## _cr16138 ## Source details **Canonical URL:** [_cr16138](https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16138.pdf) ## Other formats - [Markdown version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16138.pdf.md) - [Structured JSON version](/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16138.pdf.json) --- ### Context and executive summary - With support from the Stand-By Arrangement (SBA) that expired in December 2015, Tunisia has: - preserved macroeconomic stability; - initiated fiscal and banking reforms. - Remaining vulnerabilities: - weak economic activity; - low employment; - lingering social tensions; - deteriorated spending composition; - high external imbalances. - Recent environment: prolonged political transition, spillovers from Libya, numerous exogenous shocks including terror attacks. - Reform coordination: reform coordination unit at the Prime Ministry’s office created in December 2015. ### Authorities’ five-year vision and EFF request - Authorities’ program (Five-year economic vision, 2016–20) - Objective: promote stronger and more inclusive growth by transforming Tunisia’s growth model on a strategy predicated on macroeconomic stability. - Five pillars: effective public institutions; economic diversification; human development and social inclusion; regional development; green economic growth. - Policy focus: consolidate macroeconomic stability; reform public institutions including the civil service; facilitate financial intermediation; improve the business climate. - Five-year development plan expected to be approved in June and presented at an international donor conference in September 2016. - EFF Request - Four-year Extended Fund Facility (EFF) in the amount of SDR 2.046 billion (375 percent of quota, US$2.8 billion). - 41 percent of quota available upon Board approval. - Size and timing of disbursements intended to provide buffers against potential external shocks. ### Macroeconomic context and recent developments (key figures) - 2015 outcomes: - Real GDP growth: 0.8 percent (y-o-y) in 2015. - Tourism: arrivals and FX receipts declined by 25 percent and 54 percent (y-o-y), respectively. - Unemployment: - overall: 15 percent; - youth: 35 percent; - young graduates: 67 percent; - women: 23 percent. - Inflation: - headline inflation reached 3.3 percent in March 2016; - core inflation at 4.7 percent. - Current account deficit: 8.9 percent of GDP in 2015. - Gross reserves: US$7.6 billion after World Bank (US$500 million) and African Development Bank (US$200 million) disbursements in December 2015. - Exchange rate: dinar appreciated about 2 percent in nominal effective terms during 2015. - Sovereign spreads: about 450 bps vis-à-vis US Treasuries at end-March 2016. - Private sector credit growth: 5.8 percent (y-o-y) at end-February 2016. - Policy rate: reduced by 50 bps to 4.25 percent in October 2015. - Reliance on direct CBT refinancing: TD 4.7 billion at end–March 2016. - Total NPLs: averaged 16 percent of total loans in December 2015. - Structural fiscal position: - Structural fiscal deficit (excluding cycles and one-offs): 4.3 percent of GDP in 2015. - Overall cash deficit: 4.7 percent of GDP in 2015 (with deferred “customary” payments ~1 percent of GDP to be paid in Q1 2016). ### Outlook and key projections (selected) - Real GDP growth (prel./proj., in percent): 2014: 2.3; 2015 prel.: 0.8; 2016 proj.: 2.0; 2017 proj.: 3.0; 2018 proj.: 3.7; 2019 proj.: 4.3; 2020 proj.: 4.7; 2021 proj.: 4.5. - Inflation (CPI, period average, in percent): 2014: 4.9; 2015 prel.: 4.9; 2016 proj.: 3.9; 2017 proj.: 3.9; 2018 proj.: 3.8; 2019 proj.: 3.7; 2020 proj.: 3.5; 2021 proj.: 3.5. - Current account deficit (percent of GDP): 2014: -9.1; 2015 prel.: -8.9; 2016 proj.: -7.7; 2017 proj.: -7.0; 2018 proj.: -6.2; 2019 proj.: -5.5; 2020 proj.: -5.1; 2021 proj.: -4.4. - Gross official reserves (US$ billions, eop): 2014: 7.7; 2015 prel.: 7.6; 2016 proj.: 8.3; 2017 proj.: 8.5; 2018 proj.: 8.8; 2019 proj.: 9.4; 2020 proj.: 10.1; 2021 proj.: 10.7. - Reserve adequacy: gross reserves expected to exceed 100 percent of the Fund’s adjusted reserve metric by end-2016 under program assumptions. ### Risks to the outlook and recommended policy responses - Major risks (relative likelihood and expected impact) - High: deteriorating security situation, political instability, high social tensions, spillovers from Libya, slow consensus-building, push-back from vested interests. - Response: build consensus on five-year plan with public and donors; implement economic reforms rapidly; build public confidence via continuous communication. - High: tighter or more volatile global financial conditions. - Response: (i) create fiscal space by containing the wage bill, reforming energy subsidies and the tax system; (ii) countercyclical monetary policy (if inflationary pressures absent); (iii) complete banking reforms. - Medium: structurally weak growth in key advanced and emerging economies, especially Europe. - Response: (i) diversify export markets; (ii) accelerate structural reforms to increase productivity and competitiveness; (iii) let revenues decline in line with activity (automatic stabilizers). - High: heightened risk of fragmentation/state failure/security dislocation in the Middle East. - Response: (i) rebuild fiscal and external buffers; (ii) accelerate economic and structural reforms. - Medium/High: risks to energy prices and increased volatility. - Response: (i) urgently implement the symmetric automatic fuel price adjustment formula; (ii) save any external windfalls from lower oil prices; (iii) strengthen fiscal and external buffers. ### Fiscal policy, public debt dynamics, and revenue measures - Fiscal consolidation goals and debt outlook - A 2.2 percent of GDP reduction in the structural fiscal deficit by 2019 would help stabilize debt and reduce it to under 50 percent by 2020 (from 53 percent in 2015; foreign-denominated debt share high at 65 percent). - Amortization payments projected to peak at 4.7 percent of GDP in 2017. - Public debt dynamics remain sustainable under most shocks; exchange rate shock most severe. - 2016 fiscal adjustments and one-offs - Structural fiscal deficit for 2016 is 0.4 percent of GDP higher than originally budgeted due to one-off security related expenditures. - Revenue losses from lower oil production and weaker activity and higher pension transfers expected to be mostly offset by savings on energy subsidies and higher revenues (refinery surpluses, sale of telecom license). - Fiscal indicators (percent of GDP unless stated) — selected: - Revenue: 2018: 23.0; 2019: 24.2; 2020: 23.9; 2021: 24.1; (continuing) 24.4; 24.9; 24.8; 24.8. - Tax revenue: 2018: 21.6; 2019: 22.5; 2020: 21.7; 2021: 22.2; (continuing) 22.5; 22.9; 22.8; 22.8. - Expenditure and net lending: 2018: 28.5; 2019: 28.2; 2020: 28.5; 2021: 28.0; (continuing) 28.1; 27.3; 26.9; 26.6. - Wages and salaries: 2018: 13.5; 2019: 14.0; 2020: 14.1; 2021: 13.8; (continuing) 13.8; 12.7; 12.0; 11.7. - Transfers and subsidies: 2018: 5.7; 2019: 5.0; 2020: 4.9; 2021: 4.5; (continuing) 4.3; 4.4; 4.4; 4.4. - Capital expenditure: 2018: 4.6; 2019: 5.0; 2020: 5.0; 2021: 5.5; (continuing) 5.9; 6.5; 6.5; 7.2. - Central government overall deficit (excl. grants): 2018: -5.5; 2019: -4.0; 2020: -4.6; 2021: -3.9; (continuing) -3.7; -2.4; -2.0; -1.8. - Structural fiscal balance: 2018: -4.3; 2019: -3.6; 2020: -4.0; 2021: -3.3; (continuing) -2.8; -2.1; -1.9; -1.8. - Central government debt: 2018: 53.2; 2019: 54.6; 2020: 54.6; 2021: 54.5; (continuing) 53.1; 50.9; 48.7; 46.4. - Tax reform and revenue measures - 2016 tax package included in budget: 439.0 Million of dinars, 0.5 Percent of GDP. - Selected items (figures preserved verbatim): - VAT: 395.0 Million of dinars, 0.5 Percent of GDP. - Reduction tax exemptions (base expansion): 495.0 Million of dinars, 0.6 Percent of GDP. - Reduction withholding tax from 50 percent to 25 percent: -50.0 Million of dinars, -0.1 Percent of GDP. - Tariff harmonization (reduction from seven to two): -316.0 Million of dinars, -0.4 Percent of GDP. - Increase in fuel taxation in fuel price mechanism: 360.0 Million of dinars, 0.4 Percent of GDP. - Tax package: Outstanding reform proposals: 994.7 Million of dinars, 1.1 Percent of GDP. - Increase dividend taxation to 10 percent: 50.0 Million of dinars, 0.1 Percent of GDP. - Indirect Taxation subtotal: 1,159.7 Million of dinars, 1.3 Percent of GDP. - VAT subtotal: 820.0 Million of dinars, 0.9 Percent of GDP. - Eliminate Preferential treatment regime (customs duties): 416.7 Million of dinars, 0.5 Percent of GDP. - Decrease of CIT Rate for onshore sector to 20 percent in 2018: (figure placeholder "......" as in source). ### Wage bill, civil service, pensions, and SOEs - Wage bill - Wage bill at 14 percent of GDP (63 percent of tax revenues). - Authorities’ objective: reduce wage bill to 12 percent of GDP by 2020. - Contain 2017 wage bill increase to expected inflation rate (implies identifying savings of about 0.6 percent of GDP in 2017). - Recent wage increases for security forces: 0.2 percent of GDP on top of past agreements reflected in the current budget of 0.7 percent of GDP. - Civil service reform - Comprehensive civil service reform strategy to be adopted by September 2016 (structural benchmark). - Functional reviews of four ministries (Health, Education, Finance, Infrastructures) to be completed by December 2016 (structural benchmark). - Voluntary separation program to be examined for possible implementation beginning in 2018. - Public pension system - CNRPS deficit requires budget transfers of about 0.4 percent of GDP in 2016. - Tri-partite National Social Dialogue on pension reform to be accelerated. - State-Owned Enterprises (SOEs) - Ninety three non-financial SOEs operate in 17 sectors. - SOEs employ 180,000 people (5 percent of Tunisia’s active population), employment increasing by 50 percent since 2011. - Largest 28 enterprises represent more than 70 percent of this employment. - Consolidated non-financial SOEs registered a 4.4 percent of GDP deficit in 2013, with half operating in the red. - Transfers to public enterprises increased from about 2 percent of GDP in 2010 to about 7 percent of GDP in 2013. - Guaranteed external debt averages close to 10 percent of GDP (about a third of Tunisia’s external PPG debt). - SOE debt to the banking system is about 5 percent of GDP. - Planned creation of an independent agency overseeing SOE restructuring, with performance contracts for five largest SOEs (structural benchmark). ### Financial sector, banking reforms, and financial inclusion - Financial soundness indicators (December 2015, by bank type): - NPLs (in percent of total loans): Public banks 24.9; Private banks 10.4; All banks 16. - NPLs, net of provisions: Public banks 11.2; Private banks 3.4; All banks 6.2. - Provisions (in percent of NPLs): Public banks 55.6; Private banks 63.9; All banks 59. - Liquidity ratio: Public banks 58.9; Private banks 97.2; All banks 80. - ROA 1/: Public banks 0.5; Private banks 1.1; All banks 0.9. (data for ROA/ROE is for 2014) - ROE 1/: Public banks 7.3; Private banks 14.2; All banks 11.2. - CAR: Public banks 11.2; Private banks 12.4; All banks 12.2. - Tier 1 CAR: Public banks 7.7; Private banks 10.0; All banks 9.5. - Banking sector vulnerabilities and recent developments - Sector solvency ratio: 9.4 percent in December 2014 to 12.2 percent in December 2015. - Three public banks recapitalized in 2015. - NPLs about 16 percent of total loans; specific provisions to NPLs 65.2 percent (most recent listed). - Private sector credit: 77 percent of GDP at end-2015. - Banks continue to rely on CBT refinancing; one large bank’s liquidity ratio below prudential norms. - Reform measures and timelines - Updated business plans for public banks to be approved by boards by May 2016 (prior action); further revisions and approvals targeted Jul-16 (structural benchmark). - Performance contracts for public banks to be signed by June (SB). - Removal of legal barriers to active NPL resolution and empowerment of public banks to write-off NPLs. - Implement bankruptcy law decrees by September 30, 2016. - Set up NPL-specialist units within each public bank by June 2016. - Banking law, deposit guarantee and resolution framework adoption with implementing decrees by September 30, 2016. - Strengthen risk-based supervision: use of risk-based supervision manual systematically by December 2016 (SB); automated reporting from September 2016. - Recruitment: hiring of ten new supervisors welcomed; staff urged additional recruitment (dozen supervisors) with application closing no later than June 30, 2016. - Financial inclusion initiatives - Access to finance limited to 36 percent of adult population (World Bank estimate). - Develop private credit bureaus to complement CBT’s "Centrale de Risques". - Revise law on excessive lending rates: increase cap from "20 percent more than the average lending rate" to "at least 33 percent" (end-December 2016 SB). - Regroup 289 microcredit associations into 24 institutes; establish Bank of Regions by March 2017. ### Monetary policy, FX framework, and money-market reforms - Monetary policy stance - Authorities committed to a prudent monetary policy, implying a positive real interest rate of 1 percent. - CBT reduced policy rate by 50 bps to 4.25 percent in October 2015. - Staff supports readiness to reverse the rate cut should inflationary pressures pick up. - Transition to inflation targeting - Gradual move to full-fledged inflation targeting planned for the medium term. - Until prerequisites met, authorities will continue targeting NDA. - Preconditions: improved liquidity forecasts, strengthened collateral framework, improved CBT communication, greater exchange rate flexibility, risk-based supervision. - New central bank law grants greater CBT autonomy; staff noted deviations from best practices (government presence on CBT Board; lack of outright prohibition on receiving specific instructions). - FX framework and capital account modernization - Steps taken: reduce ex-ante controls on capital account transactions; eliminate ceiling for foreign holdings of government debt; grant greater powers to banks for FX transfers; implement FX auction mechanism (regular pre-announced FX auctions recommended). - Dinar movement: crawl-like depreciation within a two percent band; staff estimates REER overvalued by 6–13 percent. - Lower interventions, currently below 20 percent of FX market, would reduce banks’ refinancing needs. - Money markets and operational reforms (timelines) - Manual for monetary policy operations initiated April 2016; expected implementation date June 2017. - Liquidity forecasting to improve by December 2016. - Introduce fixing system for interbank rates by December 2016. - Develop yield curve by 2017; introduce interest-rate hedging instruments by June 2017. - Ceiling on CBT NDA retained as a performance criterion until stronger framework in place. - Monetary analysis finding - Reserve money remains an important driver of inflation: a third of inflation variability at a two-year horizon due to changes in base money supply. ### Program modalities, financing, reserve assessment, and monitoring - Program design and financing - Tunisia faces projected balance of payments needs of US$11 billion over the next four years. - Four-year arrangement under the EFF (May 11, 2016–May 10, 2020) proposed to meet needs. - Access: SDR 2.045625 billion (375 percent of quota, equivalent to about US$2.865 billion). - Phasing: eight program reviews and nine disbursements; disbursements even-phased; first installment at program approval. - Donors and market access expected to cover most remaining financing needs; donors expected to provide US$2 billion in first year (including third-country guarantees enabling market access of about US$500 million). - Official external financing (selected figures, US$ millions) - Official External Financing, 2016 Year total: 2,985.9. - Official External Financing, 2017 Year total: 2,586.4. - Project loans: 2016 Year total: 260.0; 2017 Year total: 300.0. - Multilateral donors: 2016 Year total: 2,175.9; 2017 Year total: 1,286.4. - Financial Market Access and other: 2016 Year total: 550.0; 2017 Year total: 1,000.0. - Budget Grants: 2016 Year total: 93.1; 2017 Year total: 150.9. - Reserve adequacy (Box 6) - Reserve coverage improved in 2015, boosted by US$1 billion Eurobond and multilateral disbursements. - Under greater exchange rate flexibility and continued donor funding, gross reserves expected to cover over four months of imports and exceed common benchmarks: three-month import coverage, 100 percent of short-term debt, and 20 percent of money supply. - ARA metric components and weights for Tunisia: export income (10 percent), broad money (10 percent), short-term debt (30 percent), other liabilities (20 percent). - Adjustments for existing capital controls by halving weights on broad money and other liabilities improve reserve adequacy; under that adjusted metric reserves cross bottom threshold starting 2016. - Use of Fund resources and monitoring - With the exception of the second tranche, Fund resources will be used for budgetary financing. - First tranche at program approval allocated to the budget to hedge donor timing uncertainties in 2016. - Program monitored through semi-annual reviews based on quantitative performance criteria, indicative targets, and structural benchmarks. - Prior actions: approval by banks' boards of updated business plans; adoption by ARP of CBT law, banking law, and bankruptcy law; adoption by Council of Ministers of comprehensive tax reform strategy. - Key program design summary (Box 7) - Access: SDR 2.045625 billion (375 percent of quota, about US$2.865 billion). - Length: 48 months, starting May 2016. - Phasing: eight program reviews and nine disbursements; disbursements even-phased. - Quantitative Performance Criteria include ceilings on primary balance (cash basis excluding grants), ceiling on net domestic assets of the central bank, ceiling on current primary expenditures, and floor on net international reserves. - Continuous Performance Criterion: ceiling on accumulation of new external debt payment arrears by central government. - Indicative targets: floor on social spending; ceiling on accumulation of new domestic arrears. - Structural Benchmarks (selected deadlines): performance contracts for public banks boards (June 2016); approval of civil service reform strategy (September 2016); implementation decrees for competition/PPP/investment code (September 2016); increase cap on lending rates to at least 2009 level (December 2016); use of risk-based supervision manual (December 2016); publication of organic budget law (December 2016); establishment of LTU (December 2016); adoption of medium-term debt strategy (December 2016); creation of independent high anti-corruption authority (December 2016). ### Debt sustainability, stress tests, and vulnerabilities - Tunisia has capacity to repay the Fund: - Outstanding Fund credit would peak in 2020 at 5.7 percent of GDP, and 14.1 percent of exports of goods and services, before gradually declining. - Obligations to the Fund peak at 6.4 percent of gross reserves (1.3 percent of GDP) in 2018. - Total external debt projected to peak in 2018 below 75 percent of GDP; public debt will stabilize below 55 percent of GDP at its peak. - Public debt path and stress-test findings (selected exact results) - Under most adverse scenarios, public debt-to-GDP would initially worsen to a maximum between 55 and 65 percent of GDP and then decline to between 48 and 58 percent in 2021. - A one-time 30 percent real depreciation would increase public debt-to-GDP to about 65 percent before declining to below 60 percent by 2021. - A combined shock (to real growth and the primary balance) would raise public