-year household survey.

### Protection of the most vulnerable groups
- Evaluation completed of assistance program to vulnerable households (expanded to 235,000 families) and health benefit cards (550,000), conducted on a representative sample of 8,000 households.
  - Report to be published in October 2015 during a national conference to develop strategic recommendations for better targeted and governed social safety net.
  - Evaluation revealed inclusion and exclusion errors under the current system.
- Unique social identifier:
  - Expected to be in place for vulnerable households during the third quarter of this year.
  - Will contribute to a better targeted and less fragmented social protection system, including establishment of a new register of vulnerable households.
- Link to energy subsidy reform:
  - Reform of energy subsidies should be accompanied by a better targeting mechanism and a decision on the targeting method to identify vulnerable households.

### Pension system challenges and reform direction
- CNRPS (National Retirement and Social Security Fund):
  - No available cash reserves and has posted an annual deficit of 0.4 percent of GDP in 2015.
- Reform approach:
  - Comprehensive reform to be designed in the context of implementing the social contract and the soon to be established National Council on Social Dialogue.
  - Initial proposal: retirement age to be raised on a voluntary basis.
  - Comprehensive reform will include revision of parameters for calculating pensions (for example, the replacement rate), the contribution rate, and the benefits.

_International Monetary Fund staff report (Tunisia), June–September 2015._

### 2. The quantitative criteria and targets are defined in Table 1 of the Memorandum of Economic

### 2. The quantitative criteria and targets are defined in Table 1 of the Memorandum of Economic

### Exchange rates and valuation rules
- For program purposes, all assets, liabilities, and flows denominated in foreign currencies will be valued at the “program exchange rate,” except items affecting the government’s budgetary accounts, which will be measured at current exchange rates.
- The program exchange rate corresponds to the accounting exchange rate of the CBT prevailing on December 31, 2012.
- For the SDR, the program exchange rate is 1 SDR = 2.38852 Tunisian dinars.
- Monetary gold assets will be valued at the price of 0.6498 dinar per gram of gold as established in the decree No. 86-785 of August 18, 1986.
- The stock of gold is 6.73 tons (6739902 grams) on December 31, 2012.
- 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

### Data reporting
- For data reporting purposes, the Ministry of Economy and Finance, the National Institute of Statistics (INS), and the Central Bank of Tunisia (CBT) will follow the rules and the format considered appropriate for data reporting as covered by this technical memorandum of understanding, unless otherwise agreed with IMF staff.

### Performance criteria and indicative targets (overview)
- Performance criteria:
  - A performance criterion (floor) on the net international reserves of the Central Bank of Tunisia.
  - A performance criterion on the net domestic assets (ceiling) of the Central Bank of Tunisia.
  - A performance criterion (floor) on the primary balance of the central government, excluding grants.
  - A performance criterion (ceiling) on total primary current expenditure of the central government.
  - 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 (floor) on capital expenditures in priority social sectors and social programs.

### Measurement of criteria
- Net international reserves and net domestic assets: measured on a stock and quarterly basis.
- Central government deficit (primary balance): measured on a quarterly basis and cumulatively from the end of the previous year.
- Adjustment factors apply to some criteria.
- Accumulation of external arrears: measured on a continuous basis.

### 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.
- The authorities will inform Fund staff of any new entity and any new program or special budgetary or extra-budgetary fund created during the period of the program to carry out operations of a budgetary nature; such funds or new programs 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 (as defined in the fifth edition of the IMF Balance of Payments Manual).
- CBT liabilities in foreign currency to nonresidents include: commitments to sell foreign currencies associated with financial derivative transactions, any portion of CBT’s assets used as collateral, IMF and Arab Monetary Fund (AMF) credits outstanding, and deposits at the CBT of international organizations, foreign governments, and foreign bank and nonbank institutions.
  - Government’s foreign currency deposits at the CBT are not included in the liabilities.
  - Any SDR allocation received after May 15, 2013 is not included.
- Treatment of CBT-issued debt instruments:
  - 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.
  - All debt instruments issued in foreign currency by the CBT on behalf of the government after May 15, 2013 will be treated as CBT liabilities, unless the prospectus and a protocol with the Ministry of Finance clearly state (i) CBT acting as agent; (ii) debt is a liability of the central government; and (iii) CBT is authorized to pay all expenses and interest/principal via direct deduction from the Treasury's current account.
- Accounting and operational adjustments for resident foreign currency deposits:
  - Deposits of residents in foreign currency (excluding government deposits) at the CBT are a form of external liability of the CBT; for operational and accounting purposes and legal considerations, the CBT includes residents’ foreign currency deposits in the monetary base.
  - Agreement: (i) retain the accounting definition of external liabilities used in the CBT balance at December 31, 2012; (ii) adopt the principle of adjusting NIR (in the opposite direction of net domestic assets of the CBT) on the basis of the variation in the residents’ deposits in foreign currency from end-December of the previous year.
  - Residents’ deposits in foreign currency at the CBT include intervention/monetary market in foreign currency, foreign currency of aggregate intermediaries, non-negotiable placement of foreign currencies, and all other items operations in foreign currency (including deposits and derivatives) created or included in reserve money and resulting in a liability of the Central Bank to residents.
  - At end-March 2015, the value of the stock of deposits in foreign currencies of residents at the CBT was $1,368.41 million at the program exchange rate.
- Program valuation example (at program rates):
  - On 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.

