IMF Survey: Tunisia Weathers Crisis Well, But Unemployment Persists

IMF News, September 10, 2010

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Authors: Joël Toujas-Bernate, Rina Bhattacharya IMF Middle East, Central Asia Department September
Published: September 10, 2010

Tunisia’s economy fared relatively well during the global crisis, but the key challenge is to boost job-generating growth and lower unemployment.
IMF assessment date: September 10, 2010.

Growth expected to reach 3.8 percent in 2010, after slowing to 3 percent in 2009.
Tunisia’s recovery is fragile due to high dependence on Europe:
- Projected growth in Tunisia’s main trading partners: 1.2 percent in 2010 and 1.5 percent in 2011.
External risks and recent developments noted:
- Potential inflationary pressures.
- Recent deterioration of the current account balance.
- Declining external reserves.
Fiscal policy leeway exists due to prior prudent macroeconomic management, but authorities must remain vigilant.

Unemployment dynamics:
- Unemployment had fallen to 12.4 percent in 2007 and was at 13.3 percent at the time of the assessment, remaining relatively high, particularly among the educated youth.
Growth projection conditional on reforms:
- “Tunisia’s growth could increase gradually and reach an average of about 5 percent over 2010-14,” provided planned policies and reforms succeed.
Strategies to boost employment-generating growth:
- Export promotion strategy to diversify target markets and products.
- Trade agreements and negotiations:
- Preferential trade agreement with the West African Economic and Monetary Union.
- Negotiations with the Central African Economic and Monetary Community for free trade agreements.
- Bilateral negotiations with the European Union to extend the Association agreement to services, agricultural products, and processed food (current agreement provides for free trade for industrial products).
- Reforms to labor market policies, the educational system, and public employment services to facilitate labor mobility and reduce mismatches between labor supply and demand.
- Implementation support from several World Bank Development Policy Loans.

Expenditure control and social security reform emphasized as essential to maintain a stable macroeconomic environment that promotes employment and growth.
Pension reform discussions with social partners to improve pension system financial sustainability.
Government advised to explore ways to contain subsidies on food and fuel products.

Tax regime reforms:
- International comparisons show a relatively high tax burden on businesses in Tunisia and scope to increase yield from consumption taxes.
- Authorities intend to reduce tax rates on businesses and offset reductions by increasing the standard VAT rate and expanding the tax base through the elimination of exemptions.
Financial sector strengthening measures:
- Consolidating the financial strength of banks.
- Enhancing the role of banks in the economy.
- Restructuring the public banking system.
- Bolstering the presence of Tunisian banks abroad.
- Ultimate aim: transform Tunisia into a banking services hub and a regional financial market.

Authorities intend to modernize the monetary policy framework by introducing inflation targeting.
Plans to implement convertibility of the dinar and capital account liberalization by 2014.
IMF assessment: achieving these goals requires significant preparatory work, including:
- Further strengthening of the banking system.
- Deepening of the foreign exchange, money, and capital markets.
- Additional steps to ensure increased reliance on interest rates as the operational target of monetary policy.

Source: IMF Survey: Tunisia Weathers Crisis Well, But Unemployment Persists (September 10, 2010).