debt to 78 percent of GDP by 2018 before declining to 72 percent by end of outlook. - A contingent liability shock will raise public debt to 69 percent in 2018 before declining to 63 percent in 2021. - External DSA highlights - Baseline external debt-to-GDP: 2016: 69.0; 2017: 71.4; 2018: 73.3; 2019: 72.5; 2020: 71.2; 2021: 69.6. - One-time 30 percent real depreciation (B5) produces external debt-to-GDP jump to 101.4 (2017) and 104.0 (2018) before declining. ### Key program risks and mitigation - Main risks: - Increased security tensions could shift focus away from reforms and reduce investor confidence. - Public disillusionment over unemployment, electoral campaigning ahead of municipal elections, or weakened political support could slow reforms. - Rebound in oil prices and deterioration of external environment could weaken growth and pressure fiscal and external positions. - Delays in reform implementation could postpone donor disbursements and create financing shortfalls. - Mitigation features: - Program design builds early momentum toward critical reforms expected to catalyze donor support. - Creation of a high-level reform implementation committee at the Prime Minister’s office and broad political consensus around the five-year plan. - Six-month Reviews with interim visits to allow early remedial actions in case of slippages. - Updated safeguards assessment being finalized; external audit arrangements continue to be sound and financial statements are published timely. - Further amendments to central bank law—particularly on greater autonomy—are needed to align with best international practices. _Italic: Source — IMF staff report and technical memoranda (document _cr16138)._ ### EXECUTIVE SUMMARY ### _cr16138 - EXECUTIVE SUMMARY ### Context - With support from the Stand-By Arrangement (SBA) that expired in December 2015, Tunisia has: - preserved macroeconomic stability; - initiated fiscal and banking reforms. - Remaining vulnerabilities: - weak economic activity; - low employment; - lingering social tensions; - deteriorated spending composition; - high external imbalances. - Recent environment included a prolonged political transition, spillovers from the crisis in Libya, and numerous exogenous shocks, including terror attacks. - The end of the political transition renewed reform momentum; a reform coordination unit at the Prime Ministry’s office was created in December 2015. ### The authorities’ program (Five-year economic vision, 2016–20) - Objective: promote stronger and more inclusive growth by transforming Tunisia’s growth model on a strategy predicated on macroeconomic stability. - Five pillars: - effective public institutions; - economic diversification; - human development and social inclusion; - regional development; - green economic growth. - Policy focus areas to help realize the vision: - consolidate macroeconomic stability; - reform public institutions, including the civil service; - facilitate financial intermediation; - improve the business climate. - The authorities’ vision will be detailed in a five-year development plan expected to be approved in June and presented at an international donor conference in September 2016. ### EFF Request - Authorities requested a four-year Extended Fund Facility (EFF) in the amount of SDR 2.046 billion (375 percent of quota, US$2.8 billion). - 41 percent of quota available upon Board approval. - The size and timing of disbursements are intended to provide buffers against potential external shocks. ### Risks - Arrangement risks stem from: - security and social tensions; - political instability; - opposition by vested interests. - External risks include: - slower growth in Europe; - rebound in international oil prices. - Emphasis: commitment of authorities and broad stakeholders is essential to avoid delays and reversals. ### Macroeconomic context and recent developments - 2015 outcomes: - Real GDP growth averaged 0.8 percent (y-o-y) in 2015. - Tourism: arrivals and FX receipts declined by 25 percent and 54 percent (y-o-y), respectively. - Unemployment: - overall: 15 percent; - youth: 35 percent; - young graduates: 67 percent; - women: 23 percent. - Inflation: - headline inflation reached 3.3 percent in March 2016 (after an October 2015 spike); - core inflation at 4.7 percent. - Current account deficit estimated at 8.9 percent of GDP in 2015, worsened by declines in remittances and tourism inflows. - Gross reserves: US$7.6 billion after World Bank (US$500 million) and African Development Bank (US$200 million) disbursements in December 2015 — above four months of import coverage but slightly below 100 percent of the Fund’s adjusted ARA reserve metric. - Exchange rate movements: - dinar appreciated by about 2 percent in nominal effective terms during 2015. - Financial markets: - sovereign spreads increased to about 450 bps vis-à-vis US Treasuries at end-March 2016. - stock market recovering from 2015 fall, led by bank shares. - Banking sector and credit: - private sector credit growth: 5.8 percent (y-o-y) at end-February 2016. - policy rate reduced by 50 bps to 4.25 percent in October 2015. - reliance on direct Central Bank of Tunisia (CBT) refinancing remained high at TD 4.7 billion at end–March 2016. - total NPLs averaged 16 percent of total loans in December 2015. - Structural fiscal position: - structural fiscal deficit (excluding cycles and one-offs) remained at 4.3 percent of GDP in 2015. - overall cash deficit stood at 4.7 percent of GDP in 2015 (lower than expected due to stronger tax revenue and deferred “customary” payments during January 1–20, 2016, about 1 percent of GDP to be paid in Q1 2016). ### Fund-supported program: strategic priorities - Overriding goals: - reform public institutions; - facilitate financial intermediation; - improve the investment climate. - Program design principles agreed with staff: - gradual and evenly phased fiscal adjustment to reduce debt and financing needs over the medium term; - strong upfront actions to create space for priority investment spending; - strong public communication campaign to explain reforms, emphasize shared burden of adjustment, and protect the most vulnerable; - strengthen broader ownership through consensus building. ### Financial sector indicators (selected, as reported) - Financial soundness indicators (December 2015, by bank type): - NPLs (in percent of total loans): Public banks 24.9; Private banks 10.4; All banks 16. - NPLs, net of provisions: Public banks 11.2; Private banks 3.4; All banks 6.2. - Provisions (in percent of NPLs): Public banks 55.6; Private banks 63.9; All banks 59. - Liquidity ratio: Public banks 58.9; Private banks 97.2; All banks 80. - ROA 1/: Public banks 0.5; Private banks 1.1; All banks 0.9. - ROE 1/: Public banks 7.3; Private banks 14.2; All banks 11.2. - Capital adequacy ratio (CAR): Public banks 11.2; Private banks 12.4; All banks 12.2. - Tier 1 CAR: Public banks 7.7; Private banks 10.0; All banks 9.5. - Note: data for ROA/ROE is for 2014. ### Macroeconomic framework (agreed program baseline) - Framework built on: - a gradual rebound in growth; - stable inflation; - steady build-up of external buffers. - Key assumptions: - receding security risks; - steady reform implementation; - gradual return of investor confidence; - situation in Libya expected to remain broadly unchanged (no significant improvement nor deterioration). - Growth projection for 2016: 2 percent (reflecting continued uncertainty and some sectoral recovery, e.g., phosphate and manufacturing), with medium-term growth gradually converging to potential. *Source: EXECUTIVE SUMMARY (document _cr16138)* ### 2019. This would reflect stronger investor ### _cr16138 - 2019. This would reflect stronger investor ### Outlook and key projections - Growth and sectoral outlook - Mining, tourism, and manufacturing sectors will continue their recovery, although tourism levels will remain below pre-2011 levels. - Prel. and projected real GDP growth (in percent): 2014: 2.3; 2015 prel.: 0.8; 2016 proj.: 2.0; 2017 proj.: 3.0; 2018 proj.: 3.7; 2019 proj.: 4.3; 2020 proj.: 4.7; 2021 proj.: 4.5. - Inflation - Headline inflation is expected to decline to 4 percent by end-2016, aided by a 5 percent reduction in retail fuel prices. - Inflation (CPI, period average, in percent): 2014: 4.9; 2015 prel.: 4.9; 2016 proj.: 3.9; 2017 proj.: 3.9; 2018 proj.: 3.8; 2019 proj.: 3.7; 2020 proj.: 3.5; 2021 proj.: 3.5. - Decline to 3.5 percent over the medium term will be helped by prudent monetary policy, a contained wage bill, and moderate increases in international food and fuel prices. - External sector and reserves - Current account deficit: 2014: -9.1 percent of GDP; 2015 prel.: -8.9; 2016 proj.: -7.7; 2017 proj.: -7.0; 2018 proj.: -6.2; 2019 proj.: -5.5; 2020 proj.: -5.1; 2021 proj.: -4.4. - Gross official reserves (US$ billions, eop): 2014: 7.7; 2015 prel.: 7.6; 2016 proj.: 8.3; 2017 proj.: 8.5; 2018 proj.: 8.8; 2019 proj.: 9.4; 2020 proj.: 10.1; 2021 proj.: 10.7. - Gross official reserves (months of next year's imports): 2014: 4.2; 2015 prel.: 4.3; 2016 proj.: 4.6; 2017 proj.: 4.5; 2018 proj.: 4.5; 2019 proj.: 4.6; 2020 proj.: 4.7; 2021 proj.: 4.8. - The current account deficit would narrow to 7.7 percent of GDP in 2016, helped by low international oil prices. Over the medium term, the deficit would decline to 4.4 percent of GDP by 2021, reflecting a rebound in tourism and phosphate exports, recovering demand from Europe, and moderate import growth. - Gross reserves are expected to exceed 100 percent of the Fund’s adjusted reserve metric by the end of 2016, with Fund resources providing sufficient cushion in case of shocks. ### Risks to the outlook and policy responses - Major risks (relative likelihood and expected impact) - High: A deteriorating security situation, political instability and high social tensions due to intensified terrorist activity, spillovers from Libya, slow consensus-building, and/or push-back from vested interests. - Expected impact: Renewed focus on security and heightened social tensions would undermine economic activity and affect the government’s ability to undertake pressing economic policy reforms, negatively impacting investment and growth. - Recommended response: Build consensus on the government’s five-year development plan with public and potential donors; implement economic reforms rapidly; build public confidence and ownership through continuous communication. - High: Tighter or more volatile global financial conditions. - Expected impact: Could slow FDI inflows and increase financing costs. - Recommended response: (i) create fiscal space by containing the wage bill, reforming energy subsidies and the tax system; (ii) countercyclical monetary policy (assuming inflationary pressures are not present); (iii) complete banking reforms. - Medium: Structurally weak growth in key advanced and emerging economies, especially Europe. - Expected impact: Adverse trade, remittances, and investment channels. - Recommended response: (i) diversify export markets; (ii) accelerate structural reforms to increase productivity and competitiveness; (iii) let revenues decline in line with economic activity (automatic stabilizers). - High: Heightened risk of fragmentation/state failure/security dislocation in the Middle East. - Expected impact: Increased security spending, higher oil prices, tighter financing conditions, lower growth. - Recommended response: (i) rebuild fiscal and external buffers; (ii) accelerate economic and structural reforms. - Medium/High: Risks to energy prices and increased volatility. - Expected impact: Could affect decisions to reform energy taxes and fuel subsidies; lower energy prices reduce external and fiscal pressures and inflationary pressures. - Recommended response: (i) urgently implement the symmetric automatic fuel price adjustment formula; (ii) save any external windfalls from lower oil prices; (iii) strengthen fiscal and external buffers. ### Fiscal policy and public debt dynamics - Fiscal consolidation goals and debt outlook - A 2.2 percent of GDP reduction in the structural fiscal deficit by 2019 would help stabilize the debt-to-GDP ratio in the near term and help reduce it to under 50 percent by 2020 (from 53 percent in 2015, albeit with a share of foreign-denominated debt that remains high at 65 percent). - Amortization payments are projected to peak at 4.7 percent of GDP in 2017. - Public debt dynamics remain sustainable under most shocks, with the exchange rate shock the most severe due to the large share of foreign-denominated debt. - Fiscal consolidation approach and risks - Consolidation should proceed gradually, anchored by wide consensus on tax and civil service reforms to improve budget composition. - Risks: spending pressures from interest groups; tax yields falling short due to slower growth; additional transfers to ailing SOEs. - 2016 fiscal adjustments and one-offs - Higher security spending reduced the pace of adjustment envisaged at the time of the 2016 budget. - Staff agreed to adjust the pace of fiscal consolidation in 2016 to account for one-off security related expenditures. As a result, the structural fiscal deficit for 2016 is 0.4 percent of GDP higher than originally budgeted, but still consistent with the medium-term adjustment path. - Revenue losses from lower oil production and weaker economic activity and higher pension transfers are expected to be mostly offset by substantial savings on energy subsidies (resulting from lower oil prices and partial adjustment in domestic energy products) and higher revenues from surpluses from refineries, the sale of the telecom license, and reduced unallocated spending. - Fiscal indicators (percent of GDP unless stated) - Revenue: 2018: 23.0; 2019: 24.2; 2020: 23.9; 2021: 24.1; (continuing) 24.4; 24.9; 24.8; 24.8. - Of which: Tax revenue: 2018: 21.6; 2019: 22.5; 2020: 21.7; 2021: 22.2; (continuing) 22.5; 22.9; 22.8; 22.8. - Expenditure and net lending: 2018: 28.5; 2019: 28.2; 2020: 28.5; 2021: 28.0; (continuing) 28.1; 27.3; 26.9; 26.6. - Wages and salaries: 2018: 13.5; 2019: 14.0; 2020: 14.1; 2021: 13.8; (continuing) 13.8; 12.7; 12.0; 11.7. - Transfers and subsidies: 2018: 5.7; 2019: 5.0; 2020: 4.9; 2021: 4.5; (continuing) 4.3; 4.4; 4.4; 4.4. - Capital expenditure: 2018: 4.6; 2019: 5.0; 2020: 5.0; 2021: 5.5; (continuing) 5.9; 6.5; 6.5; 7.2. - Central government overall deficit (excl. grants): 2018: -5.5; 2019: -4.0; 2020: -4.6; 2021: -3.9; (continuing) -3.7; -2.4; -2.0; -1.8. - Structural fiscal balance: 2018: -4.3; 2019: -3.6; 2020: -4.0; 2021: -3.3; (continuing) -2.8; -2.1; -1.9; -1.8. - Central government debt: 2018: 53.2; 2019: 54.6; 2020: 54.6; 2021: 54.5; (continuing) 53.1; 50.9; 48.7; 46.4. - Wage bill and civil service reform - Containing the wage bill remains an immediate priority. The wage bill is already at 14 percent of GDP (63 percent of tax revenues). - Rationalizing promotions and performance bonuses (savings of 0.2 percent of GDP) were necessary to keep the wage bill at the originally budgeted level in 2016. - Recent wage increases: security forces: 0.2 percent of GDP on top of past agreements reflected in the current budget of 0.7 percent of GDP. - Staff and authorities agree that recourse to the public sector cannot be the solution to reduce high unemployment. ### Energy subsidy reform and fuel pricing - The five percent decline in retail fuel prices in January 2016 increased households’ disposable income. - A new automatic fuel-price adjustment mechanism will be implemented in July 2016 to ensure full cost recovery and appropriate tax collection. - Authorities proposed quarterly implementation initially; staff recommended monthly adjustments starting in January 2017 to ensure sustainability in the face of large international oil price fluctuations. - Recommended actions: implement the symmetric automatic fuel price adjustment formula urgently; save windfalls from lower oil prices; strengthen fiscal and external buffers. ### Monetary and exchange rate policy - Monetary policy stance and objectives - Authorities committed to a prudent monetary policy. Continued declines in inflation, moderate credit growth, and economic activity well below potential justify the current monetary policy stance (implying a positive real interest rate of 1 percent). - Staff reiterated importance of maintaining a positive real interest rate and supported the CBT’s readiness to reverse its rate cut of October 2015 should underlying inflationary pressures pick up. - Transition to inflation targeting and central bank framework - A gradual move towards a full-fledged inflation targeting framework is planned for the medium term. - Until pre-requisites for inflation targeting are in place, authorities will continue targeting NDA to maintain money supply growth consistent with the inflation objective. - Preconditions highlighted: improved liquidity forecasts, strengthened collateral framework, improved communication of CBT objectives, greater exchange rate flexibility, and a risk-based supervision framework. - Adoption of a new central bank law grants greater CBT autonomy, sets up a full-fledged lender of last resort, and clarifies objectives—though staff noted deviations from best practices (government presence on the CBT Board and lack of outright prohibition on receiving specific instructions from the government) and urged future amendments. - Establishment of a yield curve recommended to improve monetary transmission. - FX framework, capital account modernization, and exchange rate flexibility - Steps taken: reduce ex-ante controls on capital account transactions; eliminate ceiling for foreign holdings of government debt; grant greater powers to banks for FX transfers; implement FX auction mechanism to improve FX liquidity management. - Staff call: regular, clearly pre-announced FX auctions. - Move toward full capital account convertibility deemed appropriate only in the medium term once pre-requisites are met. - With the dinar continuing to depreciate in a crawl-like manner within a two percent band, staff estimates the real effective exchange rate to be overvalued (6–13 percent). - Greater exchange rate flexibility would help rebuild buffers, increase competitiveness and support monetary policy. - Staff welcomed explicit CBT commitment to limit interventions to smoothing excessively large fluctuations, with a set ceiling for net FX sales. - Lower interventions, currently below 20 percent of the FX market, would complement other FX framework measures and improve liquidity management by reducing banks’ refinancing needs. - Monetary analysis - Box 3 finding: Reserve money remains an important driver of inflation. Staff analysis indicates that a third of inflation variability at a two-year horizon is due to changes in the supply of base money, under the direct control of the CBT. Changes in the policy rate help only marginally in explaining changes in inflation, even at longer horizons. - Implication: Monetary aggregates remain a relevant indicator; the ceiling on NDA accumulation can help communicate monetary stance while the policy rate becomes more important over time as markets deepen. ### Reforming public institutions and structural priorities - Reform objectives - Reforming public institutions is the cornerstone of the medium-term program to boost inclusive growth. - Key goals: increase efficiency of public services; improve budget composition to increase pro-growth expenditures; safeguard fiscal sustainability. - Required reforms - Comprehensive civil service reform. - Rationalization of energy subsidies. - Stronger public financial management. - Improved social safety net. - Equity-friendly revenue mobilization. *Source: IMF staff report (selected excerpts).