Tunisia—A People United, A Destiny Responding, Address by Christine Lagarde, Managing Director, IMF at the Central Bank of Tunisia, September 9, 2015

September 9, 2015

Address by Christine Lagarde
Managing Director, International Monetary Fund
Central Bank of Tunisia,
September 9, 2015


Bonjour—Al salaamu alaykum!

It is a great pleasure to be back here in Tunisia—the birthplace of the Arab Spring that has inspired youth and citizens in the region to reach out for their aspirations. So Governor Ayari, thank you for giving me the opportunity to be back with you today.

When I last visited Tunisia, it was 2012. The first transition government had just been installed, and the National Constituent Assembly was just created. Nobody ignores the difficulties and challenges Tunisia had to face in the following months. Severe social tensions, increased security risks, and recurring economic disruptions.

Yet, Tunisia managed to successfully navigate through these difficulties. How? By never losing sight of one important objective— that the path to a new democracy must be built on consensus and respect for economic opportunity and inclusion.

The words of the poet Abou Al Kacem Chebbi that are also part of your national anthem best capture this fortitude:

When the people will to live, Destiny must surely respond.
Oppression shall then vanish. Fetters are certain to break

Today, Tunisia can be proud of yet another achievement. In January of last year, Tunisia adopted a new Constitution. Shortly thereafter, the first post-transition government was installed through fair, peaceful, and inclusive elections. This is an important milestone in the country’s transition to a fairer society. Destiny has responded!

Even so, the inexorable march towards a better future must continue. And we must not let tragic and cowardly acts such as those inflicted at the Bardo Museum and in Sousse detract from Tunisia’s ultimate quest.

The world today is still captivated by Tunisia and its choices. That same spirit that has united Tunisia’s people so far must prevail so that destiny can again respond. So that Tunisia can turn its political victory into an economic triumph and secure an even better future for its people.

With this in mind, I will share my perspectives on three issues:

(i) First, the global environment and risks confronting Tunisia’s outlook;

(ii) Second, the policy priorities to lay the foundations for Tunisia’s economic takeoff; and

(iii) Third, how the partnership between Tunisia and the IMF has evolved.

1. Tunisian economy: resilient amidst challenges and a difficult conjuncture

Let me begin by highlighting Tunisia’s key macroeconomic achievements and the outlook for its economy.

Tunisia’s macroeconomic performance over the past few years has been commendable. Growth has been positive—around 2.5 percent per year in 2013 and 2014, despite a number of daunting challenges: a prolonged transition, recurring social unrest, increased spillovers from regional conflicts.

These challenges were compounded by a particularly difficult external environment that preceded the events of Bardo and Sousse. The low growth in Europe—Tunisia’s key trading partner—has impacted the economy through two main channels.

The first channel is through trade. More than 70 percent of Tunisia’s exports are to Europe. Our own analysis suggests that a one percentage point decline in Europe’s growth translates into a 0.6 percentage point decline in Tunisia’s growth. This is quite significant.

The second channel of transmission is through tourism. Tunisia’s tourism sector is a major growth driver for the economy—representing close to 7 percent of GDP and employing more than 400,000 people. Nearly half of the tourists (45 percent exactly) are Europeans.

That sector too was badly hit by the slowdown in Europe. Last year, European arrivals dropped by 26 percent, and revenues were 15 percent below the levels recorded in 2010. The recent attacks also inflicted a further blow to Tunisia’s tourism, with annual tourism receipts this year expected to be 50 percent lower than last year. The repercussions on the economy are palpable and employment will be significantly impacted.

Therefore, we now project a growth of the economic activity of only 1 percent for the current year.

Yet, amid these difficult conditions, there is reason for optimism. The forces that had been headwinds until recently can turn into tailwinds for the Tunisian economy. Why do I say that?

For a start, we expect growth in the global economy to remain moderate. Growth in the advanced economies is firming up, even as growth in many emerging economies slows down. Importantly, we expect growth in the Euro Area to be stronger than in previous years. This bodes well for Tunisia in terms of stronger trade and tourism flows.

At the same time, we also expect commodity prices to remain low for an extended period. This will help reduce external and fiscal imbalances. A US$10 per barrel drop in international oil prices is estimated to reduce both the fiscal and current account deficits by 0.6 percent of GDP. This is a large windfall for Tunisia as for many other oil importers.

So far for the external environment. How about the domestic outlook?

It is obvious that Tunisia is endowed with enormous assets. Your location, culture, and natural beauty make your country a vital link between Europe and Africa. And your well-educated and youthful population is a reservoir of talent.

We need to build on these assets and to deliver on Tunisia’s aspirations; my second topic.

2. Meeting the aspirations of the Tunisian people—the road forward

Let me start by quoting this beautiful Tunisian proverb that says: “He who wants beautiful things will have many a sleepless night.”

We should be under no illusion. The road ahead for achieving Tunisia’s economic triumph will not be easy. There are still hurdles to overcome.