### Ceiling on Net Domestic Assets (NDA)
- 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 the CBT’s gross foreign assets (including foreign assets not part of reserve assets) and all foreign liabilities of the CBT.
- Net foreign assets are valued at the program exchange rate.
- NDA targets measured/adjusted per program rules and converted into Tunisian dinars at the program exchange rate.

### Floor on the Primary Balance of the Central Government (excluding grants)
- Primary fiscal balance (excluding grants, on a cash basis) measured on a financing basis and equals the negative sum of:
  - (i) total net external financing;
  - (ii) privatization receipts;
  - (iii) net domestic bank financing;
  - (iv) net domestic nonbank financing;
  - plus (v) interest on domestic and external debt paid by the central government;
  - less external budgetary grants received by the central government.
- Total net external financing = net external loans of the government (new loan disbursements less repayments), including project and budgetary loans and any form of debt used to finance central government operations.
- Privatization receipts = government receipts from sale of government assets (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 (TND and FX) plus change in central government deposits at the CBT (includes a comprehensive list of central government accounts at the CBT).
  - Following the unification of government accounts at the CBT into a Single Treasury Account, government accounts are consolidated in two categories on the CBT’s balance sheet: “Compte Central du Government“ and “Comptes Spéciaux du Government”.
- Net government borrowing from the banking system = change in 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 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 considered at nominal/face value shown on institutions’ balance sheet and do not include accrued interest.

### Ceiling on Central Government Primary Current Expenditure (excluding interest payments)
- Central government primary current expenditure defined as sum of:
  - (i) personnel wages and salaries;
  - (ii) goods and services;
  - (iii) transfers and subsidies;
  - (iv) other unallocated current expenditure.

### Ceiling on the Accumulation of External Arrears
- Arrears on external debt payment defined as late payments (principal and interest) on external debt or guarantees as defined in External Debt Statistics: Guide for Compilers by the central government or the CBT after 90 days from the due date or the expiration of the applicable grace period.

### Indicative ceiling on the accumulation of domestic arrears
- Arrears on domestic debt payment defined as amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or contractual grace period). If no maturity date is specified, arrears defined as amounts owed to domestic creditors unpaid 90 days or more after contract signing or invoice receipt.

### Indicative floor on social expenditures
- Social expenditures defined as capital expenditures (development expenditures) on:
  - education, health, social transfers to needy families, the AMEL employment training program (and university scholarships), UTSS indemnities, family allocation;
  - development expenditures of the Ministry of Women and Family Affairs, Youth and Sports and Social Affairs;
  - all current expenditures (“dépenses de gestion”) of the above-mentioned sectors and programs.
- Food and energy subsidies are excluded.

