Tunisia -- Preliminary Conclusions of the IMF Staff Visit

November 14, 2006

Describes the preliminary findings of IMF staff at the conclusion of certain missions (official staff visits, in most cases to member countries). Missions are undertaken as part of regular (usually annual) consultations under Article IV of the IMF's Articles of Agreement, in the context of a request to use IMF resources (borrow from the IMF), as part of discussions of staff monitored programs, and as part of other staff reviews of economic developments.

November 14, 2006

I. Introduction

1. The mission, in Tunis since November 8, would like to thank the authorities for their invaluable cooperation before and during the mission, for their warm welcome and full availability, and for the high quality of the discussions.

2. Effective macroeconomic management and reforms towards a gradual integration into the global economy have helped position Tunisia among the leading economic performers in the region. Tunisia is ranked first among Arab and African countries in the 2006 Global Competitiveness Report (Davos Report). Average real GDP grew by 5 percent during the past decade, inflation remained at a level comparable with that of its economic partners, and the fiscal and external positions strengthened. Although unemployment declined in the past 10 years, it is still relatively high (at about 14 percent in 2005) and is one of the main challenges facing Tunisia.

3. Over the past two years, the Tunisian economy has shown great resilience in a difficult external environment, posting sustained growth and maintaining macroeconomic stability. The immediate challenge facing the authorities is to control the negative macroeconomic impact resulting from the surging prices for oil and a number of basic commodities. In the medium term, Tunisia should press ahead with reforms underpinning the authorities' strategy for achieving a growth rate sufficiently high to absorb the rising number of new job seekers—particularly university graduates—while substantially reducing the current unemployment rate.

II. Recent Macroeconomic Developments

4. The growth outlook remains favorable. Real GDP growth is expected to rise from 4 percent in 2005 to about 5.3 percent in 2006 (attached Table 1). This is based primarily on the rebound in agricultural output, the expansion of nontextile manufacturing, and particularly, the vitality of the services sector-notably, communications-which continues to grow at a rate of almost 10 percent. From an expenditure viewpoint, the sound performance in 2006 reflects a sustained expansion of domestic demand owing to relatively buoyant household consumption and an upturn in investment since 2005. Real GDP growth is expected to accelerate to 6.0 percent in 2007, assuming agricultural output continues to increase towards potential.

5. However, there are significant downside risks to this positive outlook. Although the IMF baseline scenario projects world growth of 5 percent, global economic growth could be weaker if the slowdown recently observed in the United States deepens and/or if petroleum prices resume their ascent.

6. Inflation accelerated in 2006, leading the central bank to react and raise its key interest rate by 25 basis points, the first adjustment in three years. Consumer price inflation accelerated from 2 percent in 2005 to 4.7 percent for the first 10 months of 2006. This acceleration reflects mainly the increase in international prices for oil and some basic commodities (core inflation, excluding energy and food products, stands at 3 percent for the first 10 months of 2006, compared with 2½ percent in 2005). It also reflects the lagged effect of oil prices increases in 2005, as a result of the delayed transport prices adjustments effected at end-2005. Moreover, strong domestic demand and the gradual depreciation of the nominal effective exchange rate may also have contributed to inflationary pressures. In light of these developments, the Central Bank of Tunisia (BCT) tightened liquidity in the financial system and raised its key interest rate from 5 percent to 5¼ percent at end-September. To contain imported inflation, the authorities are also encouraged to continue their policy of increasing exchange rate flexibility. Recent data indicate that inflation has slowed since August 2006, and this trend is expected to continue, bringing inflation down to 4.6 percent in 2006 and 3½ percent in 2007.

Figure 1. Inflation, year on year

7. Rising oil prices also adversely affected the external accounts. Despite the partial coverage of oil consumption by domestic production and robust growth in exports of nontextile manufactures and services, the external current account deficit is expected to widen in 2006 before narrowing down in 2007. Nevertheless, the external position remains sustainable. In fact, the current account balance, excluding energy products, was in surplus in 2005 and during the first 10 months of 2006. International reserves continue to rise-thanks in part to the partial privatization of Tunisie Télécom, which yielded $2.2 billion-standing at about $6½ billion in October, or the equivalent of almost five months of imports of goods and services.

