Mission Concluding Statement 

1.  Economic performance in 1999 was very satisfactory in terms of growth, inflation, and the external and budgetary accounts. In part, this was due to cyclical factors such as an exceptional tourist season and a recovery in agricultural activity, but it is linked also to strong underlying growth resulting from economic and social reforms sustained over several years and strengthened by consistent and prudent macroeconomic management.

2.  Economic growth will weaken somewhat in 2000 on account of both the drought that has affected cereal production and a probable stabilization of tourism activity, although this will in no way undermine internal or external stability. Vigorous growth in the nonagricultural sectors and the upturn in Europe's economic activity should contribute to an increase in real GDP of around 5 percent, in line with the authorities' latest forecasts.

3.  The offsetting budgetary effects of increased oil prices and weaker cereal production (via the cost of the food subsidy system) should help achieve the deficit objective of the Budget Law (3.3 percent of GDP, excluding privatization).¹ Nonetheless, it will still be necessary to adjust upward the prices of subsidized food products. Also, given the budgetary risks created by the current price setting system for petroleum products, it would be preferable to establish a more formal indexation system linking domestic to international petroleum prices.

4.  Although partly the result of exceptional factors (particularly higher cereal imports), the anticipated widening of the external current account deficit (3.5 percent of GDP in 2000) should be monitored closely. The authorities' intention to tap the international financial markets in the very near future will help maintain an adequate level of foreign exchange reserves in terms of imports. In an environment in which the conditions for accessing financial markets remain volatile, it is equally important to ensure that reserves provide sufficient cover for short-term financial obligations.

5.  The very large increase in the money supply in 1999 (20 percent growth for M2) is essentially the result of sizable inflows of foreign exchange. Downward pressures on the money market rate, which could have resulted from these capital inflows, were offset by an increase in fixed-term deposits linked to the redemption of transferable treasury bonds (Bons du Trésor Cessibles) (and a consequent increase in the demand for money). To the extent that the investments in fixed-term deposits will be redirected toward new treasury bonds (BTCT/BTA), a lower level of monetary growth than currently forecast will be required to maintain the money market rate at its current level. Indeed, the mission regards the current level of real interest rates as appropriate.

6.  The mission identifies two major challenges: (a) strengthening economic growth to respond, both to an acceleration in labor force growth—the labor force is set to increase by 80,000 a year during the Xth Plan, as compared to 70,000 at present—and to the expectations of continued increases in the standard of living and real wages. This means that growth should be rich in both employment and productivity gains; and (b) establishing the conditions for a sustainable reduction in the fiscal deficit to ensure the stability of the external accounts as well as internal balance, and to offset the expected deterioration in social security accounts over the coming years.

7.  A faster growth rate is achievable only by strengthening private investment which, while increasing, still accounts for only about half of the country's total investment. There are two sides to this challenge:

• A macroeconomic one, aimed at strengthening economic competitiveness and increasing overall profitability of investment; and

• A structural one, aimed at creating an institutional and regulatory framework conducive to private investment, and ensuring that the latter is not directed toward unproductive uses or toward the informal sector.

8.  Already, significant progress has been made on the macroeconomic front, particularly as regards the lowering of inflation, and thus of interest rates, economic diversification, and integration into the global economy. Nevertheless, the forthcoming changes in the external environment (gradual elimination of textiles quotas and tariff rollback) will have a significant impact on profitability and hence on the competitiveness of Tunisia's economy in the coming years—and could involve major resource reallocations across sectors. The tariff rollback is equivalent to an appreciation of the real exchange rate (in terms of its effect on competitiveness), justifiable only by equivalent productivity gains (and reductions in unit labor cost). Insofar as these productivity gains will materialize only over a longer term horizon, it will be necessary to resort to the flexibility offered by the exchange rate regime in order to maintain competitiveness in the tradable goods sector. This is all the more important since the three-year wage agreements of 1999 do not provide for any flexibility on wages until 2002.²

9.  From the structural standpoint, the reform of the banking system and expansion of the scope of private sector activity (through concessions and privatizations) will create the conditions for increased investment and more jobs. However, the mission considers that an acceleration of reforms (particularly privatization) and the establishment of a more neutral incentive system will be needed to encourage domestic and foreign private investment, and prevent capital from being directed toward unproductive or rent-seeking investments. The mission notes that:

• The privatization process could be accelerated and expanded to the services sector with the aim of increasing the productivity of privatized enterprises, thereby reducing input costs for the rest of the economy, and attracting foreign capital. The granting of a second GSM license is an important step in this direction.

• The phasing of the tariff rollback and the tariff differentials created across products (and places of origin) generate distortions that do not necessarily favor the most productive sectors in the medium term. Faster progress toward reducing tariff levels and differentials would therefore be helpful and could be achieved by lowering customs tariffs under the most favored nation (MFN) regime.

• The many tax exemptions and nontax advantages granted to certain sectors or activities undermine the transparency of the incentive system and run counter to the objective of a neutral or simple tax system. In this sense, they could act as a brake on investment. Tax exemptions are a useful instrument for correcting intrinsic or temporary market failures, and they should be revised as economic conditions evolve. Thus the advantages granted to the export sector may no longer be justified in a context of improved macroeconomic conditions and greater economic liberalization.

• The remaining legal restrictions on the right of establishment, on foreign investment in Tunisia, on Tunisian foreign direct investment abroad, and the distinction between offshore and onshore sectors could hamper the development of sectors capable of generating growth and employment (such as the services sector). Market segmentation may have responded to strategic considerations in the past, but its appropriateness should be reviewed in light of Tunisia's current state of economic development. Thus, for example, the distinction between offshore and onshore loses significance in a context where lower tariff barriers will open the domestic economy to foreign competition.

10.  While public finances show no signs of slippage at this time, they remain vulnerable in the medium term because of: (a) their dependence on nonrecurrent revenue from privatization—following these operations, dividend payments to the state will also diminish; (b) the effects of the tariff rollback; (c) a tax base eroded by an accumulation of exemptions; and (d) spending rigidities, particularly with regard to the wage bill. In this context, it would be useful to undertake a diagnostic study of the role of the civil service and its relationship to wage bill rigidity and to consider possible reforms of the tax system, with a view both to restoring its neutrality and simplicity, and to expanding its base. In this regard, the staff of the International Monetary Fund stands ready to assist the authorities in measuring the budgetary impact of the tariff rollback and proposing offsetting measures based on an update of the study already carried out in 1996.

11.  The mission congratulates the authorities on the initiatives they have taken to increase economic policy transparency and, in particular, on their decision to publish the preliminary conclusions of the missions, as well as the final consultation reports.

12.  The mission also extends warm congratulations to the authorities on their decision to participate in the pilot Financial Sector Assessment Program (FSAP) during 2001.

13.  It was agreed that the next discussions, within the context of the Article IV consultation, will take place in the fall of 2000.