### Adjustment factors for program performance criteria
- 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, the increase (decrease) in the residents’ foreign currency deposits at the CBT are greater (lower) than the levels observed in the table below. NIR targets also adjusted upward (downward) if the total amount of cash payments on external debt service of the government is greater (lower) than levels included in the table below.
- Extract from Program Assumptions on Adjustment Factors for Quantitative Performance Criteria (Millions of US dollars):  
  - 2014 Q4 Year 2015 Q1 2015 Q2 2015 Q3 2015 Q4 Year  
  - Government External Financing 823.7 2941.7 1053.6 158.8 1038.2 1036.5 3287.2  
    - Project loans 91.4 265.7 30.0 50.0 110.0 110.0 300.0  
    - Multilateral donors 150.4 1338.7 42.1 108.4 801.5 576.1 1528.1  
      - AFDB 0.0 0.0 0.0 0.0 200.0 200.0  
      - AMF (Arab Monetary Fund) 41.5 41.5 42.1 0.0 0.0 0.0 42.1  
      - IMF (budget support) 108.9 1047.2 0.0 0.0 301.5 201.0 502.6  
      - World Bank Group 0.0 250.0 0.0 0.0 500.0 60.0 560.0  
      - European Union 0.0 0.0 0.0 108.4 0.0 115.1 223.4  
    - Bilateral donors 100.0 300.0 0.0 0.0 100.0 0.0 100.0  
      - Algeria Budget support 100.0 100.0 0.0 0.0 100.0 0.0 100.0  
      - Turkish loan 0.0 200.0 0.0 0.0 0.0 0.0 0.0  
    - Financial Market Access and other 481.9 1037.3 981.5 0.5 26.7 350.4 359.1  
      - Sukuk and other market financing 0.0 0.0 97.8 50.0 0.0 33.0 308.5  
      - Market issuance with Japanese guarantee 463.7 463.7 0.0 0.0 0.0 0.0 0.0  
      - Market issuance with US Treasury guarantee 0.0 50.0 0.0 0.0 0.0 0.0 0.0  
  - Loan Transfers to SOEs 18.2 73.6 3.1 0.5 26.7 20.4 50.6  
  - Budget Grant 129.9 204.1 7.0 63.8 126.1 0.0 196.9  
  - Privatization Receipts 0.0 0.0 0.0 0.0 0.0 0.0 0.0  
  - Government External Debt Service 239.2 955.0 192.1 311.9 214.2 277.9 996.1  
    - Amortization 177.8 610.4 134.2 221.9 135.6 221.6 713.3  
    - Interest 61.5 344.6 57.9 90.0 78.6 56.3 282.8  
  - Resident deposits at the BCT 1/  
  - Sources: Tunisian authorities and IMF staff estimates.  
  - 1/ End-March 2015 is the reference level and was estimated at USD 1,368.41 million.

- 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, the increase (decrease) in residents’ foreign currency deposits at the CBT are lower (greater) than the levels indicated in the table above.
- 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 table above.
- The ceilings on the NDA of the CBT will also be adjusted downward or upward based on the amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement.
- The floor on the primary balance of the central government, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks. The recapitalization amounts for Q3 2015 are assumed to be 110 million dinars.

*Source: Technical memorandum of understanding attached to the Letter of Intent dated September 15, 2015 (Memorandum of Economic and Financial Policies) reflected in the program documentation.*

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

### _cr15285 - 31. Performance under the program will be monitored using data supplied to the IMF by the

### Monitoring framework
- Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities as outlined in the table below, consistent with the program definitions above. The authorities will promptly transmit to the IMF staff any data revisions.
- Reporting is organized by data type, with specified periodicity codes: Weekly (w), Monthly (m), Quarterly (q), Daily (d), and specified delay in days.

### Real economy and prices
- GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices.
  - Periodicity: q
  - Delay: 45
- Inflation: Including the underlying inflation of non-administered and administered prices.
  - Periodicity: m
  - Delay: 14

### 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
- Total expenditures: current and capital, transfers and subsidies.
  - Periodicity: m
  - Delay: 30
- 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
- Current expenditure: by type of expenditure: wages, goods and services, transfers.
  - Periodicity: m
  - Delay: 45
- Social expenditure
  - Periodicity: q
  - Delay: 45
- Consolidated accounts of the central government at the CBT: stock of deposits broken down into (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

### Domestic and foreign debt
- 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
- 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
- Disbursement of foreign loans: Breakdown into project loans and budgetary loans by principal donor and identifying the most important projects to be financed in the original currency and its equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction.
  - Periodicity: m
  - Delay: 30
- Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities.
  - Periodicity: m
  - Delay: 30
- Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency).
  - Periodicity: m
  - Delay: 60
- External and domestic debt service: amortization and interest.
  - Periodicity: m
  - Delay: 60
- External payment arrears: external debt contracted and guaranteed by the government.
  - Periodicity: q
  - Delay: 30
- Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors.
  - Periodicity: q
  - Delay: 45