* ### 21. Modernizing the public administration has been identified by all stakeholders as a key ### _cr16138 - 21. Modernizing the public administration has been identified by all stakeholders as a key ### Civil service reform: strategy and components - A comprehensive civil service reform will be laid out in a time-bound strategy by September 2016 (structural benchmark, SB). - The strategy will cover creation of a “Special Statute for High Level Civil Servants” to attract qualified candidates, application of stricter recruitment criteria, improved evaluation and promotion processes, and better alignment of pay structures with performance (including through rationalizing existing allowances). - As part of the strategy, the authorities are committed to: - contain wage increases; - finalize functional reviews of four ministries (end-December SB); - redeploy human resources to interior regions where needed. - The reform could allow for a reduction in the workforce—possibly accelerated through incentives for targeted voluntary departures in 2018—to help meet the authorities’ objective of reducing the wage bill to 12 percent of GDP by 2020 (MEFP ¶20). ### Wage bill dynamics and 2017 policy implications - The growing wage bill has been driven by: - a 23 percent increase in employment since the revolution; - a 37 percent rise in average wages since the revolution. - Authorities committed to limit the increase of the wage bill in 2017 to the expected inflation rate, which implies the need to identify savings of about 0.6 percent of GDP in 2017. - Specific options to consider in the 2017 budget (to be aligned with the overall reform strategy) include: - streamlining bonuses and allowances; - further reducing turnover and promotions; - extending the hiring freeze. ### Energy subsidies reform and social safety net - Fuel subsidy reform was to be implemented in July 2016 (¶14). - Authorities plan a gradual increase of electricity tariffs to cost-recovery levels, accompanied by lifeline tariffs to protect the most vulnerable (MEFP ¶22). - A better-targeted social safety net would be introduced in June 2017, with introduction of a unique social identification number and a new database on vulnerable households (end-March 2017 SB) (MEFP ¶24). - Existing cash transfer schemes have seen increased coverage and importance over the past two years. ### Public pension system - The public sector retirement and social security fund (CNRPS) is in deficit, requiring budget transfers of about 0.4 percent of GDP in 2016. - Staff emphasized accelerating the tri-partite National Social Dialogue on pension reform to restore CNRPS’s financial viability. - A comprehensive long-term solution could include changes in contribution parameters and benefits and should be consistent with civil service reform proposals. ### State-Owned Enterprises (SOEs): governance and fiscal risks - Government adopted a strategy to improve governance and ensure SOEs can operate on a commercial basis and reduce substantial losses (Box 5). - Plans include creation of an independent agency overseeing SOE restructuring, including public banks, with potential difficulties in avoiding duplications among existing ministerial structures (MEFP ¶21). - Staff encouraged concluding performance contracts for the five largest SOEs (SB), including indicators on managerial and financial performance. - Monitoring of cross-arrears between SOEs and the central administration was expected to start in 2016. - Production of a fiscal risks statement that highlights SOE risks and mitigation measures was recommended to strengthen transparency and guide policies. Box 5 — empirical and fiscal context for SOEs (selected figures preserved exactly as presented) - Ninety three non-financial SOEs operate in 17 sectors. - SOEs employ 180,000 people (5 percent of Tunisia’s active population), with employment increasing by 50 percent since 2011. - The largest 28 enterprises represent more than 70 percent of this employment. - On a consolidated basis, non-financial SOEs registered a 4.4 percent of GDP deficit in 2013, with half of the enterprises operating in the red. - Transfers to public enterprises increased from about 2 percent of GDP in 2010 to about 7 percent of GDP in 2013. - Guaranteed external debt averages close to 10 percent of GDP (about a third of Tunisia’s external PPG debt). - SOE debt to the banking system is about 5 percent of GDP. ### Public financial management and transparency - Authorities’ vision includes a three-pronged approach: - Public Financial Management: - The organic budget law, to be adopted by Parliament this year (SB), will improve budget preparation and execution, facilitate collection of budgetary information, introduce a new budgetary functional classification, and simplify control and audit procedures (MEFP, ¶25). - It will help complete rollout of performance budgeting and, together with the new procurement code and project prioritization, help accelerate public investment execution, particularly in rural areas. - Coordination among agencies and with state owned enterprises will be critical to improve cash management and forecasting (¶25). - Debt Management: - A medium-term debt strategy will be finalized by end-2016, with help from the World Bank (SB). - A centralized debt agency to be set up next year will manage issuance strategy and the share of sizeable state guarantees (about 12 percent of GDP) (MEFP ¶26). - Staff recommended publication of debt auctions calendars on a quarterly basis and issuance of short-term debt to help develop financial markets. - Staff stressed need for consistent reporting of domestic and external debt across public institutions and consolidating management of all debt types into the newly created unit. - Strengthening anti-corruption efforts: - Establishment by end-December 2016 (SB) of a high-level anti-corruption entity whose independence and budgetary autonomy are guaranteed by the Constitution. - Priorities include introduction of a whistle blowing platform and stronger financial transparency requirements for high-level public officials (MEFP ¶27). - With Fund TA, authorities are strengthening their AML/CFT framework by introducing a risk-based approach and strengthening assessment of banks’ due diligence on new customers. - Improving data transparency: - Publication of a “citizen budget” and an electronic government platform. - Efforts to improve data collection, production and dissemination by the national statistical agency. - Reducing delays in data compilation and publication recommended to monitor socio-economic developments. ### Tax reform strategy and revenue measures - Tax reforms included in the 2015-16 budgets: - Halving the difference in offshore-onshore corporate taxation; - Rationalizing customs duties; - Lowering of excessive excise rates (e.g., alcohol); - Improving presumptive taxation; - Reducing VAT exemptions by 0.5 percent of GDP. - Overall tax strategy (prior action) aims to: - Broaden the VAT tax base by removing exemptions and simplifying VAT from three to two rates (6 and 18 percent); - Improve the progressivity of the personal income tax; - Further reduce the difference in on-shore and off-shore corporate taxation while increasing dividend taxation to improve equity, eliminate tax arbitrage and preserve revenue neutrality; - Simplify taxation for small enterprises; - Reduce earmarked taxation. - Complementary actions: legislative action once tax strategy is adopted; rationalize existing tax incentives; strengthen tax administration by moving towards an integrated tax administration, starting with a Large Taxpayer Unit regrouping tax functions (MEFP ¶23). Selected estimated fiscal impacts and reform items (figures preserved verbatim from tax package table excerpt) - Tax package: First set of reforms included in the 2016 budget: 439.0 Million of dinars, 0.5 Percent of GDP. - VAT: 395.0 Million of dinars, 0.5 Percent of GDP. - Base expansion: Reduction tax exemptions: 495.0 Million of dinars, 0.6 Percent of GDP. - Reduction withholding tax from 50 percent to 25 percent: -50.0 Million of dinars, -0.1 Percent of GDP. - Impact of Customs duties harmonization: -50.0 Million of dinars, -0.1 Percent of GDP. - Tariff harmonization (reduction from seven to two): -316.0 Million of dinars, -0.4 Percent of GDP. - Increase in fuel taxation in fuel price mechanism: 360.0 Million of dinars, 0.4 Percent of GDP. - Tax package: Outstanding reform proposals: 994.7 Million of dinars, 1.1 Percent of GDP. - Direct Taxation subtotal: -165.0 Million of dinars, -0.2 Percent of GDP. - Personal income tax subtotal: -215.0 Million of dinars, -0.2 Percent of GDP. - Simplification of number of brackets: 315.0 Million of dinars, 0.3 Percent of GDP. - Increase of income tax threshold from TD1500 to TD5000: -730.0 Million of dinars, -0.8 Percent of GDP. - Elimination of deductions for professional services: 200.0 Million of dinars, 0.2 Percent of GDP. - Corporate income tax: 50.0 Million of dinars, 0.1 Percent of GDP. - Decrease of CIT Rate for onshore sector to 20 percent in 2018: (figure placeholder "......" as in source). - Increase dividend taxation to 10 percent: 50.0 Million of dinars, 0.1 Percent of GDP. - Indirect Taxation subtotal: 1,159.7 Million of dinars, 1.3 Percent of GDP. - VAT subtotal: 820.0 Million of dinars, 0.9 Percent of GDP. - Rationalization of VAT rates (6,12,18) to 6 percent and 18 percent: 320.0 Million of dinars, 0.3 Percent of GDP. - Further reduction of tax exemptions: 500.0 Million of dinars, 0.5 Percent of GDP. - Customs duties: Eliminate Preferential treatment regime (tax at current rates): 416.7 Million of dinars, 0.5 Percent of GDP. - Excises subtotal: 123.0 Million of dinars, 0.1 Percent of GDP. - Reduction of list of products subject to excises: -77.0 Million of dinars, -0.1 Percent of GDP. - Increase rates for tobacco products while liberalizing retail prices: 200.0 Million of dinars, 0.2 Percent of GDP. - Other taxes: Reduction of Earmarked Special Funds (and rationalization on spending side of Funds): -200.0 Million of dinars, -0.2 Percent of GDP. - Sources for the table: Tunisian authorities; USAID; and IMF staff estimates and projections. ### Financial intermediation and banking sector reforms - Reforms under the previous SBA included recapitalization of two large public banks and a strengthened regulatory and supervisory framework. - Adoption of banking legislation (bankruptcy, banking and central bank laws) by May 2016 was highlighted as crucial to improve banks’ ability to resolve bad loans and provide modern tools, including a lender of last resort facility and a deposit guarantee scheme (MEFP ¶29). - Private sector credit remained relatively low at 77 percent of GDP at end-2015. ### Banking sector vulnerabilities and policy support - Overall capital adequacy improved to 12.2 percent in end-December 2015, but one public bank’s capital ratios still fall short of regulatory requirements. - Banks continue to rely on central bank refinancing; one large bank’s liquidity ratio is below prudential norms. - Non-performing loans remain high and may deteriorate further once the freeze on tourism loan classifications—introduced after the Sousse attack—expires next year; about 25 percent of NPLs are from the tourism sector. - Weaker economic activity and smaller intermediation margins could put additional pressure on bank soundness and profitability. ### Financial sector strategy and governance - Authorities’ strategy, overseen by a Financial Sector Steering Committee (FSSC) chaired by the MoF, includes: - strengthening banking sector resilience; - improving banking sector regulation and governance; - expanding CBT supervisory functions; - improving financial inclusion. - Staff recommended that the FSSC ensure coordination and effective delivery of reforms and regular communication with the public. *Italic: Source — _cr16138 - 21. Modernizing the public administration has been identified by all stakeholders as a key (PDF chapter/section content provided).* ### 31. Strengthening banking sector resilience requires continued progress on public bank ### _cr16138 - 31. Strengthening banking sector resilience requires continued progress on public bank ### Strengthening banking sector resilience and public bank restructuring - Updated business plans for public banks expected to be approved by banks’ boards by May 2016 (prior action) build on prudent assumptions aiming at a rapid resolution of NPLs, including through write-offs (MEFP ¶30), while ensuring compliance with all prudential standards throughout the restructuring period. - Write-offs should avoid sales of NPLs to public banks’ own subsidiaries. - Performance contracts will be signed by June (SB) to ensure incentives for bank management, with key indicators to be monitored on a consolidated basis (MEFP ¶30) by the newly established state-ownership agency. - Authorities intend to encourage entry of strategic or technical partners by privatizing part of its stakes in the three main public banks, and to divest remaining minority shares in private banks. ### Resolution of nonperforming loans (NPLs) - Staff and authorities agreed on removing legal barriers to active NPL resolution by banks through: - new implementing decrees of the recently adopted bankruptcy law and review of the regulatory framework for insolvency practitioners; - putting public banks on an equal footing with private banks by empowering them to write-off NPLs; - simplifying write-off rules; and - allowing credit recovery companies to contact their clients to incentivize repayments of debts. - Introduction of dedicated internal structures in public banks to deal with NPLs to facilitate debt recovery. - Staff encouraged the central bank to assess the possibility of out-of-court settlements to facilitate debt renegotiations, planned with technical support from the World Bank. ### Consolidating regulatory and supervisory improvements - Key measures to consolidate progress include: - Passage of the banking law, to be adopted by parliament in early May 2016, which includes a banking resolution framework and a deposit guarantee scheme. Staff noted MoF presence in the banking resolution committee should be limited to systemic cases; the authorities disagreed. - Implementation of the CBT’s five-year plan and steps towards a risk-based supervisory system, including: - moving towards internal risk rating systems; - use of a risk-based supervision manual (to be completed) as a systematic reference for supervisors (SB); - full automation of reporting by banks. - Hiring of ten new supervisors welcomed; staff urged additional recruitment to ensure adequate resources for timely risk assessment, including on-site general inspections in the seven largest private banks (SB). - A new reporting to be obtained as of end-June will help assess whether consolidated supervision should be introduced earlier than 2018 (current target). ### Financial inclusion initiatives - Access to finance limited to 36 percent of the adult population (World Bank estimates). - Program policies include: - Development of private credit bureaus to complement the CBT’s "Centrale de Risques" for more exhaustive data collection and improved lending to non-connected clients. - Revising the law on excessive lending rates: authorities recognize need to improve regulation by increasing the cap on lending rates for individuals and SMEs from the current limit of "20 percent more than the average lending rate" to "at least 33 percent" (end-December 2016 SB), and revising the framework to adapt to different borrower types. Identifying appropriate ceilings by type is seen as essential before considering staff proposal to eliminate the ceiling for large enterprises. - Strengthening financing for microfinance and SMEs: regrouping the existing 289 microcredit associations (more than half non-compliant with regulatory framework) into 24 institutes (one per region) under a new microfinance strategy. Restructuring several public institutions specialized in development financing into a regional bank intended to increase efficiency and open financing opportunities in lagging regions. Staff urged caution: the bank should act only as an intermediary in partnership with existing banks where traditional services are not viable, avoiding duplication of commercial providers. ### Improving the business climate - Removing structural obstacles to private sector development is critical to change the development model based on pervasive state intervention, low-value added exports, excessive regulation, and limited competition. - Implementation decrees for the competition law should reduce delays for anti-trust hearings and increase sanctions for anti-competitive behavior. - Implementation of the approved PPP law will focus on two pilot projects and include a framework to evaluate feasibility and fiscal risks of new PPPs (MEFP ¶32). - New investment code expected to be adopted by September 2016 along with implementing decrees (MEFP ¶32) to reduce barriers to entry and protect investor rights; tax incentives will be removed from the investment code and any new incentive incorporated in the tax code. - Simplification of about 530 tax, customs, and business formalities completed over the past two years expected to reduce administrative burden; completion of an impact analysis will guide action on remaining procedures (MEFP ¶33). - Labor market reforms to proceed gradually: finalize a national employment strategy addressing skills mismatches, hiring/firing policies, worker protection, and public/private sector compensation; interim focus on active labor market programs for youth and marginalized regions and reform vocational training (MEFP ¶34). ### Program modalities, financing needs, and phasing - Tunisia faces projected balance of payments needs of US$11 billion over the next four years. - A four-year arrangement under the EFF (May 11, 2016–May 10, 2020) is proposed to meet needs, strengthen reserves above 100 percent of the Fund’s risk-weighted metric, and support structural reforms. - Access of 375 percent of quota (SDR 2.046 billion, or US$2.8 billion) is justified based on needed reserve coverage (Box 6). Disbursements under the proposed arrangement will be evenly phased; the first installment will be at program approval and remaining purchases contingent on completing semi-annual reviews. - Donors and market access expected to cover most remaining financing needs; external financing needs are fully covered for the first year with donors expected to provide US$2 billion (including third-country guarantees enabling market access of about US$500 million). Market access prospects and firm donor commitments for remaining years are positive, including market access with no third-country guarantee in 2017. ### Official external financing schedule (selected figures) - Official External Financing, 2016 Year total: 2,985.9 (Millions of US dollars). - Official External Financing, 2017 Year total: 2,586.4 (Millions of US dollars). - Components (selected): - Project loans 2016 Year total: 260.0; 2017 Year total: 300.0. - Multilateral donors 2016 Year total: 2,175.9; 2017 Year total: 1,286.4. - Financial Market Access and other 2016 Year total: 550.0; 2017 Year total: 1,000.0. - Budget Grants 2016 Year total: 93.1; 2017 Year total: 150.9. - Sources: Tunisian authorities and IMF staff estimates. ### Reserve adequacy assessment (Box 6) - Reserve coverage improved in 2015, boosted by January issuance of a US$1 billion Eurobond and multilateral and bilateral disbursements. - Under greater exchange rate flexibility and continued donor funding, gross reserves expected to cover over four months of imports throughout the medium term and exceed common benchmarks: three-month import coverage, 100 percent of short-term debt, and 20 percent of money supply. Reserves remain relatively low compared to most emerging economies. - ARA metric components