IMF Survey : IMF Loan Aims to Help Tunisia Boost Growth, Protect Poor

IMF News, June 17, 2013

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The IMF Executive Board on Friday, June 7, approved a $1.75 billion loan for Tunisia.
Objective: support the authorities’ economic agenda aimed at strengthening fiscal and external buffers, and fostering higher and more inclusive growth, including through addressing weaknesses in the banking sector and improving the business environment.

Real GDP growth picked up to about 3.6 percent in 2012, driven by recovering tourism, foreign direct investment inflows, and remittance receipts.
Unemployment remains high.
The current account deficit deteriorated due to weaker exports (slowdown in Europe) and a rise in imports.
Government spending pressures: higher wage bill and rising subsidies drove a wider fiscal deficit in 2012.
Higher food and fuel prices pushed overall inflation above 6 percent and contributed to increases in the fiscal and current account deficits.
Critical weaknesses remain in the banking sector despite recent steps to improve banking supervision and strengthen regulation.

The SBA is the IMF’s workhorse lending instrument for middle-income member countries with balance of payments needs.
Interest rate on Tunisia’s SBA is 1.08 percent.
An additional 2 percent charge is added on the borrowing amount that exceeds 300 percent of quota, increasing repayment amount for the last 6 months of the program.
Rationale: SBA loans generally carry lower interest rates than private market financing and help restore investor confidence and rebuild reserve cushions.

Macroeconomic stabilization:
- Appropriate mix of fiscal, monetary, and exchange rate policies.
- Restore fiscal space and improve composition of public spending for priority social and capital programs that support growth and poverty reduction.
- Prudent monetary policy to contain inflation while safeguarding banking sector stability.
- Greater exchange rate flexibility to improve external competitiveness and rebuild foreign reserves.
Banking sector reforms:
- Fix vulnerabilities in the banking sector to support lending and economic recovery.
- Strengthen banking supervision and address weaknesses in Tunisia’s three public banks.
- An auditing process has started to identify the business model for these banks and their possible recapitalization needs.
Private sector development:
- Corporate tax reform, a new investment code, and a reduction of red tape to improve the business environment and sustain growth.
Social protection and equity:
- Move towards a better targeted social safety net to protect the most vulnerable.
- Social security and labor market reforms will require consensus building and prioritization by the authorities.

The authorities increased energy and electricity prices in March to reduce untargeted subsidies; these measures were proposed for the 2013 budget and approved by the National Constituent Assembly at the end of 2012.
The increase of fuel prices by 7 percent in March of this year was proposed by the government for the 2013 budget and was approved by the National Constituent Assembly at the end of 2012.
The government is working on a strategy to ensure future price increases are offset by compensatory measures to protect the most vulnerable groups.
IMF and government agreement: the program is the authorities’ program; IMF discussions focused mainly on sequencing rather than types of reforms.
All policy commitments are spelled out in the published letter of intent; there are no hidden or unannounced conditions.

Youth unemployment in Tunisia stands at 30 percent, especially high among college graduates.
Boosting job creation will take time and require higher growth led by the private sector.
Program measures to encourage private sector development include reforms of the investment code and the business environment.
The government has launched training programs to help reduce skill mismatches in the labor market and lessen unemployment among college graduates.

Program ownership, political and societal buy-in are emphasized as key to success.
IMF mission team met with a range of actors, including representatives of the media, civil society, political parties, parliamentarians, labor unions, and academics.
Such dialogue aims to increase transparency, ownership, and accountability of economic policy choices and to enrich discussions with the authorities.
The IMF looks forward to continuing engagement during program implementation.

Source: IMF Survey Online, June 17, 2013.