Tunisia -- Interim Misssion Concluding Statement

IMF News, May 9, 2000

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Published: May 9, 2000

Overview and context

Document dates: May 9, 2000; Tunisia—Interim Mission Concluding Statement dated May 2, 2000.
Purpose: Describes the preliminary findings of IMF staff at the conclusion of a mission undertaken in the context of Article IV consultations and related staff reviews of economic developments.
Assessment summary: Economic performance in 1999 was "very satisfactory" in terms of growth, inflation, and the external and budgetary accounts, reflecting cyclical factors (exceptional tourist season, recovery in agricultural activity) and sustained economic and social reforms combined with prudent macroeconomic management.

I. Short-term prospects and considerations

Findings and projections

Real GDP: "an increase in real GDP of around 5 percent" in 2000, in line with authorities' forecasts.
External current account: anticipated widening to "3.5 percent of GDP in 2000".
Budget deficit objective: Budget Law target of "3.3 percent of GDP, excluding privatization".
Including anticipated spending in connection with onlending, budget deficit projection: "3.7 percent of GDP, excluding privatizations." (footnote)
Money supply: "20 percent growth for M2" in 1999.

Risks and considerations

Growth weakness in 2000 expected due to drought affecting cereal production and probable stabilization of tourism activity, but not undermining internal or external stability.
Offset factors: vigorous nonagricultural growth and upturn in Europe's economic activity.
Budgetary pressures from increased oil prices and weaker cereal production via the food subsidy system; need to adjust upward prices of subsidized food products.
Petroleum pricing: current price setting system creates budgetary risks; recommendation to establish a more formal indexation system linking domestic to international petroleum prices.
External reserves and financing: authorities' plan to tap international financial markets soon should help maintain adequate foreign exchange reserves; importance of ensuring reserves cover short-term financial obligations given volatile market access.
Monetary conditions: large foreign exchange inflows drove M2 growth; increases in fixed-term deposits (linked to redemption of transferable treasury bonds, Bons du Trésor Cessibles) offset downward pressure on money market rates. If investments in fixed-term deposits are redirected toward new treasury bonds (BTCT/BTA), a lower level of monetary growth than currently forecast will be required to maintain the money market rate. Mission regards current level of real interest rates as appropriate.

II. Challenges for 2001 and the medium term

Principal challenges

(a) Strengthen economic growth to accommodate labor force growth and rising living standards: labor force projected to increase by "80,000 a year during the Xth Plan, as compared to 70,000 at present."
(b) Establish conditions for a sustainable reduction in the fiscal deficit to ensure external and internal stability and offset expected deterioration in social security accounts.

A. Growth — constraints and policy directions

Need to strengthen private investment, which still accounts for "only about half of the country's total investment."
Two dimensions:
- Macroeconomic: strengthen competitiveness and increase overall profitability of investment.
- Structural: create institutional and regulatory framework conducive to private investment and prevent allocation to unproductive uses or the informal sector.

Structural and policy recommendations

Continue progress on lowering inflation and interest rates, economic diversification, and global integration.
Exchange rate flexibility recommended to maintain competitiveness in tradable goods, especially given forthcoming elimination of textiles quotas and tariff rollback; tariff rollback has effects equivalent to an appreciation of the real exchange rate and is justifiable only by equivalent productivity gains and reductions in unit labor cost.
Concern that productivity gains will materialize over a longer horizon; wage rigidity noted—three-year wage agreements of 1999 "do not provide for any flexibility on wages until 2002." (footnote)
Accelerate reforms, particularly privatization, and establish a more neutral incentive system to attract domestic and foreign private investment and avoid rent-seeking or unproductive capital allocation.
Specific points:
- Accelerate and expand privatization to the services sector to increase productivity of privatized enterprises, reduce input costs economy-wide, and attract foreign capital; granting a second GSM license cited as an important step.
- Phasing of tariff rollback and tariff differentials create distortions; faster progress toward reducing tariff levels and differentials recommended, achievable by lowering customs tariffs under the most favored nation (MFN) regime.
- Many tax exemptions and nontax advantages undermine transparency and a neutral/simple tax system; these could act as a brake on investment. Tax exemptions should be revised as economic conditions evolve; advantages to the export sector may no longer be justified under improved macroeconomic conditions and greater liberalization.
- Remaining legal restrictions on establishment, on foreign investment in Tunisia, on Tunisian foreign direct investment abroad, and the offshore/onshore distinction could hamper development of growth- and employment-generating sectors (e.g., services). Market segmentation should be reviewed given lower tariff barriers and increased foreign competition.

B. Public finances — vulnerabilities and policy actions Vulnerabilities identified

Dependence on nonrecurrent revenue from privatization, with subsequent reductions in dividend payments to the state.
Effects of tariff rollback on revenues.
A tax base eroded by accumulation of exemptions.
Spending rigidities, particularly the wage bill.

Policy recommendations

Undertake a diagnostic study of the role of the civil service and its relationship to wage bill rigidity; consider possible civil service reforms.
Consider reforms of the tax system aimed at restoring neutrality and simplicity and expanding the tax base.
IMF staff stands ready to assist authorities in measuring the budgetary impact of the tariff rollback and proposing offsetting measures based on an update of the study carried out in 1996.

III. Additional observations and process notes

Mission commends authorities for initiatives to increase economic policy transparency, including decision to publish preliminary conclusions of missions and final consultation reports.
Mission congratulates authorities on decision to participate in the pilot Financial Sector Assessment Program (FSAP) during 2001.
Next discussions within the context of the Article IV consultation agreed to take place in the fall of 2000.
Footnote on wages: "Wage increases on the order of 4 ½ percent through 2001 will have to be justified by even larger productivity gains inasmuch as the prices of those products subject to competition from imports will experience downward pressures."

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