and weights for Tunisia: export income (10 percent), broad money (10 percent), short-term debt (30 percent), other liabilities (20 percent). - Using the unadjusted Reserves Adequacy Metric (no capital controls and fixed exchange rate regime for 2016 onwards), reserves would fall short of the suggested adequacy range of 100–150 percent. - Adjusting the ARA metric to account for existing capital controls by halving the weights on broad money and other liabilities improves reserve adequacy; applying this to Tunisia suggests reserves cross the bottom threshold of the satisfactory ARA adequacy range starting 2016 and gradually improve under a Fund-supported program. ### Use of Fund resources and monitoring - With the exception of the second tranche, Fund resources will be used for budgetary financing. For 2016, the first tranche at program approval will be made available to the budget to hedge against uncertainties about timing of donor disbursements in 2016. - Large amortization payments and protracted fiscal needs from 2017 onwards call for using IMF resources for fiscal support. - All use of Fund resources for budget support governed by a Memorandum of Understanding regarding Ministry of Finance and CBT responsibilities for servicing charges and obligations to the Fund. - Program monitored through semi-annual reviews based on: - quantitative performance criteria focused on fiscal, monetary and external objectives; - indicative targets on domestic arrears and social spending; - structural benchmarks on financial sector reform, budget policy and public institutions, and business climate (MEFP, Tables 1-2). - Prior actions in the banking sector and on the tax strategy were undertaken to signal commitment to the reform agenda. ### Debt, repayment capacity, and risk assessment - Tunisia has capacity to repay the Fund: outstanding Fund credit would peak in 2020 at 5.7 percent of GDP, and 14.1 percent of exports of goods and services, before gradually declining. - Obligations to the Fund peak at 6.4 percent of gross reserves (1.3 percent of GDP) in 2018 (Table 10). - Total external debt projected to peak in 2018 at below 75 percent of GDP; public debt will stabilize below 55 percent of GDP at its peak, but remains vulnerable to exchange rate risks and a combined macro-fiscal shock. - Under conservative assumptions on tourism and remittances, external debt expected to start declining by end of program while public debt declines to under 50 percent of GDP (Table 8, DSA Annexes). ### Program risks and mitigation - Main risks: - Increased security tensions could shift focus away from reforms and reduce investor confidence. - Public disillusionment over unemployment, electoral campaigning ahead of municipal elections, or weakened political support could slow reforms. - Rebound in oil prices and deterioration of external environment could weaken growth and pressure fiscal and external positions. - Delays in reform implementation could postpone donor disbursements and create financing shortfalls. - Risk mitigation features: - Program design builds early momentum toward critical reforms expected to catalyze donor support. - Creation of a high-level reform implementation committee at the Prime Minister’s office and broad political consensus around the five-year plan. - Six-month Reviews with interim visits to allow early remedial actions in case of slippages. - Safeguards: an updated safeguards assessment is being finalized. External audit arrangements continue to be sound and financial statements are published timely. New central bank law adopted but further amendments—particularly on greater autonomy (¶17)—are needed to align with best international practices. ### Key program design summary (Box 7) - Access: SDR 2.045625 billion (375 percent of quota, equivalent to about US$2.865 billion). - Length: 48 months, starting May 2016. - Phasing: eight program reviews and nine disbursements; disbursements even-phased. - Quantitative Performance Criteria include ceilings on the primary balance of the central government (cash basis excluding grants), ceiling on net domestic assets of the central bank, ceiling on current primary expenditures, and a floor on net international reserves of the central bank. - Continuous Performance Criterion: ceiling on accumulation of new external debt payment arrears by central government. - Quantitative Indicative Targets: floor on social spending; ceiling on accumulation of new domestic arrears. - Prior Actions included: - Approval, by banks' boards, of updated business plans for all three public banks. - Adoption, by the Assembly (ARP), of the CBT law, the banking law, and the bankruptcy law in line with good international practices. - Adoption, by the Council of Ministers, of the comprehensive tax reform strategy. - Structural Benchmarks (selected deadlines): - Approval of performance contracts by Boards of public banks (STB, BH, and BNA), June 2016. - Approval of comprehensive civil service reform strategy, September 2016. - Adoption of implementation decrees for new competition law, PPP law, and new investment code, September 2016. - Increase of the cap on lending rates to, at least, the 2009 level, December 2016. - Systematic use of the new manual on risk-based supervision by supervisors, December 2016. - Publication of the organic budget law, December 2016. - Establishment of a Large Taxpayers Unit with formal responsibility for major tax and enforcement functions, December 2016. - Adoption of a medium-term debt strategy, December 2016. - Creation of an independent, high anti-corruption authority, December 2016. *Source: IMF staff report text provided in content unit _cr16138.* ### 46. Tunisia’s economy has shown resilience but continues to face important challenges. ### Tunisia’s economy has shown resilience but continues to face important challenges ### Current situation and key vulnerabilities - Social and security tensions dampen immediate prospects for recovery despite a more favorable external economic environment and low international oil prices. - External imbalances persist, budget composition has worsened, and the financial sector does not provide sufficient support to the economy. - These vulnerabilities underscore the need to tackle long-standing structural weaknesses. ### Fund-supported program and policy priorities - The Fund-supported program—built on the authorities’ five-year vision—is focused on consolidating macroeconomic stability and promoting more inclusive growth. - Early and decisive action is needed on key structural reforms that may be politically and socially difficult but will yield the largest gains in economic opportunities, job creation, and renewed confidence. - Inaction or delays risk undermining macroeconomic stability and disappointing public aspirations. ### Fiscal policy, debt, and revenue measures - Staff welcomes the authorities’ commitment to put debt firmly on a downward path. - Further reduction of the structural fiscal deficit would: - ease financing constraints, - reduce external imbalances, - ensure fiscal sustainability. - Policy measures recommended: - reduction of current spending, - greater revenue mobilization through a more progressive and efficient tax system, - a wider tax base via further reductions of exemptions, - move towards an integrated tax administration. - Increased fiscal space would allow priority investment and better-targeted social spending. ### Civil service reform and wage bill - Recent increases in public sector employment and wages are unsustainable. - Staff welcomes commitments to: - conduct functional reviews of ministries, - align the increase in the 2017 wage bill to inflation, - reduce the wage bill to 12 percent of GDP by 2020. - The soon-to-be adopted civil service reform strategy should: - increase public service efficiency, - avoid unnecessary hiring in the already large public sector, - refrain from additional wage increases. ### Energy subsidy reform and social protection - Staff welcomes the lowering of fuel prices and the planned introduction of an improved automatic price mechanism to be implemented on a monthly basis to ensure close alignment with international prices. - Further rationalization of electricity subsidies is welcome, as is the introduction of a lifeline tariff for the poor. - Institutional steps to improve targeting: - introduction of a new social identification number, - creation of a new database on vulnerable households. - In the interim, human development and social assistance programs should be protected, as signaled by the inclusion of an indicative floor on social spending in the program. ### Fiscal risks: SOEs, pensions, and debt management - Large losses and weak governance in SOEs are important vulnerabilities. - Urgent measures needed: - introduction of an SOE monitoring agency, - new performance contracts to mitigate risks. - The financial viability of the public pension system should be restored. - A medium-term debt strategy and close cooperation among agencies on cash and debt management will improve program monitoring, transparency, and policy coordination. ### Governance and statistical strengthening - Accelerate efforts to strengthen governance. - Implementation of a new organic budget law will improve data dissemination, budget preparation and execution, and government accountability. - Anti-corruption efforts and further strengthening of statistical data will help reduce fiscal risks and inform sound policies. ### Monetary policy and central bank framework - Monetary policy should remain prudent. - Staff welcomes the authorities’ readiness to raise interest rates should inflationary pressures materialize. - Enhanced central bank independence—following the adoption of the new central bank law—will improve policy effectiveness through: - establishment of an emergency liquidity framework, - better communication of the CBT objectives, - facilitating the transition to an inflation targeting framework. ### Exchange rate policy and reserves - Greater exchange rate flexibility will strengthen reserve buffers and gradually reduce dinar overvaluation. - Policy measures to support flexibility: - reduced FX interventions, - regular FX auctions, - a deeper FX market enabled by recent relaxation of restrictions on FX use by banks. - These steps will help promote exchange rate flexibility and improve banks’ liquidity management, important given high external current account deficits and rising external debt. ### Banking sector reform and financial inclusion - Moving forward on banking sector reforms is essential to reduce fragilities and boost financial inclusion. - Required reforms include: - continued progress on public bank restructuring, - a proper resolution framework, - a risk-based supervision system enhanced by on-site inspections and adequate resources. - Public banks should make all efforts to stay above regulatory requirements, with swift and decisive remedial actions in case of breach. - Measures to increase access to finance: - developing credit bureaus, - relaxing existing caps on lending rates, - developing microfinance institutions. ### Business climate and private sector role - Improvements in the business climate are necessary for more sustainable growth. - Key measures: - adoption of the competition and PPP laws and their implementation decrees, - implementation of the new investment code and more simplified procedures to reduce red tape and ensure a level playing field. - Continued gradual reduction of the dichotomy between onshore and offshore corporate tax rates will help clarify policy intentions to investors while reducing regional disparities. - Streamlining tax incentives is essential to reduce distortions. ### Program risks and mitigation - Program risks are high. Main risks include: - worsening security situation, - social unrest, - political uncertainty, - opposition by vested interests, - external shocks that could undermine reforms. - Mitigating actions: - steadfast reform implementation, - continued efforts to build consensus on reforms—manifest in the forthcoming government’s five-year plan, - continued policy dialogue and program monitoring to reduce risks further. * _cr16138 - 46. Tunisia’s economy has shown resilience but continues to face important challenges._ ### 58. In view of Tunisia’s balance of payment and budget needs, the strong policies ### _cr16138 - 58. In view of Tunisia’s balance of payment and budget needs, the strong policies ### Program approval and Fund support - Staff supports the authorities’ request for a 48-month EFF for the amount of SDR 2.046 billion (375 percent of quota). - Schedule of proposed purchases under the EFF (total): Total 2,045.625 Millions of SDR; Percent of quota 375.000; Millions of U.S. dollars 2,865.095. ### Macroeconomic outlook and growth projections - Real GDP growth: - 2012: 3.9 - 2013: 2.4 - 2014: 2.3 - 2015: 0.8 - 2016: 2.0 - 2017 (proj.): 3.0 - Inflation (CPI, average): - 2012: 5.1 percent - 2013: 5.8 percent - 2014: 4.9 percent - 2015: 4.9 percent - 2016: 3.9 percent - 2017 (proj.): 3.9 percent - GDP deflator and CPI end of period included in Table 1: - GDP deflator (2016): 5.1; (2017 proj.): 3.3 - CPI, end of period (2016): 4.0; (2017 proj.): 3.9 - Gross national savings (percent of GDP): - 2012: 16.1 - 2013: 14.4 - 2014: 14.0 - 2015: 12.9 - 2016: 14.1 - 2017: 15.3 - Gross investment (percent of GDP): - 2012: 24.4 - 2013: 22.7 - 2014: 23.2 - 2015: 21.8 - 2016: 21.8 - 2017: 22.3 ### Fiscal stance, balances, and debt - Central government (percent of GDP): - Total revenue (excluding grants): 2012: 24.0; 2013: 24.9; 2014: 25.4; 2015: 23.0; 2016: 23.9; 2017: 24.1 - Total expenditure and net lending: 2012: 29.8; 2013: 32.4; 2014: 29.7; 2015: 28.5; 2016: 28.5; 2017: 28.0 - Central government overall balance (excluding grants): 2012: -5.8; 2013: -7.5; 2014: -4.3; 2015: -5.5; 2016: -4.6; 2017: -3.9 - Central government overall balance (excluding grants, cash basis): 2012: -5.5; 2013: -9.8; 2014: -5.4; 2015: -4.7; 2016: -4.6; 2017: -3.9 - Structural fiscal balance: 2012: -5.7; 2013: -6.4; 2014: -4.3; 2015: -4.3; 2016: -4.0; 2017: -3.3 - Change in structural fiscal balance (+: improvement): 2012: -2.4; 2013: -0.7; 2014: 2.1; 2015: 0.0; 2016: 0.3; 2017: 0.7 - Central government debt (foreign and domestic, percent of GDP): - 2012: 45.5; 2013: 44.5; 2014: 49.0; 2015: 53.2; 2016: 54.6; 2017: 54.5 - Foreign currency public debt (percent of total debt): 2012: 61.6; 2013: 59.6; 2014: 62.6; 2015: 62.6; 2016: 68.0; 2017: 68.6 - Central government fiscal operations (selected levels, in millions of dinars, 2016 Est. / 2017 Proj.): - Total revenue and grants (2016 Est.): 19,941; (2017 Proj.): 22,107 - Revenue (2016 Est.): 19,649; (2017 Proj.): 21,910 - Tax revenue (2016 Est.): 18,487; (2017 Proj.): 19,860 - Total expenditure and net lending (2016 Est.): 24,340; (2017 Proj.): 26,097 - Current expenditure (2016 Est.): 19,729; (2017 Proj.): 21,584 - Wages and salaries (2016 Est.): 11,542; (2017 Proj.): 12,960 - Interest payments (2016 Est.): 1,641; (2017 Proj.): 1,860 - Capital expenditure (2016 Est.): 3,943; (2017 Proj.): 4,573 - Central government overall balance (excluding grants) (2016 Est.): -4,692; (2017 Proj.): -4,187 (millions of dinars) - Central government overall balance (including grants) (2016 Est.): -4,400; (2017 Proj.): -3,990 (millions of dinars) - Central government debt (millions of dinars, memorandum): - 2016: 50,045; 2017 (proj.): 53,162 ### External sector, reserves, and external debt - Current account (percent of GDP): - 2012: -8.3; 2013: -8.4; 2014: -9.1; 2015: -8.9; 2016: -7.7; 2017: -7.0 - Trade balance (percent of GDP): - 2012: -13.6; 2013: -12.8; 2014: -14.0; 2015: -11.5; 2016: -10.4; 2017: -10.1 - Exports and imports (goods, f.o.b., in $ millions, annual 2017): - Exports (2017 annual): 17,401 - Imports (2017 annual): -21,771 - External debt: - External debt (US$ billions, 2017): 30.7 - External debt (percent of GDP, 2017): 71.4 - Debt service ratio (percent of exports of GNFS, 2017): 16.7 - Gross official reserves (US$ billions, e.o.p): - 2012: 8.7; 2013: 7.7; 2014: 7.7; 2015: 7.6; 2016: 8.3; 2017 (proj.): 8.5 - In months of next year's imports of goods and services, c.i.f.: 2012: 3.9; 2013: 3.4; 2014: 4.2; 2015: 4.3; 2016: 4.6; 2017: 4.5 ### Balance of payments and financing - Current account in levels (US$ millions, selected years): - 2016: -3,390 - 2017 (annual): -3,113 - 2018 (Q1–Q4 annualized): -2,789; 2019 Q1–Q4 annual: -2,632; 2020 Q1–Q4 annual: -2,568; 2021 annual: -2,325 - Capital and financial account (annual): - 2016: 4,135; 2017 annual: 3,127; 2018 annual: 3,177; 2019 annual: 3,324; 2020 annual: 2,952 - Changes in gross reserves ( + = accumulation): 2016: -745; 2017: -539; 2018 annual: 6; 2019 annual: -462; 2020 annual: 555; 2021 annual: 145 (values in US$ millions as per Table 2) - External financing needs (total financing requirements, US$ millions, selected): - 2016 total financing requirements: 11,944 - 2017 total financing requirements: 11,244 - 2018 total financing requirements: 11,510 - Total financing sources and composition (2016–18, US$ millions): - Direct investment and portfolio (net): 2016: 1,106; 2017: 1,097; 2018: 1,139 - Disbursements (total): 2016: 3,474; 2017: 3,179; 2018: 3,351 - Short-term debt (rollover amounts noted across projections): e.g., short-term debt stock movements recurring in financing tables. ### Monetary and financial sector - Monetary aggregates (selected, in millions of dinars): - Broad money (M3, annual 2016): 61,892; (2017 proj.): 70,384 - Money plus quasi-money (M2, annual 2016): 58,821; (2017 proj.): 66,690 - Credit to the economy (annual levels): 2016: 66,162; 2017 (proj.): 76,052 - Central Bank (selected items, in millions of dinars): - Net foreign assets (2016 annual): 9,084; 2017 proj.: 8,970 - Reserve money (2016 annual): 11,009; 2017 proj.: 11,311 - Total refinancing of banks by the CBT (except OMPs): 2016: 5,372; 2017 proj.: 4,794 - Financial soundness indicators (banking sector, selected): - Regulatory capital to risk-weighted assets (most recent listed): 12.2 percent - Nonperforming Loans (NPLs) to total loans (2015 Prel.): 16.0 percent - Specific provisions to NPLs (most recent listed): 65.2 percent - Liquid assets to total assets (2015, revised definition): 5.4 percent (note: definition changed in 2015) - Deposits to loans (most recent listed): 87.4 percent ### Risks, scenarios, and medium-term outlook - Illustrative medium-term growth scenario (real GDP growth path): - 2016: 2.0 - 2017: 3.0 - 2018: 3.7 - 2019: 4.3 - 2020: 4.7 - 2021: 4.5 - Savings-investment gap (percent of GDP): - 2016: -7.7 - 2017: -7.0 - 2018: -6.2 - 2019: -5.5 - 2020: -5.1 - 2021: -4.4 - Memorandum items (from medium-term scenario): - Nominal GDP at current prices (TD millions): 2016: 91,658; 2017: 97,495; 2018: 104,116; 2019: 112,227; 2020: 121,208; 2021: 130,766 - Central government debt in percent of GDP (scenario): 2016: 54.6; 2017: 54.5; 2018: 53.1; 2019: 50.9; 2020: 48.7; 2021: 46.4 - Current account balance in percent of GDP under scenario: 2016: -7.7; 2017: -7.0; 2018: -6.2; 2019: -5.5; 2020: -5.1; 2021: -4.4 ### Fund credit and obligations - Existing and prospective Fund credit (millions of SDR, selected): - Disbursement (2016): 455 - Stock (2016): 314 - Stock of existing and prospective Fund credit (in percent of quota): 2016: 262.6 percent; 2017: 304.3 percent; 2018: 320.0 percent; 2019: 353.0 percent; 2020: 371.5 percent; 2021: 354.2 percent - Stock in percent of GDP: 2016: 4.5 percent; 2017: 5.2 percent; 2018: 5.4 percent; 2019: 5.7 percent; 2020: 5.7 percent; 2021: 5.1 percent *Source: IMF staff estimates and projections, Tunisian authorities (document: _cr16138 - 58. In view of Tunisia’s balance of payment and budget needs, the strong policies).