Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

Typical street scene in Santa Ana, El Salvador. (Photo: iStock)

IMF Survey : Tunisia Gets $2.9 billion IMF Loan to Strengthen Job Creation and Economic Growth

June 2, 2016

  • Tunisia faces weak economic activity, low employment, high external imbalances
  • IMF loan to support the government’s economic vision of more inclusive growth
  • Program includes reforms to tackle high unemployment, strengthen governance

The IMF has approved a four-year, $2.9 billion loan for Tunisia to support the authorities’ economic agenda aimed at promoting more inclusive growth and job creation, while protecting the most vulnerable households.

Tunisian youth sit on theater steps in the country’s capital. Tunisia’s new program aims to tackle the country’s high unemployment (photo: Fethi Belaid/Gettyimages)

Tunisian youth sit on theater steps in the country’s capital. Tunisia’s new program aims to tackle the country’s high unemployment (photo: Fethi Belaid/Gettyimages)

Tunisia’s Program

The program builds on the previous arrangement, which supported Tunisia in the immediate aftermath of the Arab Spring.

Speaking to IMF Survey, IMF Mission Chief for Tunisia Amine Mati explains how the country’s economic program aims to tackle remaining challenges and support the authorities’ new economic reform plan.

IMF Survey: What has Tunisia achieved under the first program, and why does the country need additional assistance from the IMF?

Mati: The first program, the Stand-By Arrangement, helped Tunisia preserve macroeconomic stability during a very difficult time—prolonged political transition, increased social tensions including strikes and work stoppages, and security tensions arising from conflicts with Salafists and the tragic terror attacks of 2015 that devastated the tourism industry. Amid this challenging landscape, the authorities were able to implement an ambitious reform agenda aimed at supporting private sector development, tackling high unemployment, and reducing regional disparities.

Despite significant progress, Tunisia is still facing many economic challenges—spending composition has worsened, external imbalances are high, the dinar remains overvalued, banking fragilities remain, and reforms to strengthen the business climate have been slow. That is why the authorities requested a follow-on four-year program, the Extended Fund Facility, to support their economic vision of modernizing the country’s development model and reducing existing vulnerabilities.

This longer-term program is designed to target the critical long-standing structural weaknesses of Tunisia's economy—the ones that have resulted in slow growth and high external balances. Therefore, the main focus of this program is to consolidate the progress that has already been made on macroeconomic stability and to address remaining structural obstacles to more inclusive growth and job creation.

IMF Survey: Can you describe how the IMF’s new program for Tunisia plans to support the authorities’ five-year economic vision?

Mati: The authorities’ vision rests on five-pillars, of which the main driver is private sector development. To contribute to the authorities’ economic reform agenda, the new program with the IMF focuses on the following priorities:

• A gradual reduction of the overall fiscal deficit to stabilize public debt at about 50 percent of GDP

• Better composition of public spending, as wage containment would allow for a doubling of priority public investment that supports growth and poverty reduction

• Greater exchange rate flexibility to improve Tunisia’s external competitiveness and rebuild foreign reserves

• Improving financial sector intermediation, including through continued restructuring of public banks

• Structural reforms, including reforms to public institutions and state-owned companies, reducing energy subsidies, a more progressive and equity-friendly tax system, strengthening governance, and improving the business climate

All these reforms will take time to bear fruit, but over time they will help increase growth to 5 percent.

IMF Survey: What are some of the IMF’s recommendations to help Tunisia create more jobs given the high overall unemployment rate of 15 percent, and youth unemployment of 35 percent?

Mati: Both macroeconomic policies and structural reforms that I mentioned above, need to be pursued vigorously for the private sector to invest and create jobs. At this time in Tunisia, restoring investors’ confidence—weakened by political uncertainties and security challenges—is key. Just as important, however, is changing the long-standing development model—which is based on pervasive state intervention that led to an economy dependent on low-value added exports, excessive regulation, and limited competition—requires moving quickly with the new investment code and implementing the new competition law.

The country can also implement private-public partnerships that attract private capital for infrastructure projects. All these improvements in the business climate, helped by further streamlining of existing regulations, will encourage private sector development and signal to local and global investors that Tunisia is open for business. Reforming the labor market will also be necessary, although that is likely to take time to build more consensus. In the meantime, the authorities have launched active labor market programs (e.g. public works, microfinance) and vocational training programs that can help lessen unemployment among college graduates.

IMF Survey: Part of the new reform agenda seeks to increase employment, especially in the non-coastal regions. How can civil service reform help in this respect?

Mati: First, let me say that reforming the civil service is the number one priority listed by all the key stakeholders we talked to, and not surprisingly is at the top of the authorities’ list in their economic vision. All stakeholders recognize both weaknesses in the quality of public services and the unsustainability of the current wage bill path, which represent 65 percent of tax revenue, 14 percent of GDP, and 45 percent of total spending.

The reform—which aims at increasing public sector efficiencies and quality of services—will look at several aspects, including status for high-level civil servants, revision of the pay structure, better linking of pay with performance, and redeployments to the underserved interior regions. It will also help contain the wage bill by reducing it to 12 percent of GDP by 2020, thereby creating the necessary fiscal space to double public investment.

Civil service reform is a necessary step to create growth but can only be successful if the reform achieves broad-based consensus. This in turn requires reforms in other important areas. For example, civil service reform should go hand in hand with tax reform that improves fairness by widening the base and increasing the purchasing power for the lowest income taxpayer (e.g., by raising the income tax threshold). As recognized by the authorities, reform implementation is essential as only the private sector can create sustainable jobs— not the public sector.

IMF Survey: Is enough being done to address corruption and strengthen good governance?

Mati: Strengthening governance is a priority for the government. Improving anticorruption and good governance provisions are also enshrined in the Tunisian constitution that was adopted last year. Now, the challenge is implementation and how to move forward. To address these concerns, the authorities are drafting a law to set an independent high-level constitutional body to fight corruption.

New legislation by the end of the year will also protect whistleblowers, address conflicts of interest in the public sector, and require financial disclosure of net worth by senior government officials. Work to improve public financial management and increase publication of government documents will help promote transparency and strengthen governance. A new ministry of civil service affairs and good governance, established three months ago, will also help implement this reform. The IMF program will support the authorities in this area, including by helping the authorities strengthen their anti-money laundering and combating the financing of terrorism framework.

IMF Survey: What has the IMF done to engage non-governmental stakeholders to ensure buy-in and support for the follow-on program?

Mati: We engage with a variety of stakeholders to obtain different perspectives that we can bring to our discussions with the authorities. We meet with a lot of non-governmental organizations that are focused on a variety of social issues. We also meet with think tanks and trade and business unions on a regular basis. These series of discussions are an evolutionary process that helps us listen to concerns of all stakeholders, improve our understanding of the country’s key issues, and enhance our discussions on government policies.

The dialogue with all stakeholders occurs during our periodic visits in-country, and also through a regular dialogue with the IMF resident representative in Tunis.