8. The fiscal impact of higher oil prices includes 0.7 percent of GDP of additional fuel subsidies as compared to the 2006 budget. The fiscal deficit for 2006 is estimated at 3.2 percent of GDP, comparable with last year's deficit but below the 3.6 percent budget forecast owing to the improved performance of nontax revenues. The debt consolidation effort and the use of a portion of the privatization receipts for early debt repayment should reduce the public debt from 58.4 percent of GDP in 2005 to 54.5 percent in 2007. Similarly, the medium- and long-term external debt is expected to decline from 54.6 percent of GDP in 2005 to 46 percent in 2007.

III. Progress with Structural Reforms

9. In the medium term, the authorities aim to bring per capita income to the level attained in the lower-tier OECD countries and to reduce the unemployment rate to below 10 percent. The preliminary draft of the 11th Plan articulates the strategy to achieve this objective around three key elements: stimulate private investment, particularly in high-value-added sectors, reform the education and training system to improve its efficiency, and continue to gradually open up the Tunisian economy. The plan emphasizes the need to persevere with the reform effort so as to make productivity an even more important engine of growth, targeting a productivity gain of approximately half the projected GDP growth rate.

10. The gradual liberalization of the capital account is continuing. For example, nonresidents may now subscribe to Treasury bills, up to 10 percent of each issue. This ceiling will be raised to 20 percent on January 1, 2007 and to 30 percent on January 1, 2009. Some new measures have been announced by the President. They pertain, in particular, to: (a) liberalization of medium-and long-term external borrowing for companies listed on the stock exchange; (b) raising of the ceilings on allowances and transfer rights of foreign currency in connection with business travel, tourism, and some personal expenses; (c) wider opportunities to open foreign currency accounts; (d) enactment of an exchange amnesty;
(e) amendment of the exchange legislation so as to make the requirement of prior authorization the exception rather than the rule; and (f) closer alignment of onshore/offshore regimes.

11. At the same time, the authorities have continued to introduce reforms aimed at strengthening the financial sector to stimulate growth and minimize the risks associated with the liberalization of international capital flows:

• The authorities have amended the Banking Law and published the implementing regulations, hence providing a legal framework supporting the consolidation of the banking sector, while the amendment of the BCT Law establishes the legal framework required for the transition to an inflation targeting regime.

• The authorities shared with the banking sector the results of the recent assessment of the financial system in the context of the Financial Sector Assessment Program (FSAP) update.1 They underscored the need for credit institutions to continue efforts to strengthen their capital base, particularly by proactively reducing their portfolio of nonperforming loans and improving their risk coverage ratio through provisioning, while seeking to increase their profitability. To that end, the banking system is making further headway: capital adequacy ratios are at comfortable levels, nonperforming loans are still trending downward although they remain quite high, and provisioning rates continue to rise (48.4 percent in 2006 with the objective of reaching 70 percent in 2009).

13. The mission is pleased with the progress achieved on the tax reforms supported by the 2005 IMF technical assistance mission. In particular, the mission noted the reduction in the corporate income tax rate from 35 percent to 30 percent, the elimination of the 29 percent VAT rate, the easing of VAT credit refund procedures, the reduction in customs duties and in the number of tariff lines at the multilateral level, and the simplification of customs procedures through the establishment of advanced IT systems to boost enterprise competitiveness. Finally, the mission welcomes the authorities' decision to allocate a substantial proportion of the privatization receipts to early repayment of the external debt. However, the mission encourages the authorities to continue their fiscal consolidation effort beyond the use of privatization receipts by adopting long-term measures to increase revenue and control expenditure so as to maintain long-term fiscal sustainability.

14. The overall energy strategy, based on conservation, increased production, and diversification toward renewable energies, holds considerable promise. However, this reform should be supported by the gradual elimination of costly subsidies on retail prices for petroleum products. Despite the authorities decision to pass a portion of the oil price increase on to consumers—domestic gasoline prices increased by about 15 percent in 2005 with a similar increase in the first 10 months of this year—so as to limit subsidies and encourage energy saving, retail prices in Tunisia remain lower than those in its trading partners (Table 2).