* ### Annex I. The 2013–15 SBA—Context, Design, and Outcomes ### Annex I. The 2013–15 SBA—Context, Design, and Outcomes ### Background and Context - The 2013-15 two-year SBA disbursed US$1.6 billion out of US$1.75 billion originally envisaged. - Objectives: maintain macroeconomic stability after the Arab Spring; support private sector development; tackle high unemployment; reduce regional disparities; build fiscal and external buffers; improve investment climate; strengthen social safety nets; address critical vulnerabilities of Tunisia’s banking sector. - Implementation complications: - Protracted political transition with frequent government changes, delayed elections, and heavy legislative focus on constitutional/political process. - Social tensions (strikes, work stoppages) and security shocks (conflicts with Salafists, Libya spillovers, political assassinations, 2015 terror attacks at Bardo, Sousse, and Tunis). - Opposition by vested interests, including within the administration, led to longer consensus-building and less ambitious reforms. - Weak international environment—particularly European growth—throughout the program; substantial decline in global oil prices starting in late 2014 was a positive unexpected development. ### Program Design and Implementation - Original ambitious design adapted to accommodate exogenous shocks that were unexpected at the concept stage. - Prior actions were used regularly. - Monitoring: quarterly reviews with emphasis on timely structural reform implementation; high number of benchmarks due to perceived slippage risk. - Review and disbursement issues: - Delays in achieving key reforms led to combined reviews (first and second program reviews). - Halving of expected disbursement at the 5th Review. - 9-month delay in completing the 6th Review and program extension. ### Program Outcomes - Overall assessment: mixed outcomes — macroeconomic stability broadly maintained but key vulnerabilities persisted; fiscal consolidation occurred at the cost of worsening composition; structural reforms advanced unevenly. - Key statistics and facts: - By 2015, real GDP was 10 percent lower than initially envisaged, and growth was four percentage points lower. - Reserves have stabilized at 2013 levels and above three months of imports coverage. - Some delays in external disbursements, a worse-than-expected external environment, and continued FX interventions by the CBT contributed to a lower reserve level than originally programmed. - The dinar experienced a 20 percent nominal depreciation vis-à-vis the US dollar since January 2014 but remains overvalued in real terms. - Progress towards the weekly auction mechanism was made; the mechanism came into effect in early 2016. - Structural benchmarks: 60 percent of the forty six introduced under the program were met. Subsections of outcomes: - Macroeconomic outcomes - Growth: security incidents, work stoppages, and political uncertainty delayed recovery; by 2015 real GDP was 10 percent lower than initially envisaged and growth was four percentage points lower. - Inflation: reversal of post-revolution monetary loosening and declining food/energy prices contributed to a decline in inflation, which remained in line with projections. - Current Account: low phosphate and energy exports, delayed recovery in manufactured exports, high energy imports, and a substantial drop in tourism flows contributed to a widening current account deficit. - Reserves: stabilized at 2013 levels and above three months of imports coverage; lower than programmed due to delays in external disbursements, weak external environment, and CBT FX interventions. - Macroeconomic policies - Fiscal policy: - Underlying fiscal stance improved for most of the program; the structural fiscal balance improved even faster than initially envisaged (Annex Figure 2). - The stance was appropriately loosened in 2015 in response to terror attacks. - Debt levels increased, reflecting increasing financing and one-off bank recapitalization costs consistent with program objectives. - Current primary spending moved in line with expectations as declining international oil prices helped reduce energy subsidies faster than programmed. - Budget composition worsened: public investment reached historically low levels while the public sector wage bill rose steadily. - Monetary policy: - Policy rates were tightened. - Framework improvements: removal of caps on deposit rates, strengthened collateral requirements, introduction of a monetary policy committee. - Caps on lending rates were not eliminated. - Exchange rate policy: - Steps toward greater exchange rate flexibility by reducing CBT interventions (halved in the last year of the program, with some increase following terror attacks). - Despite a 20 percent nominal depreciation vis-à-vis the US dollar since January 2014, the dinar remains overvalued in real terms. - Progress made toward introducing the weekly auction mechanism, which came into effect in early 2016. - Structural reforms and private-sector development - General: 60 percent of 46 structural benchmarks were met. - Banking sector: - Progress: restructuring of public banks through audits; recapitalization of two public banks; governance changes (unifying rules for public and private banks; changes in management/Boards); strengthened regulations on loan classification, provisioning, and liquidity; improved bank reporting design; development of a bank rating system. - Remaining gaps: operational restructuring of public banks has yet to start; bank supervision needs considerable strengthening; legal framework not yet in line with international best practices. - Fiscal reforms: - Energy subsidies: progress in reducing energy subsidies and early introduction of a household compensation mechanism to accompany domestic energy price increases. - Tax reform: national consultations led to design of a comprehensive tax reform aimed at greater equity and efficiency, but adoption is occurring piecemeal and clarity to investors is lacking. - Customs modernization ongoing; tax administration modernization plan approved by a previous government has yet to be implemented. - PFM: changes in the procurement code and some simplification of control procedures have not yet accelerated public investment implementation; transparency improved through introduction of a Treasury Single Account. - Business climate reforms: - Parliamentary delays postponed adoption of key legislation critical for growth; competition, PPP, and bankruptcy laws approved in September 2015, December 2015, and April 2016, respectively. - Investment code (revised several times during transition) still pending parliamentary approval. - Progress in simplifying administrative procedures in pilot ministries; generalization required. - Social protection: - PNAFN cash transfer system expanded to cover 235,000 families (twice the level of 2010 and close to 60 percent of the estimated poor). - Average transfer tripled to about US$80 per month. - A social electricity tariff was introduced to protect households consuming less than 100 kwh. - These achievements need consolidation within a comprehensive, better-targeted social safety net. - Labor market and pension reform: - Discussions with stakeholders initiated during the program. - Conditionality on these reforms was left out of program design because authorities and staff considered such reforms should be designed by a post-transition government. *Source: IMF Staff estimates* ### Annex II. Tunisia: Public Debt Sustainability Analysis ### Annex II. Tunisia: Public Debt Sustainability Analysis ### Baseline assessment and realism of projections - Central government debt is expected to peak at 55 percent of GDP in 2016 under the program (“baseline” scenario). - Central government debt was estimated at 53.2 percent of GDP at end-2015 (from 45.5 percent in 2012). - Under the programmed fiscal consolidation and growth recovery beyond 2016, debt-to-GDP is projected to decline to 50 percent by end-2020 (about 5.5 percentage points of GDP higher than the 2005–13 average). - Growth and inflation assumptions: - Growth over the medium term expected to recover to potential by 2019. - Low commodity prices and a prudent monetary policy are expected to contain inflation below 4 percent over the medium term. - Forecast track record: past projections of growth tilted optimistic mainly due to the large swing in 2011 GDP; inflation since 2011 generally higher than initially projected. - Fiscal adjustment metrics: - Three-year adjustment of the cyclically-adjusted primary balance (CAPB) is higher than three percent of GDP and in the top quartile (driven by large adjustment from 2013–16). - Structural fiscal balance consolidation under the program is estimated at 2.2 percent of GDP (places expected path in the second quartile). - Forward-looking three-year average cyclically-adjusted primary deficit forecast: 4.4 percent of GDP in 2016, halving by 2021. - Sovereign yields and interest rate assumptions: - Effective interest rate projected to decline to its lowest level in the next two years due to concessional/guaranteed debt and redemption of the 2017 Eurobond; later medium-term increases expected with market issuance. - Domestic yields might increase over the next three years before stabilizing in the medium term. - Maturity and rollover: - Relatively long maturities in both foreign and domestic debt (average above three years for domestic debt). - Gross financing needs peaked in 2015 at 9.4 percent of GDP and expected to remain moderate thereafter. - High share of foreign currency-denominated public debt creates exchange rate vulnerability. ### Stress tests, heat map, and vulnerabilities - Public debt dynamics remain sustainable under all adverse shocks, but debt could deteriorate significantly relative to the baseline. - Key vulnerabilities highlighted: - Large proportion of foreign debt (about 66 percent of public debt denominated in foreign currency). - Exchange rate risks and permanently lower growth. - Contingent liabilities and the composition of debt require close monitoring. - Stress test outcomes (selected results preserved exactly as reported): - Under most adverse scenarios, public debt-to-GDP would initially worsen to a maximum of between 55 and 65 percent of GDP and then decline to between 48 percent and 58 percent in 2021. - A one-time 30 percent real depreciation would increase the public debt-to-GDP ratio to about 65 percent before it declines to below 60 percent by 2021 (reflecting that about 66 percent of public debt is denominated in foreign currency). - A combined shock (to real growth and the primary balance) would raise public debt to 78 percent of GDP by 2018 before declining to 72 percent by the end of the outlook. - A contingent liability shock will raise public debt to 69 percent in 2018 before declining to 63 percent in 2021. - Even if 90 percent of contingencies were called, the shock analysis indicates debt trajectory would remain sustainable, though levels would increase. - Contingent liability composition note: - The one-off 10 percent of GDP fiscal contingent liability shock reflects an additional three 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). ### Key statistics and projection highlights (public DSA tables and charts) - Historical and projected public debt and related indicators (selected datapoints preserved): - Nominal gross public debt: 44.4 (2005-2013 actual average), 49.0 (2014), 53.2 (2015), 54.6 (2016), 54.5 (2017), 53.1 (2018), 50.9 (2019), 48.7 (2020), 46.4 (2021). - Public gross financing needs (in percent of GDP): 6.7 (2014), 8.6 (2015), 9.4 (2016), 8.0 (2017), 7.1 (2018), 7.0 (2019), 6.9 (2020), 7.5 (2021), 5.4 (2022—table projection horizon ended 2021 in text). - Effective interest rate (defined as interest payments divided by debt stock): 4.9 (2014), 4.5 (2015), 4.1 (2016), 4.1 (2017), 2.5 (2018), 0.8 (2019), 1.2 (2020), 1.8 (2021), 2.3 (2022 projection in table context). - Real GDP growth (baseline projections row): 2.0 (2016), 3.0 (2017), 3.7 (2018), 4.3 (2019), 4.7 (2020), 4.5 (2021). - Inflation (GDP deflator, baseline): 5.1 (2016), 3.3 (2017), 3.0 (2018), 3.3 (2019), 3.2 (2020), 3.2 (2021). - Primary balance (baseline, in percent of GDP): -2.3 (2016), -1.5 (2017), -1.6 (2018), -0.6 (2019), -0.5 (2020), -0.4 (2021). - Change in gross public sector debt (cumulative projection): -1.1 (2005-2013 actual), 4.4 (2014), 4.3 (2015), 1.4 (2016), -0.1 (2017), -1.4 (2018), -2.2 (2019), -2.2 (2020), -2.2 (2021), cumulative -6.8 (projection horizon). - Risk-assessment thresholds and heat-map indicators (benchmarks stated): - Benchmarks cited: 200 and 600 basis points for bond spreads; 5 and 15 percent of GDP for external financing requirement; 0.5 and 1 percent for change in the share of short-term debt; 15 and 45 percent for public debt held by non-residents; 20 and 60 percent for share of foreign-currency denominated debt. - Country-specific reported values (2015): Public Debt in Foreign Currency = 66 percent; Public Debt Held by Non-Residents = 27 percent; External Financing Requirement = 12 (percent of GDP) in one table context; Bond spread (EMBIG) = 457 bp (as of April 13, 2016 table entry); 5-year CDS = 467 bp (as reported). ### External Debt Sustainability Analysis (Annex III highlights) - External debt trends and baseline trajectory: - External debt fell from over 61 percent of GDP in 2002 to 49 percent at end-2010, then rose from 51 percent in 2011 to around 64 percent by end-2015. - Under baseline projections, external debt would increase to 69 percent of GDP in 2016, peak at 73.3 percent in 2018, then decline gradually to around 69.6 percent by end-2021 (table shows 69.6 at projection end). - External debt increase through 2016 driven by US-guaranteed market access and continued official financing; peak driven by multilateral financing—including the Fund’s EFF—and international market access. - External DSA stress results: - External debt-to-GDP ratio remains below 80 percent of GDP throughout the projection period under all but one shock scenario. - A combined negative shock to real interest rate, growth and the current account would raise the external debt ratio to around 76 percent of GDP by end-2021 (vs. 70 percent under baseline). - A one-time 30 percent real depreciation in 2016/2017 would raise the external debt ratio to around 104 percent of GDP in 2018 before declining to about 99 percent by end-2021. - External-sector indicators and projections (selected datapoints preserved exactly): - Baseline external debt-to-GDP (selected years): 51.3 (2011), 52.9 (2012), 57.0 (2013), 61.4 (2014), 63.5 (2015), 69.0 (2016), 71.4 (2017), 73.3 (2018), 72.5 (2019), 71.2 (2020), 69.6 (2021). - Change in external debt: 2.5 (2011), 1.6 (2012), 4.1 (2013), 4.4 (2014), 2.1 (2015), 5.5 (2016), 2.5 (2017), 1.8 (2018), -0.7 (2019), -1.3 (2020), -1.7 (2021). - Current account deficit excluding interest (baseline): -6.0 (2011), -6.9 (2012), -7.2 (2013), -7.9 (2014), -7.6 (2015), -4.2 (2016), -3.2 (2017), -6.3 (2018), -5.7 (2019), -5.0 (2020), -4.6 (2021). - External debt-to-exports ratio (in percent): 95.1 (2011), 107.1 (2012), 119.4 (2013), 134.8 (2014), 158.8 (2015), 178.8 (2016), 177.9 (2017), 178.0 (2018), 177.5 (2019), 177.3 (2020), 176.7 (2021). - Gross external financing need (in billions of US dollars): 10.4 (2011), 10.9 (2012), 11.6 (2013), 12.2 (2014), 11.9 (2015), 11.2 (2016), 11.5 (2017), 10.8 (2018), 11.0 (2019), 11.0 (2020), 11.1 (2021). - External DSA bound tests (selected): - B5 (One time 30 percent real depreciation in 2016): external debt-to-GDP path includes 69.0 (2016 baseline) and jumps to 101.4 (2017), 104.0 (2018), 103.0 (2019), 101.1 (2020), 98.8 (2021). *Source: IMF staff (Annex II. Tunisia: Public Debt Sustainability Analysis).* ### Annex III. Table 1. Tunisia: External Debt Sustainability Framework, 2011–2021 ### Annex III. Table 1. Tunisia: External Debt Sustainability Framework, 2011–2021 ### External debt dynamics and methodology - Debt change decomposition formula (as presented): - Derived as [r - g - r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock, with r = nominal effective interest rate on external debt; r = change in domestic GDP deflator in US dollar terms, g = real GDP growth rate, e = nominal appreciation (increase in dollar value of domestic currency), and a = share of domestic-currency denominated debt in total external debt. - Contribution from price and exchange rate changes (as presented): - Defined as [-r(1+g) + ea(1+r)]/(1+g+r+gr) times previous period debt stock. - Note: r increases with an appreciating domestic currency (e > 0) and rising inflation (based on GDP deflator). ### Bound tests, shocks, and scenario design (figure notes) - Shocks specification (as presented in figure notes): - Individual shocks are permanent one-half standard deviation shocks (except for growth which is a 3/4th standard deviation). - For historical scenarios, historical averages are calculated over the ten-year period, and the information is used to project debt dynamics five years ahead. - Permanent 1/4 standard deviation shocks applied to real interest rate, growth rate, and current account balance. - One-time real depreciation of 30 percent occurs in 2017. - Figure captions and data notes (as presented): - Shaded areas represent actual data. - Figures in the boxes represent average projections for the respective variables in the baseline and scenario being presented. Ten-year historical average for the variable is also shown. ### Baseline projections and key macro numbers (program text) - Program financing request and arrangement: - Request for an Extended Fund Facility for a four-year program in the amount of SDR 2.045625 billion (375 percent of quota, or about US$2.8 billion). - Growth and inflation projections: - Growth in 2016 will remain modest (2 percent). - Average growth projected at 4 percent (2017 to 2020). - Past five-year annual growth: 1.5 percent. - Current-account and reserves: - Current-account deficit in 2015: about 8.9 percent of GDP. - Medium-term current-account deficit target: 4.4 percent of GDP. - Foreign exchange reserves in 2015: US$7.6 billion (covers more than four months of imports). - From 2016 onwards, reserves projected to be above 100 percent of the Fund’s ARA index and to cover more than four and half months of imports. - Public debt and fiscal targets: - Medium-term debt sustainability objective: stabilize public debt at 51 percent of GDP by 2019. - Structural fiscal deficit reduction target: reduce by 2.2 percentage points of GDP by 2019 (i.e., to bring overall fiscal deficit, excluding grants, to the equivalent of 2.4 percent of GDP by 2019). - Structural fiscal deficit for 2016 will be 0.4 percent of GDP higher than implied by the budget (due to contingencies described below). - Wage bill target: equivalent of 12.7 percent of GDP by 2019. - Investment target: increase investment to 7 percent of GDP. - Sources and planned financing for 2016 budget (as presented): - World Bank: US$550 million. - African Development Bank (AfDB): US$500 million. - European Union: US$492 million in financing and US$96 million in grants. - Planned international bond issue: US$500 million (with a guarantee from the United States’ government). - Planned use of domestic debt market issuance: approximately 2.3 billion dinars (with limits to avoid crowding out private-sector credit). - Request that the first disbursement of the IMF’s EFF be allocated to the government’s budget to alleviate expected cash-flow pressures during the first half of the year. - IMF program monitoring: - Progress will be monitored through semi-annual reviews based on prior actions, quantitative criteria, and structural benchmarks. - The first two reviews must be completed no later than December 31, 2016, and June 30, 2017, respectively. ### Fiscal developments, shocks, and 