### External sector reporting
- Imports of Petroleum Products: average import price of main petroleum products.
  - Periodicity: m
  - Delay: 30
- Foreign trade: imports and exports of goods, including volumes and prices, by sector.
  - Periodicity: m
  - Delay: 30
- Deposits: Stock of foreign currency deposits, according to the residence of the holder.
  - Periodicity: m
  - Delay: 14
- External debt:
  - Debt service (amortization and interest) of institutional agents by instrument and at type of currency (in foreign currency and its equivalent in dinars).
    - Periodicity: q
    - Delay: 30
  - 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: m
    - Delay: 30
  - Overall net external position of Tunisia (preliminary).
    - Periodicity: q
    - Delay: 90
  - Overall gross external debt position
    - Periodicity: q
    - Delay: 90
  - Overall net external position of Tunisia (in conformity with our obligations under SDDS).
    - Periodicity: q
    - Delay: 180
- Balance of payments: Prepared by the CBT.
  - Periodicity: q
  - Delay: 30

### Monetary and financial sector
- CBT accounts at the current exchange rate: detailed table including the monetary system.
  - Periodicity: m
  - Delay: 30
- CBT accounts at the program exchange rate: Including net international reserves.
  - Periodicity: m
  - Delay: 30
- 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 (TND/FX or FX/TND), 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
- CBT foreign exchange reserves, breakdown by currency and by instrument, and the institutions where such reserves are held.
  - Periodicity: m
  - Delay: 30
- Banks’ financial soundness ratios: Indicators of financial soundness and regulatory capital adequacy ratios of the banking system, including the quality of assets and the profitability of banks. The indication of the different banks is optional.
  - Periodicity: m
  - Delay: 30
- Direct refinancing of commercial banks by the CBT: Breakdown by bank.
  - Periodicity: m
  - Delay: 14
- Interest rates: Deposit rates, interbank rates, and lending rates.
  - Periodicity: w
  - Delay: 14
- NPLs: Stock of banking sector NPLs, and breakdown by commercial banks.
  - Periodicity: q
  - Delay: 60
- Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff.
  - Periodicity: q
  - Delay: 60

### 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

*Prepared by the Middle East and Central Department (in Consultation with Other Departments); STAFF REPORT FOR THE 2015 ARTICLE IV CONSULTATION, SIXTH REVIEW UNDER THE STAND-BY ARRANGEMENT, AND REQUEST FOR REPHASING—INFORMATIONAL ANNEX (September 16, 2015).*

### 15.4 percent

### _cr15285 - 15.4 percent

### Investment lending and disbursement performance
- The slower investment lending disbursement rate, delays in preparation of new small grants and some implementation issues are attributed to disruptions caused by the revolution and political transition, including delays with decentralized entities and with the awarding of contracts for projects that required investor participation.

- Lending instrument portfolio (selected entries as presented):
  - SIL (nine projects): total Net Comm Amt ($m) 518.79; Tot Undisb Bal ($m) 308.83
    - P086660 TN-Second Natural Resources Management — Date, Board App 06/17/2010; Closing 12/31/2015; Net Comm Amt ($m) 36.10; Tot Undisb Bal ($m) 28.14
    - P119140 TN-4th NW Mount & Forest Area Dev PNO4 — 12/20/2010; 06/30/2017; 41.60; 23.42
    - P104266 TN-Energy Efficiency — 06/30/2009; 06/30/2015; 40.06; 18.94
    - P132381 TN-Third Export Development Project — 06/16/2014; 12/31/2020; 50.00; 50.00
    - P064836 TN-Urban Water Supply — 11/17/2005; 06/30/2018; 64.23; 32.53
    - P095847 TN- Water Sector Investment II — 05/19/2009; 03/31/2015; 30.60; 7.93
    - P099811 TN-Tunis West Sewerage — 07/06/2006; 06/30/2015; 66.80; 12.75
    - P117082 TN-Northern Tunis Wastewater — 06/17/2010; 06/30/2017; 39.40; 35.12
    - P124341 TN-MSME Financing Facility — 07/14/2011; 01/31/2018; 150.00; 100.00
  - P4R (one project): P130637 TN-Urban Dev. and Local Governance — 07/24/2014; 12/31/2019; Net Comm Amt ($m) 300.00; Tot Undisb Bal ($m) 300.00
  - DPL (one project): P132709 TN - Governance Opportunities Jobs DPL-2 — 04/29/2014; 06/30/2015; Net Comm Amt ($m) 250.00; Tot Undisb Bal ($m) 0.00
  - GEF projects (selected):
    - P112568 TN:GEF Second Natural Resources Mgt — 06/17/2010; 12/31/2015; 9.73; 7.49
    - P118131 TN-GEF Northern Tunis Wastewater — 06/17/2010; 12/31/2015; 8.03; 5.23
    - P100478 TN:GEF Managing Healthcare Waste and PCB — 07/26/2012; 05/31/2017; 5.50; 4.71
    - P120561 Tunisia: Ecotourism and B. Conservation — 01/22/2013; 07/31/2018; 4.27; 3.41