For a start, unemployment remains very high, especially among youth and women. At 34 percent, youth unemployment is more than double the overall rate. At the same time, regional disparities — a main trigger to the Arab Spring — remain high. Average poverty rates are three times higher in the interior of the country than in the richer coastal areas.

With growth projected at 1 percent this year, this will not be enough to make a significant dent in unemployment and secure a better life and more inclusive growth for Tunisia’s people.

Fortunately, a roadmap exists. The Constitution obligates the government to effectively manage public resources, and serve its citizens and public interests with clear transparency and accountability rules.

Now more than ever is the time to push for the reforms that are necessary to transform Tunisia into a dynamic, competitive economy and create jobs for its citizens. I can see three reform areas where progress will be crucial.

The first is a growth-friendly budget. Unleashing Tunisia’s growth potential will require higher investment spending.

Last year, as much as 1.6 percent of GDP in fiscal space was created by reduced energy subsidies due to the decline in international oil prices. However, much of these savings was absorbed by a growing public sector wage bill. Close to 13 percent of GDP, Tunisia’s wage bill is among the highest in the world.

Improving the composition of the budget to support growth will require re-orienting public spending towards higher investment and social expenditures. It also means reforming the tax system—to make it both more equitable and more efficient.

In fact, we have just released an in-depth study on how tax systems can play a role in meeting the aspirations for greater economic fairness in the Middle East and North African countries. For example, in the case of Tunisia, equity and efficiency can be achieved through greater simplification, progressivity, and convergence of tax rates between the onshore and offshore sectors.

The second reform area is the financial system. A strong and efficient financial system is key for a healthy and vibrant economy. More effort is needed to overcome the vestiges of the old model, which was a key constraint to growth.

A modern banking system that is subject to strong supervision and open to competition is essential to improve access to finance and credit allocation to productive activities of all type, large companies as well as small and medium size enterprises.

A good place to start is with public banks—which account for 40 percent of total banking assets and more than a quarter of non-performing loans. Recapitalizing these banks, and restructuring others, are important steps that must be built upon to improve governance practices and facilitate financial intermediation. But we need to continue.

The third reform area is the business climate. Tunisia needs a first-class business climate for a fast gear growth take-off.

Currently, businesses and enterprises are shackled by complex and burdensome regulations. According to the World Bank’s Doing Business Indicators, it takes 94 days to get a construction permit, and over 50 percent of sectors in the economy face investment restrictions. All these regulations do is stifle the private sector, cloud the clarity of rules, and inhibit investment and job creation.

What is needed now is a level playing field for all firms. Two new laws can be game changers. The first is the new investment code, which will be key in spurring private domestic and foreign investments. The second is the law on competition and prices, approved by the Parliament last week, which will open up key product markets and remove discretionary practices.

In sum, a growth friendly budget, an efficient financial system, and a first-rate business climate can lay the foundations for a vibrant economy. These are difficult reforms, they can no longer be postponed and need to be implemented quickly in order to meet the aspirations of Tunisia’s people. And the message to the world will be clear: Tunisia is determined to transform its political accomplishment into an economic triumph.

3. Tunisia and the IMF—the partnership continues

Tunisia is not alone in its quest. The IMF has been a close partner throughout. Let me now turn to my final topic.

Throughout its historic political transition, the IMF has been supporting Tunisia through financial assistance, policy advice and extensive technical assistance.

A Fund-supported program in the amount of US$1.75 billion was approved in June 2013 to help Tunisia implement its homegrown program of economic policies and reforms. The objective of these reforms was to preserve macroeconomic stability, generate higher and more inclusive growth, while protecting the most vulnerable.

Flexibility and responsiveness have been a fundamental pillar of our partnership. In a landscape of shifting political and social constraints, our program has responded accordingly. For example, our resources were shifted early in the program to support not only balance of payments but also the public budget to accommodate spending pressures.

On several occasions, the program targets and test dates were revised to take into account implementation difficulties—or unforeseen events such as the recent attacks. This flexibility was crucial in enabling us to effectively support Tunisia while ensuring that the program objectives remained achievable.

We have also engaged with the Tunisian authorities through capacity building and training in a wide range of areas for example tax policy and administration, the design of an automatic fuel pricing formula, and strengthening of banking supervision.

Looking ahead, the IMF will continue to be Tunisia’s partner as it its lays the foundations for a stronger, more resilient and more inclusive economy.


In conclusion, I would like to pay tribute to one of Tunisia’s greatest luminaries—Ibn Khaldun—the father of historiography and sociology. And I would particularly like to recognize Ibn Khaldun’s the concept of “social cohesion” that he coined as a contribution to our understanding of how societies are formed—their genesis and their proliferation.

Today these same attributes are shaping the Tunisian society as it embarks on a new historical phase of democracy. A new society that is inclusive and cohesive. A society united by the quest for economic opportunity and prosperity.

The world is watching you, and stands firmly behind you. Destiny will respond.

Thank you.


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