2016 adjustments - 2016 budget law and structural deficit: - 2016 budget called for a structural fiscal deficit—corrected for the economic cycle and excluding bank recapitalization costs—of approximately 3.6 percent of GDP. - This target reflects: wage increases and new wage “agreements”, a 16 percent increase in capital expenditure, a reduction in energy subsidies, and implementation of the first phase of tax reform (reducing exemptions and rationalizing customs duties). - Unforeseen additional 2016 costs (total 1.2 percent of GDP) and breakdown: - Security expenditures: 0.4 percent of GDP. - Increases in security personnel: 0.3 percent of GDP. - Expenditures on other goods and services: 0.1 percent of GDP. - Transfer to the pension system (related to delay in approving legislation which extends the retirement age): 0.4 percent of GDP. - Revenue declines and partial offsets in 2016: - Decline in tax revenue: 1.0 percent of GDP. - Decline in nontax revenue: 0.3 percent of GDP. - Offsetting measures and one-offs: - Reduction in energy subsidies: 0.5 percent of GDP. - Profit transfer from STIR (Tunisian Refineries Corporation) arising from lower global oil prices: 0.4 percent of GDP. - Sale of 4G mobile telephone licenses: 0.4 percent of GDP. - Lower unallocated expenditure: 0.2 percent of GDP. - Rationalization of promotions and performance bonuses keeping wage bill in line: 0.3 percent of GDP. - Policy stance on deviations: - Commitment to take additional measures to correct any deviation from fiscal targets, including reducing current expenditures that have been a source of past overruns. - Investment and social expenditures (excluding energy subsidies) will be protected. ### Monetary policy and institutional reforms - Recent monetary stance and indicators: - Central Bank of Tunisia lowered its policy rate by 50 basis points in October 2015. - Output gap in 2015: 2.5 percent. - Conditional readiness: - Authorities are ready to tighten monetary policy to prevent any resurgence of inflationary pressures, particularly should core inflation increase because of a depreciating dinar or higher wages. - Higher policy rates would support positive real interest rates, one of the central bank’s main objectives. - Reform of the monetary policy framework (priorities and actions): - Move gradually towards a credible inflation-targeting framework in the medium term once prerequisites are met. - Priorities include: - Approval of the new Central Bank of Tunisia (CBT) statutes: A new central banking law was approved by the Assembly of the People’s Representatives (ARP) in April 2016 (prior action). That law confirms price stability as the central bank’s overriding objective. - Greater focus on communication to enhance the monetary policy framework. - Implementation of a lender-of-last-resort (LOLR) facility by September 2016 to allow differentiation of urgent liquidity operations from monetary policy ones. - A framework agreement for loans granted under the LOLR was established in April with Fund technical assistance (TA). - The LOLR mechanism will contain risks to the central bank’s balance sheet and delineate justification for bank financing needs, which remain high. ### Program objectives, constraints, and structural reform pillars - Overarching objective: - Restore Tunisia’s economic growth to create more jobs and reduce unemployment, while pursuing prudent macroeconomic policies and reducing vulnerability to exogenous shocks. - Four pillars of the reform program: - (i) Consolidating macroeconomic stability. - (ii) Reforming government institutions to improve service delivery, increase transparency, and reallocate public expenditure to reduce regional and social inequalities. - (iii) Reforming the banking sector to adequately support growth. - (iv) Developing the private sector to create jobs. - Institutional arrangements for reform coordination: - A unit in the Prime Minister’s office will oversee economic reforms with full coordination powers to ensure reforms are carried out within the agreed timeline. *Italic: Annex III. Table 1. Tunisia: External Debt Sustainability Framework, 2011–2021 (extracted content).* ### 4.7 billion dinars, excluding FX swaps, at the end-March 2016). In tandem with that reform, we ### _cr16138 - 4.7 billion dinars, excluding FX swaps, at the end-March 2016). In tandem with that reform, we ### Strengthening monetary policy framework and money markets - Drafting of a manual for monetary policy operations initiated in April 2016 with TA from the Bank of France and Fund staff; expected implementation date of June 2017. - Manual will streamline intervention tools, operations, counterparties and eligible assets, penalties, discretionary measures, and tighten the collateralization system. - By December 2016, liquidity forecasting should improve through implementation of a system to analyze deviations from forecasts and adjust liquidity allocations. - Plans to sharpen qualitative criteria used to rate refinancing collateral (including a revision of the proportion of treasury bills which may be used). - By June 2017 (with TA from the Fund), introduce ratings instruments to strengthen the existing haircut system, including for government securities. - Development of the interbank market based on four pillars: - (i) introduction of a fixing system for interbank rates in December 2016; - (ii) development of a yield curve by 2017, including the use of separate auctions by maturity; - (iii) diversification of liquidity management instruments to include repurchase agreements; - (iv) introduction of interest-rate hedging instrument by June 2017. - Program will retain a ceiling on the central bank’s net domestic assets as a performance criterion until a stronger monetary policy framework is in place. - Possibility of modifying the criterion in future reviews to include a monetary policy consultation clause (MPCC), conditional on pre-requisites for a credible inflation-targeting framework (including a more flexible exchange rate). ### Exchange-rate policy and foreign-exchange market reforms - Regular foreign-exchange auction system introduced in February 2016 with Fund TA; nine banks participating (90 percent of the market). - Market interventions reduced from an average of 37 percent of the market in 2014 to 24 percent in the fourth quarter of 2015. - Recent circular severs the link between interbank, trade, and financial operations; grants more flexibility to cover exchange and interest rate risk (forwards, swaps, and options) and for registered intermediaries to convert foreign bank drafts into foreign exchange. - Policies to increase exchange rate flexibility: - Limit central bank interventions in the foreign-exchange market to smooth out excessive fluctuations; firmly committed to limiting net foreign-exchange sales, and only if the market cannot supply the necessary foreign exchange. - Plan to buy foreign exchange when market conditions permit. - Gradually make foreign exchange regulations more flexible as prerequisites are met. CBT Board-approved measures include: - (i) reducing ex-ante controls by the CBT with respect to capital operations and replacing them with ex-post controls; - (ii) eliminating the cap on the amounts that foreigners can buy of government securities or securities issued by resident companies; - (iii) removing all caps on foreign borrowing by domestic credit institutions and export-only companies, and raising the cap for all other enterprises (to 10 million dinars); - (iv) making foreign exchange operations more flexible by delegating certain transfer procedures to banks. ### Reforming government institutions — objectives and priorities - High-priority objective: make the public administration more productive and improve service delivery; reforms include civil service, public-sector enterprises, tax policy and administration, pension funds, and social safety nets; fighting corruption integrated across reforms. ### Civil service reform - Civil service reform strategy to be adopted by September 2016 aimed at: - (i) redefining government functions, duties, and responsibilities; - (ii) establishing statutes for the senior civil service in addition to ongoing revision of general status; - (iii) redeploying officials between ministries and regions; - (iv) reducing staff numbers (including by voluntary separations and no replacement of those who leave); - (v) updating the civil service recruitment process; - (vi) reviewing the salary and benefits structure; - (vii) redefining civil service performance evaluation and career paths. - Strategy consistent with objective of reducing the wage bill to the equivalent of 12 percent of GDP in 2020 (53 percent of tax revenues); to be adopted by the Council of Ministers by end-September 2016 (structural benchmark). - Implementation commitments: - Maintain the hiring freeze in all ministries through the next three years, except urgent needs for security and defense personnel; measure to be assessed over the next two years for retirement-related staffing distortions from 2018 onward. - Contain the increase in the 2017 wage bill to no more than the rate of inflation, i.e., 4 percent; implies taking measures to cut spending equivalent to 0.6 percent of GDP, to be established in the 2017 budget (options include harmonization/rationalization of benefits and performance bonuses and suspension of promotions). - Facilitate redeployment of staff to regions outside the capital; functional reviews for four ministries (Health, Education, Finance, and Infrastructures), which account for over half of all the country’s civil servants, to be completed by December 2016 (structural benchmark). - By December 2016, review legal framework for redeploying civil servants and other government personnel to implement results of functional reviews. - Functional reviews for all other ministries beyond the first four in 2017 to define duties, recruitment requirements, staff reallocation, and budget cost structure. - Develop a voluntary separation program to be examined for possible implementation beginning in 2018; seek technical and financial assistance from development partners. ### State-owned enterprises (SOEs) - Strategy adopted October 2015 promotes good governance and strengthens internal governance and financial restructuring of SOEs. - Establish an agency by January 2017 to manage government corporate shareholdings, oversee SOE restructuring programs (including banks with government equity stakes), and overhaul governance. - Group existing oversight bodies under a supervision and coordination committee. - Finalize performance-based contracts relying on management and financial indicators for the five largest public-sector enterprises—STEG, STIR, the Office des Céréales, Tunisair, and the Régie Nationale des Tabacs—by end-September 2016 (structural benchmark). - Produce a list of all arrears between SOEs and the State by December 2016 and between all SOEs by June 2017. - Professionalize boards of directors starting with the five largest SOEs. - Review government shareholdings to identify nonstrategic sectors and potential divestments. ### Energy subsidy reform - Establish a symmetrical, automatic adjustment formula for petroleum products (gasoline, diesel fuel) adopted in May 2016. - Implementation stages: from July 2016 on a quarterly basis, then monthly from January 2017, gradually extended to other petroleum products (natural gas, kerosene). - New pricing scheme to accompany establishment of new minimum social-protection safety nets. - Electricity subsidy reform to include rate reviews in 2017 while maintaining a lifeline tariff; eliminate subsidized tariffs for manufacturing and industrial sectors (example: cement plants in 2014). ### Tax policy and tax administration reforms - Tax policy reform initiated through rationalization of VAT exemptions, reduction in the number of customs tariff rates, and closing the gap in corporate taxation between on-shore and off-shore businesses. - Full tax strategy—harmonization of VAT rates, further reduction of exemptions, a more progressive personal income tax (IRPP) with lower rates for low-income people, and revised allowances and deductions—expected to be approved by the Council of Ministers in May 2016 (prior action) and subsequently published. - Modern tax administration to be designed over the next 12 months; aim to establish an integrated and modern tax administration within the next three to five years. - Large Taxpayer Unit (LTU), which collects about 55 percent of tax revenues, to be reformed by December 2016 (structural benchmark) to include formal responsibility for major tax and enforcement functions (return processing, taxpayers advisory services, and audit). - LTU to monitor and report on arrears of large taxpayers using monthly information from the Public Accounting and Collections Directorate (DCPR). - A pilot medium-sized taxpayer office (MTO) modeled on the reformed LTU to be established in the greater Tunis area by June 2017; three other MTOs to be established throughout the country in 2017–18. - Continue implementation of risk-based and selective audit programs, efforts to identify and bring into compliance informal sector taxpayers, and improve services to compliant taxpayers. ### Social protection and pensions - Targeted social safety net based on data on vulnerable families with limited incomes to be finalized by March 2017 (structural benchmark) using 2016 field survey findings. - System will use a new, unique social identifier to eliminate fragmentation; unique social identifier to be finalized once lists of social assistance beneficiaries have been cross-checked. - Intend to expand coverage of the unique social identifier beyond vulnerable families to those registered in the existing social security system (8.3 million people) and beneficiaries of reduced-rate health care cards; aim to define a new well-targeted social safety net by June 2017. - Pension reform: adopt a voluntary increase in the retirement age in 2016 to smooth short-term imbalances in the National Retirement and Social Security Fund (CNRPS), which has no available cash reserves and will post an annual deficit of 0.4 percent of GDP. - National Council on Social Dialogue to be established in May 2016 once the national assembly approves its creation; discussions planned to overhaul the system by 2017 to reestablish CNRPS financial viability. - Key reform elements to review parameters for calculating pensions (e.g., replacement rate), rate of contributions, and benefits; strategy will take into account civil service reform guidance. ### Public financial management and public investment - Publish a new organic budget law in the official gazette in December 2016 (structural benchmark) to improve budget design, provide additional budget information (new functional classification), tighten control on expenditures, simplify budget execution and monitoring, and entrench performance-based budgeting. - 18 ministries (85 percent of the budget) already preparing budgets according to the new classification and a multiyear framework. - Strengthen coordination between the Directorate General of Debt, the Treasury, and other Ministry of Finance units to improve cash-flow management. - Monitor a Treasury Single Account (TSA) regrouping sub-accounts that relate to central government; TSA operations management to benefit from Fund TA. - Reform public investment framework to accelerate public investment to 7 percent of GDP by 2020. - Procurement overhaul yielded a 76 percent increase in new contracts awarded in 2015. - Improved execution rate on investments to 90 percent in 2015 through flexibility in reallocating investment expenditures from stalled to viable projects. - Priorities: identify high-priority projects for the 5-year development plan, simplify procedures, accelerate establishment of evaluation and monitoring systems for government projects at regional and national levels, and reduce land-deed constraints. ### Debt management - With World Bank TA, finalize a medium-term debt strategy by end-December 2016 (structural benchmark) to strengthen debt management, minimize costs, optimize composition of domestic and external debt, and ensure debt sustainability. - Finalize an action plan by June 2016 to establish a debt management agency in 2017 with authority to analyze fiscal risks and financing options. - Agency to closely monitor risks arising from guarantees (currently equivalent to about 12 percent of GDP). - Publish timetable of regular auctions of government securities with three months’ advance notice; examine possibility of issuing short-term treasury bills. ### Fighting corruption, transparency, and statistics reform - Draft law to set up an independent “high-level constitutional body to fight corruption and promote good governance” to be approved no later than December 2016 (structural benchmark); body to be adequately resourced with criminal investigatory powers and access to relevant information. - Issue a decree strengthening oversight powers of existing “good governance units”; three additional laws under preparation: - (i) protection for whistleblowers; - (ii) conflicts of interest in the public sector; - (iii) financial disclosure of net worth by senior government officials. - Strengthen AML/CFT framework to address corruption risks by implementing enhanced customer due diligence measures for domestic politically exposed persons in line with the FATF standard, and strengthening AML/CFT supervision aided by two commissions set up by the August 2015 Anti-Terrorism and Money Laundering law. - Data access and e-government: - Citizens’ budget published online in December 2015. - Tunisia joined the “open government initiative”; Ministry of Finance launched the Mizaniatouna portal to disclose budget performance. - Draft organic law on access to information voted by the ARP in March 2016; implementation decrees to be finalized by September 2016. - National e-Gov plan to bring government services into a unified portal online. - Statistics reform: - Eurostat completed a comprehensive diagnosis of the statistics system. - Strategy to consolidate governance, modernize production, and maintain quality standards; requires capacity-building for the National Bureau of Statistics (INS), a new National Statistics Charter, and drafting a new statistics law to be presented to the government in December 2016 to guarantee independence of published statistics. - Strengthen CBT’s statistical and analytical capacities, including consolidation and modernization of monetary and balance-of-payments statistics. - Five-year household consumption survey to be completed in June 2016 and published no later than December 2016. *IMF staff report excerpt (content unit provided)* ### 28. The soundness of the banking sector has improved, but vulnerabilities remain. Three ### 28. The soundness of the banking sector has improved, but vulnerabilities remain. Three ### Banking sector soundness — key findings - Solvency ratio of the sector as a whole increased from 9.4 percent in December 2014 to 12.2 percent in December 2015. - Three public banks were recapitalized in 2015. - All banks except the Banque Franco Tunisienne and a large public bank (BNA) were in full compliance with the 10 percent regulatory minimum at end-2015. - Credit growth slowed to 5.8 percent at end-February 2016. - Deposit growth in 2015 was half that of 2014 (November to October), which affected liquidity and caused excessive recourse to central bank refinancing, particularly in the case of one public bank that was not in compliance with the minimum liquidity ratio. - Nonperforming loans (NPLs) remain high at about 16 percent of total loans, covered to 65 percent by provisions. ### Reform actions pursued to stabilize and strengthen the banking