### Relations with the European Bank for Reconstruction and Development (EBRD)
- Membership and operations:
  - Tunisia became a member of the Bank in December 2011 and was granted recipient/country of operations status in June 2012.
  - The EBRD opened a fully operational office in June 2013.
  - The EBRD has built an investment portfolio of 18 transactions, committing a total of more than EUR 250 million, all in the private sector.
  - Investments currently emphasize the financial sector, supporting SMEs through credit lines to local banks and equity investments in private equity funds.
  - The EBRD signed trade facilitation agreements with two local banks to facilitate foreign trade and support local banks' import-export transactions.
  - The Bank has directly financed private corporates in agribusiness, automotive and telecommunication sectors.

- Technical assistance and donor-funded assignments:
  - Presently 18 donor-funded technical assistance assignments in Tunisia supported by a €3 million donor funding. Examples include: Transport Sector Review; Assessment of the Sub-Sovereign Financing Framework; Sustainable Energy Initiative study; Environmental and Social Assessment; Country Law Assessment.
  - Tunisia benefits from 41 regional assignments for about €33 million of approved funding, including the Food Security Initiative, small business support (SBS) advisory services, local capital market development, expansion of the Local Enterprise Facility, and the Direct Company Assistance program for agribusiness companies.
  - The SBS program provided direct technical assistance for nearly 150 SME for a total amount of €2 million of donor funds.
  - The EBRD is scaling up SBS activities with an extra €10 million funding received from EU under the Programme d’Appui a la Competitivite des Services (PACS Program); the agreement with the EU was signed in June 2015 and envisages implementation over the next 5 years.

- EBRD operational priorities in Tunisia (in coordination with other IFIs and bilateral agencies):
  - Financial sector: help bank restructuring and broaden financial sector access to support private sector development; address prevalence of weak state-owned banks, limited access to finance for SMEs, and lack of a functioning local capital market.
  - Modernization of industry through the private sector: promote higher value added production and sustainable job creation.
  - Power and energy sector: support energy efficiency, improve energy security, and develop a sustainable energy sector.
  - Infrastructure sector: facilitate non-sovereign financing for infrastructure to provide wider access to better quality urban and more efficient public services.

### Statistical issues — adequacy and data standards (as of end-August 2015)
- Assessment of Data Adequacy for Surveillance:
  - General: Data provision is adequate for surveillance but it should be strengthened in the financial sector.
  - National Accounts: NSI published a revised national accounts series covering 1997–2009 based on SNA 1993 and now uses a chained-index approach to estimating GDP growth. Quarterly GDP series at constant and current prices are disseminated on the NSI website. Surveillance would benefit from higher frequency data on employment, unemployment, and wages. Tunisia utilizes a periodicity and timeliness flexibility option for the labor market data category under the SDDS; since end-2011 quarterly employment and unemployment data are disseminated with a timeline of three months.
  - Government finance statistics: Tunisia produces annual general government data and quarterly budgetary central government cash flow in the GFSM 2001 framework, but the depth of the budgetary central government should be improved to include one quarter timeliness and quarterly financial balance sheet information.
  - Monetary statistics: The Central Bank of Tunisia (CBT) has not yet migrated to the Standardized Report Forms (SRFs). The CBT has started to develop the SRF 1SR and plans to request technical assistance from STA for reviewing and validating the 1SR and to provide recommendations on migration to the SRF 2SR.
  - Balance of payments: Generally adequate for surveillance, although greater details for quarterly BOP and development of a quarterly IIP are needed. Improvements dependent on development of additional source data, including access to administrative databases at the CBT and other government agencies. Major expected changes from adoption of BPM6 may broadly result in:
    - (i) a larger goods balance deficit, mainly due to the removal of goods for processing gross flows;
    - (ii) a relative increase in the services balance (addition of goods for processing fees, FISIM, repairs, etc.);
    - (iii) a decline in the primary income balance (recording of reinvested earnings in the debits);
    - (iv) changes in the financial account due to improvements in coverage and reclassification of transactions by functional category.
  - Financial indicators: Available with significant lag and accuracy is challenged by problems in the banking supervision information system and database management.