Table 2. Fuel prices, June 2006
in US dollars per liter


High Octane Diesel

UK 1.78 1.82
EU-15 1.68 1.44
France 1.64 1.40
Spain 1.39 1.26
Morocco 1.21 1.08
Jordan 0.90 0.53
USA 0.81 0.76
Tunisia 0.79 0.52
Egypt 0.23 0.10

Source: Authorities  

15. Tunisia is actively promoting regional and global cooperation. A number of agreements have been introduced or came into effect in 2006, particularly the adoption of the system of pan-European cumulation of origin and the entry into force of the free trade agreement with Turkey. Tunisia has initiated preparatory work for the negotiations on including agricultural products into the free trade area with the European Union. Tunisia is also actively involved in the integration of the Maghreb countries, particularly through the recent effort supported by the IMF. In this context, Tunisia took part in the conference on trade facilitation in Algiers in November 2005, will participate in the conference on financial sector reform and prospects for regional integration in the Maghreb, to be held in Rabat in December 2006, and will host the third conference on the development of the private sector in late 2007.

IV. Other Issues

16. The mission welcomes the authorities' decision, as customary, to publish this aide-mémoire.

17. The technical assistance mission on the transition to inflation targeting will take place in January 2007, and it is agreed that the next Article IV mission will take place in May 2007.

Table 2. Fuel prices, June 2006
in US dollars per liter


High Octane Diesel

UK 1.78 1.82
EU-15 1.68 1.44
France 1.64 1.40
Spain 1.39 1.26
Morocco 1.21 1.08
Jordan 0.90 0.53
USA 0.81 0.76
Tunisia 0.79 0.52
Egypt 0.23 0.10

Source: Authorities  

Table 1. Tunisia: Selected Economic Indicators, 2001-07

    2001 2002 2003 2004 2005 2006 2007
              Est. Proj.


Output and Prices

  (Annual percentage change)

Real GDP (market prices)

  4.9 1.7 5.6 6.0 4.0 5.3 6.0

Consumer price (end of period)

  3.5 1.6 4.5 1.2 3.9 4.0 3.0

Consumer price (period average)

  2.0 2.7 2.7 3.6 2.0 4.6 3.5

Public Finances

  (In percent of GDP)

Central government balance (excluding privatization receipts and grants)

  -3.8 -3.5 -3.4 -2.9 -3.1 -3.2 -3.1

Total government debt

  62.7 61.5 60.4 59.7 58.4 55.6 54.5


  23.6 22.4 21.5 22.0 21.1 23.3 24.5


  39.2 39.0 38.9 37.7 37.3 32.3 30.0

Monetary Sector

  (Annual percentage change)

Credit to the private sector 1/

  10.3 6.7 4.6 5.3 6.3 8.4 7.0

Base money 1/

  18.3 1.8 5.5 12.2 21.9 16.2 8.3

Broad money (M3) 1/

  11.3 5.2 6.3 10.3 11.0 15.0 8.4

External Sector

  (In percent of GDP)

Current account including official transfers

  -3.9 -3.1 -2.7 -1.6 -0.7 -2.8 -2.2

Total external debt

  65.8 66.8 66.1 66.4 65.8 62.1 59.1

medium and long term

  52.3 53.8 53.9 54.9 54.4 48.3 46.0

short term

  13.5 13.0 12.2 11.5 11.4 13.8 13.1

Gross reserves (in billions of U.S. dollars) 2/

  2.0 2.3 3.0 4.0 4.4 6.3 6.2

In months of imports of goods and services

  2.3 2.7 3.0 3.5 3.7 4.7 4.3

Prudential indicators of the banking sector 3/

  (In percent)

Capital adequacy ratio 4/


Commercial banks

  10.6 9.8 9.3 11.6 12.4 12.4 ...

Development banks

  63.9 54.6 54.3 55.3 50.3 50.3 ...

Nonperforming loans 5/

  21.0 21.4 24.2 23.6 20.9 20.7 ...

Provisioning ratio 6/

  48.7 45.6 44.1 45.1 46.8 48.4 ...

Commercial banks

  47.4 43.9 43.1 45.8 47.4 49.1 ...

Development banks

  56.3 69.5 62.3 23.0 28.5 31.0 ...





Sources: Tunisian authorities and IMF staff estimates.

1/ In 2006, from August 2005 to August 2006

2/ Stock of October 25 2006.

3/ Indicators at end-June 2006.

4/ Capital adequacy ratio based on risk-weighted assets.

5/ In percentage of total loans.

6/ In percent of nonperforming loans.

1 A summary of the BCT's strategy and the recommendations of the FSAP mission can be found in the report on the 2006 Article IV consultation, on the IMF website: http://www.imf.org/external/pubs/ft/scr/2006/cr06207.pdf


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