sector - A committee chaired by the Minister of Finance was set up in April 2016 to coordinate future reform commitments; it will monitor reform implementation and liaise with the coordinating unit in the Office of the President for major reforms. - Significant progress already made: - Public banks: the three public banks were recapitalized in 2015 to align with prudential standards and provisioning requirements identified in audits from 2013–15. Updated restructuring plans for the three banks to be approved by their boards of directors by May 2016 (prior action). - Legislative and regulatory framework: laws concerning the central bank statutes and bankruptcy procedures were approved in April 2016, with the law on banks and financial institutions (the banking law) to be approved by Parliament in May 2016 (parliamentary approval of all three laws are prior actions). - Banking supervision: in 2015, penalties were systematically applied to banks failing to maintain prudential ratios; general and thematic on-site inspections were conducted (especially related to credit risk management); intermediate steps for automated reporting and establishing a rating system for lending institutions (SYNTEC) have been implemented. ### Reform priorities and structural benchmarks - Strategic and operational restructuring of the three public banks: - Ensure implementation of restructuring plans approved by boards of directors. - Restructuring plan goals will feed into performance-based contracts monitoring indicators such as the cost-to-income ratio and restructuring of nonperforming loans on a consolidated basis (structural benchmark: 2016 end-June). - Medium-term plan to allow technical and strategic partners to purchase equity in the three banks by selling significant parts of the government’s stake; a divestment strategy for other minority stakes is in progress. - Resolving nonperforming loans (NPLs) — priorities and timelines: - Implement the bankruptcy law with decrees setting out implementing provisions by September 30, 2016, including a training program for officers of the court in competent jurisdictions. - Set up NPL-specialist units within each public bank by June 2016. - Amend legal texts by December 2016 to place governance structures of public banks on an equal footing with those of private banks by removing prohibitions on public banks writing off NPLs. - Adopt by December 2016 a new amendment to the law on credit recovery companies allowing them to renegotiate NPLs directly with customers. - Simplify conditions to remove unrecoverable loans that are fully provisioned from banks’ balance sheets (December 2016, as part of the budget law). - Strengthening risk-based supervision — three main components and targets: 1. Overhaul regulatory framework to implement Basel Committee’s three pillars: - Adoption of CBT circulars on operational risk in June 2016 and market risk in the first quarter of 2017, with technical assistance. - Regulatory guidance in September 2016 setting qualitative standards for banks’ internal ratings systems pursuant to circular 2006–19, imposing implementation of rating systems. - By June 2016, the CBT will have comprehensive information on banks’ intra-group transactions, including minority and nonfinancial holdings. - Consolidated supervision to be carried out from the second half of 2018 unless reporting information requires revision of the calendar. - CBT to issue a circular in June 2016 phasing in a lowering of the authorized maximum exposure vis-à-vis related parties to 50 percent of a bank’s Tier 1 capital at year-end 2017, and 25 percent at year-end 2018. 2. Develop DGSB operational capacities and information systems: - SYNTEC system will link supervisory intensity to banks’ risk profiles. - Apply a risk-based supervision manual systematically starting in December 2016 (structural benchmark). - Reporting will be entirely automated from September 2016 onward. - Recruit a dozen supervisors (in addition to the 10 already planned) for this purpose, with a closing date for applications no later than June 30, 2016. 3. Increase on-site inspections over the next three years: - Conduct at least seven general and/or thematic inspections a year as resources become available. - By March 2017, the CBT will have conducted inspections in the seven largest private banks to verify that credit risk management and provisioning frameworks meet best standards; completion of the seven inspections is a structural benchmark for end-March 2017 (inspections to be conducted with Fund TA and agreed terms of reference). - Continue inspections focusing on other prudential concerns, including combating money laundering and monitoring restructuring of public banks. - Implement bank resolution framework and deposit guarantee fund: - Adoption of implementation decrees for bank resolution and the deposit-guarantee fund by September 30, 2016; new rules will apply to all banks covered by the new resolution mechanism. ### Financial inclusion and access to credit initiatives - Develop legal framework for private credit bureaus: - Establish regulatory framework and central bank monitoring in a separate organic law. - Private credit bureaus will complement the central credit register maintained at the CBT. - New law on credit bureaus expected to be adopted by Parliament in June 2016. - Review rules on effective cost of borrowing and raise cap on excessive lending rates: - Reform in two phases: - By December 2016 increase the allowable spread between the maximum lending rate allowed and effective rates on loans to at least the same level as in 2009 (i.e., 33 percent) (structural benchmark). - By June 2017 complete overhaul of legal framework governing excessive interest rates by setting thresholds according to borrower profile rather than type of loans. - Establish a Bank of Regions (BdR) to streamline government support: - Bring some public entities together within the BdR; business model currently being developed. - BdR to be set up by March 2017 with technical support from the KfW German development agency. - BdR financing solutions (loans, guarantees, etc.) to be offered in partnership with commercial banks. ### Structural reforms to improve business climate and labor market - Improve regulatory framework to promote competition, market access, investor protection, and transparency. Decrees to operationalize three laws are a structural benchmark for end-September 2016: - Competition law (approved September 2015): expected effects include strengthening the advocacy powers of the Competition Board; defining duties of the Competition Board and the ministry; reducing Ministry of Trade and Commerce review deadlines from six to three months for proposed concentrations or mergers; increasing company fines from 5 to 10 percent of turnover for competition violations. - Public-private partnerships (PPPs) law (approved November 2015): will become operative once implementation decrees are finalized; operationalization includes feasibility and budget risk assessments, particularly for two pilot water and infrastructure projects, supported by a monitoring framework for PPP budget risks. - Investment code: will establish a more transparent regulatory framework, better protect investors, improve investment governance, promote market access, reduce the number of permits and authorizations over the next five years, and consolidate tax incentives into the tax code; three implementation decrees to be issued by September 2016 once the ARP adopts the investment code. - Streamline administrative procedures and regulations: - Already streamlined about 376 customs and tax formalities and 154 administrative procedures considered priorities for private sector activity. - An impact study of the streamlining will be completed in June 2016. - A third streamlining phase of 372 administrative procedures (housing infrastructure, territorial planning, healthcare, environment, tourism and interior) will be carried out over the next two years. - Reduce labor market frictions: - National Dialogue on Employment held in March 2016 resulted in a consultative dialogue and analysis of job market developments and a stakeholder consensus on short- and medium-term measures. - With ILO technical assistance, develop by the first quarter of 2017 a national employment strategy to: (i) improve employability of job seekers, (ii) develop local SMEs, and (iii) reform vocational training (including greater independence and better governance of vocational training centers). - Speed up implementation of work programs and support micro-projects favoring youth and underprivileged areas. ### Selected program-level quantitative figures and timelines (as presented) - Solvency ratio: 9.4 percent in December 2014; 12.2 percent in December 2015. - NPLs: about 16 percent of total loans; coverage by provisions: 65 percent. - Credit growth: 5.8 percent at end-February 2016. - Three public banks recapitalized in 2015. - Central bank statutes and bankruptcy procedures laws approved in April 2016; banking law to be approved by Parliament in May 2016. - Key implementation dates and structural benchmarks: - Updated public-bank restructuring plans approved by boards: by May 2016 (prior action). - NPL units within public banks: by June 2016. - Risk-based supervision manual applied systematically: starting December 2016 (structural benchmark). - Reporting automated: from September 2016 onward. - CBT circular phasing related-party exposure caps: June 2016; caps to 50 percent of Tier 1 capital at year-end 2017, and 25 percent at year-end 2018. - Implementation decrees for bank resolution and deposit-guarantee fund: by September 30, 2016. - Credit bureaus law expected adoption by Parliament: June 2016. - Increase allowable spread to 33 percent: by December 2016 (structural benchmark). - BdR to be set up: by March 2017. - Seven inspections of largest private banks completion: structural benchmark end-March 2017. *Source: IMF staff report content provided in the supplied chapter section.* ### 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff ### 1. This Memorandum establishes the agreement between the Tunisian authorities and IMF staff ### Scope and Purpose - Establishes agreement between the Tunisian authorities and IMF staff concerning the definition of the quantitative performance criteria and indicative targets under the program supported by the Extended Fund Facility. - Sets out the content and frequency of data reporting to IMF staff for program monitoring purposes. ### Program 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, 2015. - For the SDR, the program exchange rate is: 1 SDR = 2.797590 Tunisian dinars. - Program Exchange Rates, Tunisian Dinars per FX Currency at End-December 2015 (Accounting exchange rate of the CBT): - AED 0.54802 - BHD 5.3373 - CAD 1.45005 - CHF 2.0322 - DKK 0.2947335 - DZD 0.01878 - EUR 2.1993 - GBP 2.9837 - JPY 0.0167135 - KWD 6.63225 - LYD 1.44535 - MAD 0.203175 - NOK 0.228923 - QAR 0.552815 - SAR 0.53634 - SEK 0.23918 - USD 2.01285 ### Monetary Gold Valuation - Monetary gold assets will be valued against the corresponding value in Dinar (at the program exchange rate) at the price of 2,138.15 dinar per ounce of gold in the international market on 12/31/2015 (London morning fixing). - The stock of gold is 4.13 tons (4,129,806 grams) on December 31, 2015. ### Data Reporting and Agencies - For data reporting purposes, the Ministry of Economy and Finance (MoF), the Ministry of Planning and Economic Cooperation (MDCI), 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. ### Definition of Performance Criteria and Indicative Targets (Summary) - Performance criteria listed in Table 1 of the MEFP: - A performance criterion (floor) on the net international reserves of the Central Bank of Tunisia. - A performance criterion on the net domestic assets (ceiling) of the Central Bank of Tunisia. - A performance criterion (floor) on the primary balance of the central government, excluding grants. - A performance criterion (ceiling) on total primary current expenditure of the central government. - A continuous performance criterion on the accumulation of new external debt payment arrears (zero ceiling). - Indicative targets: - An indicative target (ceiling) on accumulation of new domestic arrears. - An indicative target (floor) on capital expenditures in priority social sectors and social programs. ### Measurement and Frequency - Net international reserves and net domestic assets: measured on a stock and semi-annual basis. - Central government primary balance and total primary current expenditure: measured on a semi-annual basis and cumulatively from the end of the previous year. - Continuous performance criterion on accumulation of new external arrears: measured on a continuous basis. - Indicative criteria: monitored on a quarterly basis. - Adjustment factors will be applied to some criteria. ### Institutional Definition of Central Government - Central government comprises all ministries and agencies subject to central budgetary administration in accordance with the organic law on the government budget. - Regional governments and municipalities subject to central budgetary administration are part of the central government. - Authorities will inform Fund staff of any new entity and any new program or special budgetary or extra-budgetary fund created during the program period; such funds/programs will be included in the definition of the central government. ### Net International Reserves (NIR) of the CBT — Definition and Components - NIR defined as the difference between 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, and negotiable foreign securities and bills purchased and discounted (per 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 (such as swaps, futures, options), 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 liabilities. - Any SDR allocation received after March 31, 2016 is not included in liabilities. - Treatment of debt instruments: 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 prospectus clearly states (i) CBT acting as an agent to execute sovereign debt issued for general budgetary purposes of the Republic of Tunisia, (ii) debt is a liability of the central government, and (iii) a protocol between the CBT and the Ministry of Finance authorizes CBT to pay all expenses and service the issue through direct deduction from the Treasury's current account at the CBT. ### NIR Stock Values at Program Rates (as of December 31, 2015) - Value of stock of net international reserves: US$4,487.5 million. - Stock of reserve assets: $7,496.6 million. - Stock of CBT liabilities in foreign currency: US$3,009.2 million. ### Net Domestic Assets (NDA) — Definition and Components - NDA defined as the difference between the monetary base and the net foreign assets of the CBT. - Monetary base includes: - Fiduciary money (money in circulation excluding cash balances of banks and the Treasury). - Deposits of 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 defined as difference between CBT’s gross foreign assets (including foreign assets not part of reserve assets) and all foreign liabilities of the CBT. - Net foreign assets valued at the program exchange rate. ### Primary Balance of Central Government (Excluding Grants) — Measurement - 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: new loan disbursements less repayments of principal; includes project and budgetary loans and any debt used to finance central government operations. - Privatization receipts: receipts from sale of government assets (government shares, nonfinancial assets, licenses, sale of confiscated assets), excluding confiscation of bank accounts. For NIR adjustor, only receipts in foreign currency are included. - Net domestic bank financing: change in net bank loans to central government (TND and FX) plus change in central government deposits at the CBT (includes specific government accounts; following unification, consolidated into “Compte Central du Government” and “Comptes Spéciaux du Government” on CBT’s balance sheet). - Net government borrowing from banking system: change in stock of government securities held by banks and any other central government borrowing from banks, less repayments. - Net domestic nonbank financing: change in stock of government securities held by nonbanks (including social security funds) and other central government borrowing from nonbanks, less repayments; includes use of cash from non-banking institutions (including La Poste). Treasury bills and other public debt instruments taken at nominal/face value shown on institutions’ balance sheet (does not include accrued interest). ### Ceiling on Central Government Primary Current Expenditure (Excluding Interest) - Central government primary current expenditure defined as sum of central government expenditure on: - (i) personnel wages and salaries; - (ii) goods and services; - (iii) transfers and subsidies; - (iv) other unallocated current expenditure. ### Ceiling on 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 Accumulation of Domestic Arrears - Domestic arrears defined as amounts owed to domestic financial and commercial creditors that are 90 days or more overdue with respect to a specific maturity date (or contractual grace period). If no maturity date specified, arrears are amounts unpaid beyond 90 days after contract signing or receipt of invoice. ### 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 Ministries of Women and Family Affairs, Youth and Sports and Social Affairs; - all new targeted cash transfers in support of vulnerable groups. - Excludes all current expenditures (“dépenses de gestion”) of the above sectors and programs, and excludes food and energy subsidies. ### Adjustment Factors for Performance Criteria - NIR targets adjusted upward (downward) if cumulative sum of: - net external financing of the central government, - budgetary grants, - privatization receipts received in foreign currency, - increase (decrease) in residents’ foreign currency deposits at the CBT (including FX swaps) are greater (lower) than the levels observed in the table below. - NIR targets also adjusted upward (downward) if total cash payments on external debt service of the government are lower (greater) than the levels included in the table below. - NDA targets adjusted upward (downward) based on downward (upward) adjustment of the NIR floor if cumulative sums above are lower (greater) than levels indicated in the table below. - NDA targets also adjusted upward (downward) based on downward (upward) adjustment of the NIR floor if total cash payments on external debt service are greater (lower) than the levels included in the table below. - NDA targets adjusted based on change in stock of foreign currency swaps between Central bank and commercial banks relative to level on December 31, 2015 (US$299.4 million, 602.65 million Tunisian dinars). - NDA ceiling will be converted into Tunisian dinars at the program exchange rate. - Program Assumptions on Adjustment Factors for the Quantitative Performance Criteria presented in a table (In million of US dollars). - Ceilings on NDA will also be adjusted downward or upward based on amount of CBT reserves released/mobilized because of a possible decrease/increase in the reserve requirement. - Floor on the primary balance of the central government, excluding grants, will be adjusted upward/downward based on the amount used to recapitalize the public banks and all amount used to finance the severance pay of the voluntary departures which may be part of the civil service reform. ### Monitoring and Reporting Requirements - The memorandum sets out that monitoring and reporting requirements apply (section K), with specific reporting rules and formats to be followed by MoF, MDCI, INS, and CBT as covered by this technical memorandum of understanding, unless otherwise agreed with IMF staff. *Source: Memorandum of Understanding between Tunisian authorities and IMF staff (technical memorandum of understanding, attached to Letter of Intent dated May 2, 2016).