- Data Standards and Quality:
  - Subscribed to the Special Data Dissemination Standard (SDDS) June 20, 2001.
  - A data ROSC was published on the IMF website on August 9, 2006.

- Reporting to STA:
  - Data are reported for publication in the International Financial Statistics (IFS), Government Finance Statistics Yearbook, the Direction of Trade Statistics, and the Balance of Payments Statistics Yearbook.

- Tunisia — Table of Common Indicators Required for Surveillance (key recent observations as presented):
  - Exchange Rates — Date of latest observation: Current; Date received: Current; Frequency of Data/Reporting/Publication: D D D
  - International Reserve Assets and Reserve Liabilities of the Monetary Authorities — Date of latest observation Jun. 2015; Date received Aug 2015; Frequency M M M
  - Reserve/Base Money — Jun. 2015; Aug 2015; M M M
  - Broad Money — Jun. 2015; Aug 2015; M M M
  - Central Bank Balance Sheet — Jun. 2015; Aug 2015; M M M
  - Consolidated Balance Sheet of the Banking System — Jun. 2015; Aug 2015; M M M
  - Consumer Price Index — Jul 2015; Aug 2015; M M M
  - Revenue, Expenditure, Balance and Composition of Financing – General Government — 2011; May 2012; A A A
  - Revenue, Expenditure, Balance and Composition of Financing – Central Government — Jun. 2015; Aug 2015; M M I
  - Stocks of Central Government and Central Government-Guaranteed Debt — Q2. 2015; Aug 2015; Q Q Q
  - External Current Account Balance — Q2 2015; Aug 2015; Q Q Q
  - Exports and Imports of Goods — Jul. 2015; Aug. 2015; M M M
  - GDP/GNP — Q2 2015; Aug. 2015; Q Q Q
  - Gross External Debt — Q2 2015; Aug 2015; A A A
  - International Investment Position — 2014; Aug 2015; A A A

### IMF Staff statement (September 30, 2015) — key updates and recommendations
- Labour and wages:
  - The Tunisian government and the main labor union signed an agreement for another round of public sector wage increases for 2016–18; the agreement was signed on September 22, 2015.
  - Staff estimates that the annual 4–5 percent generalized salary increase in 2016 will add 0.4 percent of GDP to the wage bill in the absence of compensating measures.
  - Staff regrets this latest increase, noting it will add to an already unsustainable wage bill and hurt competitiveness. Staff urges the authorities to introduce compensating measures in the 2016 budget and to move quickly with comprehensive civil service reform to contain and eventually reduce the wage bill.

- Bank recapitalizations and prudential measures:
  - Banque de l’Habitat (BH) recapitalized on September 12, 2015 with a capital injection of 110 million dinars. Existing shareholders—the state (with 57 percent) and private shareholders—both contributed in line with their initial shares. The capital injection, together with explicit state guarantees for BH related to claims outstanding on public enterprises (prior action) issued in September 2015, increased BH’s end-March Tier 1 capital ratio to 7.2 percent and the capital adequacy ratio to about 10 percent; this meets the prior action as verified by the bank’s auditors.
  - Société Tunisienne des Banques (STB) recapitalized: first phase of subscription ended on September 14 (prior action), and all phases completed on September 18, 2015, bringing total capital to 776.8 million dinars. Government share increased from 51 percent to close to 80 percent. Explicit guarantees for STB (prior action) were issued in a lesser amount than expected (about half), on grounds of smaller outstanding claims on public enterprises. Authorities expect this to be sufficient to bring Tier 1 capital above 7 percent as of end-June; this and total capital will be verified following certification of end-June accounts in October.
  - Staff welcomes actions to ensure banks meet prudential norms, stresses importance of quickly completing the update of existing business plans, and urges introduction of strategic partners in STB and BH to help with restructuring.

### Authorities’ statement and macroeconomic outlook (September 30, 2015)
- Overview:
  - Authorities note successful completion of political transition and describe resilience in political, social, and economic fields.
  - The government (took office in February 2015 with a five-year mandate) aims to improve security, combat terrorism, strengthen macroeconomic stability, accelerate structural reforms to foster growth and employment, and rely on dialogue, good governance, and communication on social issues.
  - A development plan for 2016–2020 is being formulated; a first draft was submitted to the Council of Ministers in June 2015 and is expected to be showcased at an international conference in early 2016.