* ### 31. Performance under the program will be monitored using data supplied to the IMF by the ### Performance under the program will be monitored using data supplied to the IMF by the Tunisian authorities ### Monitoring framework and data transmission - 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 these data and any data revisions previously transmitted to the IMF Resident Representative’s office in Tunisia. ### Official external financing and related flows (quarterly and annual figures) - Official External Financing: 75.0, 551.0, 999.0, 1,361.0, 2,985.9, 475.0, 1,143.2, 75.0, 893.2, 2,586.4 - Project loans: 65.0, 65.0, 65.0, 65.0, 260.0, 75.0, 75.0, 75.0, 75.0, 300.0 - Multilateral donors: 476.0, 419.0, 1,281.0, 2,175.9, 400.0, 568.2, -, 318.2, 1,286.4 - AFDB: -, -, 200.0, 300.0, 500.0, -, -, -, -, - - AMF (Arab Monetary Fund): -, -, -, -, -, -, -, -, -, - - IMF (budget support starting 2017): 317.0, -, 317.0, 633.9, -, 318.2, -, 318.2, 636.4 - World Bank Group: 50.0, -, 500.0, 550.0, 400.0, -, -, -, 400.0 - European Union: 109.0, 219.0, 164.0, 492.0, -, 250.0, -, -, 250.0 - Bilateral donors: -, -, -, -, -, -, -, -, -, - - Financial Market Access and other: 10.0, 10.0, 515.0, 15.0, 550.0, -, 500.0, -, 500.0, 1,000.0 - Sukuk and other market financing: -, -, -, -, -, 500.0, -, 500.0, 1,000.0 - Market issuance with US Treasury guarantee: -, -, 500.0, -, 500.0, -, -, -, -, - - Loan Transfers to SOEs: 10.0, 10.0, 15.0, 15.0, 50.0, -, -, -, -, - - Budget Grants: -, 47.7, 45.4, 93.1, -, 150.0, -, 0.9, 150.9 - Privatization Receipts: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - Government External Debt Service: 206.5, 280.9, 282.5, 282.6, 1,052.5, 265.9, 807.1, 445.7, 332.2, 1,851.0 - Amortization: 103.1, 188.2, 153.8, 224.8, 669.9, 142.2, 725.1, 327.4, 282.9, 1,477.5 - Interest: 103.4, 92.7, 128.7, 57.8, 382.6, 123.7, 82.1, 118.4, 49.3, 373.5 - Bank recapitalization and one-off costs linked to the civil service reform: 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0, 0.0 - FX swaps between the CBT and the commercial banks: 299.4, 299.4, 299.4, 299.4, 299.4, 299.4, 299.4, 299.4, 299.4, 299.4 - FX swaps between the CBT and the commercial banks (in million of Tunisian dinars): 602.7, 602.7, 602.7, 602.7, 602.7, 602.7, 602.7, 602.7, 602.7, 602.7 - Resident deposits at the BCT, including FX swaps: 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8, 1,268.8 - Sources: Tunisian authorities and IMF staff estimates. - Years indicated in table header: 2016, 2017 ### Information to be reported (periodicity, delays, responsible department) - Frequency codes: Weekly (w), Monthly (m), Quarterly (q) - GDP: Supply and demand at current, constant, and the previous year’s prices, including sectoral indices. - Periodicity: q; Delay in days: 45; Responsible department: INS - Inflation: Including the underlying inflation of non-administered and administered prices. - Periodicity: m; Delay in days: 14; Responsible department: INS - Fiscal Sector - Tax and nontax revenue of the central government decomposed on the basis of main tax and nontax revenues items. - Periodicity: m; Delay in days: 30; Responsible department: MoF - Total expenditures: current and capital, transfers and subsidies. - Periodicity: m; Delay in days: 30; Responsible department: MoF - 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 in days: 45; Responsible department: MoF - Current expenditure: by type of expenditure: wages, goods and services, transfers. - Periodicity: m; Delay in days: 45; Responsible department: MoF - Social expenditure - Periodicity: q; Delay in days: 45; Responsible department: MoF - 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 in days: 30; Responsible department: MoF - Stock of domestic arrears as per TMU, as well the stock of accounts payable that correspond to expenditures committed/payment ordered more than 90 days before (and by type of expenditures). - Periodicity: q; Delay in days: 45; Responsible department: MoF - Disbursement of foreign loans: Breakdown into project loans and budgetary loans by principal donor and identifying the most important projects to be financed in the original currency and its equivalent in Tunisian dinars converted at the current exchange rate at the time of each transaction. - Domestic borrowing from banks and nonbanks: including bonds, Treasury bills, and other issued securities. - Periodicity: m; Delay in days: 30; Responsible department: MoF - Debt guaranteed by the government: by instrument and type of currency (in dinars and in foreign currencies and its equivalent in national currency). - External and domestic debt service: amortization and interest. - Periodicity: m; Delay in days: 60; Responsible department: MoF - External payment arrears: external debt contracted and guaranteed by the government. - Periodicity: q; Delay in days: 30; Responsible department: MoF/CBT - Debt rescheduling: possible rescheduling of debts contracted and guaranteed by the government, agreed with creditors. - Periodicity: q; Delay in days: 45; Responsible department: MoF - Consolidated accounts of the central government at the CBT: Detailed breakdown of the stock of deposits into Treasury current account (detailed by sub accounts of the central government, N BIS, outstanding payments, Public administrative entities (EPA), and local governments), special account of the Tunisian government in foreign currency and its equivalent in dinars, miscellaneous dinar accounts, loan accounts, grant accounts, FONAPRA-FOPRODI accounts, and Foreign exchange accounts pending adjustment in dinars (available). - Periodicity: m; Delay in days: 30; Responsible department: CBT (MoF/TGT for sub-account) - External Sector - Imports of Petroleum Products: average import price and volume of main petroleum products. - Periodicity: m; Delay in days: 30; Responsible department: CBT - Deposits: Stock of foreign currency deposits, according to the residence of the holder. - Periodicity: m; Delay in days: 14; Responsible department: CBT - External debt: - Debt service (amortization and interest) of institutional agents by type of currency (in foreign currency and its equivalent in dinars). - Periodicity: q; Delay in days: 30; Responsible department: CBT - Stock of external debt of institutional agents by type of currency (in foreign currency and its equivalent in dinars). - Periodicity: q; Delay in days: 90; Responsible department: CBT - Overall net external position of Tunisia (in conformity with our obligations under SDDS). - Periodicity: q; Delay in days: 180; Responsible department: CBT - Balance of payments: Prepared by the CBT. - Periodicity: q; Delay in days: 30; Responsible department: CBT - Monetary and Financial Sector - CBT accounts at the current exchange rate: detailed table including the monetary system. - Periodicity: m; Delay in days: 30; Responsible department: CBT - CBT accounts at the program exchange rate: Including net international reserves. - Periodicity: m; Delay in days: 30; Responsible department: CBT - Foreign exchange market operations, Interbank market, retail market and wire transfers for CBT purchases on the retail market: Detailed reporting of CBT interventions (sales and purchases) in million of dinars (and equivalent in US million), including the CBT share in percentage of the market transactions, 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 in days: 30; Responsible department: CBT - CBT foreign exchange reserves, breakdown by currency and by instrument. - Periodicity: m; Delay in days: 30; Responsible department: CBT - 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 in days: 30; Responsible department: CBT - Direct refinancing of commercial banks by the CBT: Breakdown by bank. - Periodicity: m; Delay in days: 14; Responsible department: CBT - NPLs: Stock of banking sector NPLs, and breakdown by commercial banks. - Periodicity: q; Delay in days: 60; Responsible department: CBT - Balance sheets of commercial banks, including detailed income statements, in accordance with “Uniform Bank Performance Reporting” agreed with Fund staff. - Periodicity: q; Delay in days: 60; Responsible department: CBT - 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 in days: 3; Responsible department: CBT/MoF - The price structure of the petroleum products and the needed data to monitor the automatic adjustment mechanism (formulas and data). - Periodicity: d; Delay in days: 15; Responsible department: Min. of Energy ### Prior actions, implementation status, and staff assessment (May 17, 2016) - Overall context: This supplement reports on the implementation of the prior actions since the Staff Report was issued on May 3, 2016. While two prior actions have not been met, staff supports Tunisia’s request for the extended arrangement under the Extended Fund Facility (EFF), given the substantial progress made toward meeting them alongside the authorities’ commitment to continue to address shortcomings by implementing two structural benchmarks. The inability to complete all elements of the prior actions on time highlights risks to the EFF-supported program in a political environment that remains fragile. - Prior action on the tax strategy: Met. - The Council of Ministers adopted in early May a strategy anchored on the principles of equity and efficiency of the tax system, with a timeline for: - (i) broadening the VAT base by reducing exemptions; - (ii) rationalizing VAT rates (from three to two); - (iii) introducing a more progressive personal income tax (including through less deductions and a significantly higher tax threshold); - (iv) reducing further the dichotomy between the offshore and onshore corporate tax rates by 2018; - (v) increasing the tax on dividends. - A study on earmarked taxation is expected to further rationalize “special treasury funds” and the taxes funding them. - The authorities are working on reforming their tax incentives framework; staff urges the authorities to rationalize tax incentives as they distort economic decisions and have failed in the past to stimulate investment in Tunisia. - Prior action on central bank, banking, and bankruptcy laws: Not met (despite considerable progress). - New legislation: - Enhances central bank independence, - Introduces a lender of last resort mechanism, - Establishes a banking resolution mechanism and a deposit guarantee fund, - Modernizes the bankruptcy regime. - Gaps remain with good international practices on: - Central bank autonomy (e.g., government presence in the CBT board), - Resolution framework (constraints of the guarantee fund to finance transactions, creditor hierarchy in liquidation, and government presence in the resolution committee). - Staff welcomes progress and encourages amendments to close remaining gaps; authorities plan to address some shortcomings through decrees and by-laws. - Prior action on business plans of public banks: Not met. - All three banks revised their business plans and boards adopted them. - Staff assessment by bank: - BH: Business plan judged in line with minimum regulatory requirements; planned issuance of subordinated loans helps BH comply with prudential ratios during the entire restructuring period. - STB: Progress made but not enough to meet minimum prudential requirements; new financial assumptions are more modest than in the initial plan but still depend on finalizing a NPL resolution strategy already underway. A newly hired external consultant will help finalize the business plan by end-June. - BNA: Additional work needed to meet minimum requirements. A Council of Ministers meeting in early May clarified government policy on the agricultural sector and on government guarantees backing loans provided to SOEs, paving the way to revise the plan in the next few weeks with clearer justification of profitability of agricultural exposure and NPL reduction strategy. Additional revisions needed to ensure regulatory compliance throughout the restructuring period. - Staff urges swift adoption of proper business plans and signing of performance contracts to monitor banks’ financial performance on a consolidated basis (at least for key indicators). - Staff recommendations and conditionalities - Staff welcomes authorities’ plans to address shortcomings of the banking law regarding the resolution framework through decrees (e.g., least–cost test of resolution) and by-laws (e.g., short timeframe to determine resolution measures for systemic cases). - Timely implementation of related structural benchmarks, as outlined in the supplement to the MEFP, will be critical for the success of the program and for the completion of the first review. - Staff will continue to work with the authorities to improve the CBT law and align it with good international practices during the EFF-supported program. ### Supplementary Memorandum of Economic and Financial Policies — commitments (Tunis, May 17, 2016) - The new legislation on the central bank, bankruptcy and banking statutes adopted in early May 2016 is expected to have a large transformational impact on Tunisia’s business environment and banking sector. - Commitment on resolution framework improvements (structural benchmark by end-August): - (i) Adoption of a government decree to implement the framework of the Bank Deposit Guarantee Fund that includes a least cost-test for resolution with an exception for systemic cases. - (ii) Adoption of a bylaw of the Resolution Committee providing a short timeframe to determine resolution measures for systemic cases. *Source: Tunisian authorities and IMF staff (Supplementary Information and Supplementary Memorandum of Economic and Financial Policies, May 17, 2016).* ### 3. All three public banks revised their business plans, but two of them need further ### 3. All three public banks revised their business plans, but two of them need further revisions to ensure regulatory compliance throughout the restructuring period ### Business-plan revisions and immediate supervisory concerns - Recently appointed management of STB and BNA initiated organizational restructuring but require more time to revise business plans to align strategy, organization, and terms of reference for each business unit. - Public banks are working on a new version of their business plans to remedy weaknesses noted by the Central Bank of Tunisia’s banking supervision department; these plans are to be approved by their boards by end-July 2016 (structural benchmark). - Specific concerns to be addressed in the revised plans: - STB: - The plan will fully incorporate revised macroeconomic and financial assumptions. - It will take into account the forthcoming capital requirements on operational risk. - It will take into account the lifting of forbearance on new NPLs (granted following the 2015 terrorist attacks). - The plan will focus on a proper NPL resolution strategy rather than on an aggressive growth strategy. - BNA: - The plan will focus on maintaining adequate liquidity and solvency levels throughout the restructuring plan (2016-20). - It will start with booking a sale of non-strategic assets as soon as possible to ensure buffers to meet capital requirements during the restructuring period (2016-20). - The plan will take into account the forthcoming lifting of forbearance on new NPLs and the recent government decision on the treatment of new loans to agriculture on a commercial basis (with the impact of old loans fading as they are repaid or resolved). - Confirmation of government guarantees (callable on first demand) for loans to public entities will help meet regulatory requirements throughout the restructuring period. - Sound operational restructuring will help properly assess, price, monitor and manage credit risk on all loans. ### Structural benchmarks (selected) - Approval, by the board of Directors of STB and BNA, of revised business plan ensuring regulatory compliance throughout the restructuring period and in line with the principles detailed in the MEFP. - Objective: Financial sector stability - Date: Jul-16 - Approval of secondary legislation to address weaknesses in the banking law regarding the bank resolution framework through: - (i) adoption of a government decree to implement the framework of the Bank Deposit Guarantee Fund that includes a least cost-test for resolution with an exception for systemic cases; and - (ii) adoption of a bylaw of the Resolution Committee providing a short timeframe to determine resolution measures for systemic cases. - Objective: Financial sector stability - Date: Aug-16 ### Financial-sector context, progress, and remaining vulnerabilities - Recapitalization of three public banks raised the solvency ratio of the banking sector from 9.4 percent in December 2014 to 12.2 percent in December 2015. - All banks met the regulatory minimum capital adequacy ratio of 10 percent in December 2015, except a small private bank. - Audits of the three public banks led to restructuring plans, with updated versions approved by their respective boards in May 2016 (prior action). - Two of the three public banks require amendments to their plans to address remaining weaknesses noted by the Central Bank of Tunisia; these amendments will be approved by their boards by end-July 2016 (new structural benchmark). - Non-performing loans (NPLs) remain high at 16 percent in December 2015. - Tourism accounts for 21 percent of NPLs. - Provisioning improved from 58 percent in December 2014 to 65 percent in December 2015. ### Broader policy measures to strengthen the banking system - Legislative and regulatory upgrades: - Law on banks and financial institutions (banking law) approved by the ARP on May 12, 2016 (prior action). It introduces a banking resolution framework and a deposit guarantee scheme; these will be aligned with best international practices following improvements to be adopted by end-August 2016 (new structural benchmark). - Third law on bankruptcy procedures approved in April 2016 (prior action); implementing decrees to be issued by September 30, 2016 (structural benchmark). - Supervision and operational initiatives: - Strengthen banking supervision in line with the 2015-20 action plan with Fund/Bank technical assistance. - Overhaul the regulatory framework, improve information on intra-group transactions for consolidated supervision, develop operational capabilities, implement an automated reporting system, and develop SYNTEC (Scoring System of Tunisian Credit Institutions). - On-site inspections of banks to be increased with Fund TA to cover the seven largest private banks by end-March 2017 (structural benchmark). - Measures to improve access to credit for SMEs: - Develop a legal framework for credit bureaus. - Raise the cap on excessive lending rates. - Establish a Bank of Regions, with technical support from the KfW, to centralize lending activities for development purposes. ### Implementation and oversight arrangements - Authorities will endeavor to ensure proper implementation of the business plans of the three public banks through performance contracts (¶30). - Confirmation of government guarantees for loans to public entities (callable on first demand) is expected to help banks meet regulatory requirements during restructuring. - Structural benchmarks and prior actions anchor the timetable for board approvals, legislative improvements, and implementing decrees through dates including Jul-16, Aug-16, Sep-30-2016, and end-March-2017. *Source: IMF staff report content provided in the supplied PDF chapter/section.* --- _Source: https://www.imf.org/-/media/websites/imf/imported-full-text-pdf/external/pubs/ft/scr/2016/_cr16138.pdf_