- Recent economic developments and key indicators:
  - Growth projections revised down to 1 percent in 2015, or about half last year’s level.
  - Inflation fell to 4.2 percent in August 2015 and is expected to reach 4.4 percent in December 2015.
  - Unemployment declined to 15.2 percent in the second quarter of 2015 but remains high, especially for youth and women.
  - The current account deficit is expected to improve slightly in 2015 but would remain elevated at 8 ½ percent of GDP.
  - The US$1 billion international bond issue in January 2015 and disbursement of multilateral loans are expected to keep gross international reserves at the equivalent of 4 months of imports by end-2015.
  - Access to the international financial market without third party guarantee at relatively favorable terms is cited as attesting to continued market confidence in Tunisia.

- Program implementation:
  - Program implementation has been adequate given exceptional circumstances. All quantitative performance criteria for end-December 2014 and end-March 2015 were met, most with comfortable margins.
  - The floor on the primary fiscal balance was met with a wide margin; the indicative ceiling on current expenditure was met. The indicative ceiling on social spending was missed due to delivery difficulties in remote regions.
  - Continued under-execution of capital spending reflected capacity absorption difficulties in the post-revolution period rather than an intended adjustment measure.
  - Implementation of structural reforms has been challenging due to an unsettled social environment and need to build consensus, but significant progress was made in areas including adoption of bank restructuring plans.

- Authorities’ financing request and program sequencing:
  - Based on SBA performance, Tunisian authorities request completion of the sixth review, agree on proposed new performance criteria for end-September 2015 and timetable for structural benchmarks as described in the MEFP, and request a rephasing of disbursements, with the final tranche of SDR 143.25 million to be made available upon completion of the seventh and last review under the SBA.

*Source: _cr15285 - 15.4 percent (IMF content unit)*

### 4.1 percent of GDP and 5.3 percent in 2012. This has been achieved mainly due to

### _cr15285 - 4.1 percent of GDP and 5.3 percent in 2012. This has been achieved mainly due to

### Fiscal developments and fiscal stance
- Overall fiscal deficit increased since 2011 but public debt remains sustainable and low relative to regional peers; under the DSA’s medium-term and stress scenarios public debt is expected to remain sustainable.
- Revenue-side developments:
  - Increase in revenue-to-GDP ratio driven by increased revenue mobilization, including VAT and the exceptional contribution on income.
- Expenditure-side developments:
  - Significant decline in expenditures, including from under-execution of public investment.
- 2015 policy response:
  - Authorities moderately eased fiscal policy in 2015 in response to adverse developments and a difficult international environment.
  - A supplementary budget law introduced measures to increase security expenditure, support the tourism sector, and strengthen programs for small and medium enterprises (MEFP ¶8-10).
  - The supplementary budget provided for a 5 percent general salary increase, including for regularization of past wage agreements, while deferring recruitments and implementation of specific wage increases concluded and not yet implemented.
- Commitment to adjustment:
  - Authorities committed to take additional measures in 2015, including reduction of non-essential non-wage expenditure.
  - Committed to fiscal adjustment from 2016 onwards, including accelerating energy subsidy reform by introducing in the 2016 budget an automatic oil price adjustment formula to replace the asymmetrical formula adopted in January 2014.
  - Accelerating preparation of major tax and public finance management reforms to improve the fiscal situation, equity, and reduce public debt.
  - Plans to accelerate execution of public investments through strengthened coordination between governorates and central government, new procurement procedures, and improved monitoring and execution.
- Civil service reform:
  - A comprehensive reform strategy will be formulated in consultation with the National Council of Social Dialogue to gradually lower the wage bill to about 11 percent of GDP over the medium-term.

### Monetary and exchange rate policy
- Inflation and policy rate:
  - Gradual monetary policy tightening and declining international commodity prices helped contain inflation.
  - The central bank has kept the policy rate unchanged at a level considered adequate given weak economic activity and sluggish credit demand.
  - Convergence of the money market rate and the policy rate has made the policy rate a more effective signaling tool.
  - The CBT remains vigilant to address possible inflationary pressures from second-round effects of wage increases or exchange rate depreciation.
- Modernization of monetary policy framework:
  - Changes introduced to reduce risks to the central bank from refinancing operations.
  - Cooperation with the Banque de France to modernize the operational framework, improve liquidity forecasts, and deepen the interbank market.
  - The draft law on the central bank was presented to the CBT’s Board of Directors in June 2015 and is expected to be submitted for parliamentary approval in October 2015; the draft, benefiting from Fund technical assistance, aims to grant the CBT greater autonomy, add financial stability to its mandate, and strengthen governance, transparency, and accountability.
- Exchange rate flexibility and FX market development:
  - Exchange rate policy allowed the dinar to continue to reflect movements in fundamentals; interventions smoothed excessive fluctuations following the Bardo attack.
  - Authorities committed to further increase exchange rate flexibility and deepen the foreign exchange market.
  - The CBT Board adopted in May 2015 measures including introduction of foreign exchange auctions to give more weight to the market in determining the value of the dinar (MEFP19).
  - Implementation of weekly foreign exchange auctions is to start in October 2015 (structural benchmark).

### Financial sector stability
- Priority areas of reform:
  - (i) recapitalization and restructuring of public banks, (ii) introduction of a bank resolution scheme, a deposit guarantee scheme, and lender-of-last-resort mechanism, and (iii) strengthening of banking supervision.
- Public bank recapitalization and restructuring:
  - Following legislative approval in August 2015, recapitalization of the three public banks for up to 1 billion dinars (1 percent of GDP) is underway.
  - Restructuring plans approved for two banks.
  - Subscriptions to capital increases were closed for Banque de l’Habitat (BH) and Société Tunisienne des Banques (STB).
  - Sale of non strategic assets for Banque Nationale Agricole (BNA) are ongoing.
  - Government committed to ensuring updated business plans of recapitalized banks will be carried out in light of the changed economic environment.
- Supervision and governance:
  - CBT will strengthen supervision of public banks to ensure full compliance with prudential requirements.
  - Performance contracts will be developed to ensure convergence of public banks’ performance indicators to those of the private sector, to be done on a consolidated basis for selected indicators (structural benchmark for end November 2015).
  - New board members representing the government have been appointed; functions of chairman and CEO have been separated; the role of the board, its committees, and senior management will be redefined.
  - A tender will be launched in the last quarter of 2015 for selection of an investment bank to assist entry of technical/strategic partners in bank capital.
- Nonperforming loans and legal framework:
  - Authorities actively working to address the NPL problem, including a draft revised law on bankruptcy expected to be approved by parliament in October 2015.
- Sector-specific measures and monitoring:
  - Exceptional and urgent measures to support the tourism sector following the Sousse attack; these measures will be subject to special prudential monitoring (MEFP ¶25).

### Medium-term structural reforms
- Authorities plan decisive progress on wide-ranging structural reforms to improve the business climate, attract private sector investment, and enhance efficiency and competitiveness over the medium-term.
- Reforms advanced in preparation:
  - Major overhaul of the tax system and modernization of tax administration.
  - Reform of the investment code.
  - Reform of the bankruptcy law.
- Reforms to be introduced in the 2016-20 development plan after further preparatory work and consultations:
  - Labor market reform.
  - Restructuring of public enterprises.
  - Public expenditure management reform.
  - Civil service reform.
  - Pension reform.
- Authorities acknowledge impediments to the business environment, many legacies of the pre-revolution regime, and express determination to address them in collaboration with stakeholders and international partners.
- Authorities appreciate analytical work in the Selected Issues Paper on Tunisia’s growth potential and note reforms needed to unleash this potential.

### Key statistics and dates (preserved verbatim)
- "4.1 percent of GDP and 5.3 percent in 2012."
- 5 percent general salary increase.
- Wage bill target: "about 11 percent of GDP over the medium-term."
- Recapitalization: "up to 1 billion dinars (1 percent of GDP)."
- Draft law on the central bank presented in June 2015; expected submission for parliamentary approval in October 2015.
- Implementation of weekly foreign exchange auctions: October 2015 (structural benchmark).
- Draft revised law on bankruptcy expected to be approved by parliament in October 2015.
- Structural benchmark for performance contracts: "end November 2015."
- Tender for investment bank: "last quarter of 2015."

### Conclusion and policy stance
- Tunisia faces daunting challenges, exacerbated by two terrorist attacks, but has shown resilience and determination to implement its reform agenda under the Fund-supported program.
- Authorities committed to a medium-term strategy focused on fostering growth and job creation while reducing macroeconomic imbalances.
- Authorities seek continued close collaboration with the Fund and other partners to achieve their objectives.

*Source: IMF staff report content (as provided).*

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_Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2015/_cr15285.pdf_