Mission Concluding Statement 

• The Tunisian financial sector was not affected by the global financial crisis. Banks are not dependent on external financing and have continued to benefit from buoyant deposits. Following a slight slowdown at the end of 2009, credit to the economy picked up again in 2010, largely as a result of loans to the services and real estate sectors. Tunis Stock Exchange continues to enjoy exceptionally high levels of growth. This reflects the solid financial performance of listed companies, particularly banks, as well as the abundant liquidity in the economy and the relatively limited alternatives for financial investments in Tunisia. Market capitalization is still relatively low compared to the other markets in the region and its potential for growth is therefore high. With that in mind, the authorities introduced tax incentives to encourage more listings by companies on the stock market.¹

• The BCT pursued its efforts to absorb excess liquidity by stepping up the operations that allowed it to drain TD 844 million per month on average in 2009, versus TD 418 million in 2008. In response to the growing excess liquidity in the first months of 2010, the BCT raised the required reserve ratio on two occasions, from 7.5 percent to 10 percent on March 1, 2010 and then to 12.5 percent on May 1, 2010. These measures, coupled with lower foreign currency inflows since the start of the year, made it possible to absorb excess liquidity. In line with these developments, the average money market rate (TMM) rose to 4.36 percent in May 2010, up from 4.07 percent in January 2010.

• The ratio of public debt continued to decline in 2009, even as in the context of the crisis, the government implemented a more expansionary fiscal policy in 2009, with the fiscal deficit rising to 3 percent of GDP. Revenue (excluding grants and privatization receipts) declined by 1 percentage point of GDP in 2009 owing to shortfalls in direct taxes, customs receipts, and nontax revenue. The fall in commodity prices on the world market and the introduction of a petroleum product prices adjustment mechanism allowed for petroleum product and basic foodstuff subsidies to be lowered. At the same time, capital expenditure and net lending rose, as the government took steps to mitigate the impact of the global crisis by accelerating public investment projects and providing direct support to exporting companies affected by the crisis. The fiscal deficit was fully financed on the domestic market. Despite the deficit increase, the public debt ratio continued to fall and stood at 42.8 percent in 2009. Over the first four months of 2010, favorable revenue performance coupled with expenditure control measures, in particular, strict limits on capital expenditure, led to a sizeable budget surplus. Consequently, Treasury bill amortization exceeded new issuance.

III. Global Situation, Outlook, and Economic Policies

A. Global Situation and Outlook

8. Following the recession in 2009, global economic growth has picked up more swiftly than anticipated. In 2010 and 2011, based on April 2010 WEO projections, global economic activity is set to rise 4¼ percent a year, after contracting ½ percent the previous year. The recovery is, however, very uneven from one country to another, with the Asian emerging economies growing strongly, and more sustained growth in the United States compared to Europe and Japan. Access to credit and financial conditions remain more difficult than before the crisis, but capital flows from advanced countries to many emerging markets have recovered significantly.

9. In view of the geographical structure of Tunisia’s current transactions, Tunisia could expect to see a more gradual rebound in its partner countries, reaching around 1.2 percent in 2010 and 1½ percent in 2011, with downside risks still present. The European Union is by far Tunisia’s largest partner, accounting for 76 percent of revenues from goods exports, 84 percent of tourism revenues, 88 percent of transfers from Tunisians abroad, and 73 percent of foreign direct investment inflows over the 2007-08 period. The prospects for gradual recovery in Europe remain subject to significant downside risks, more specifically if the sovereign debt crisis facing some counties worsens and if the fiscal adjustment plans put in place in several European countries constrain domestic demand more than expected. On the other hand, the recent depreciation of the euro could boost euro zone exports, including in sectors of importance for Tunisian exports.

10. In this context of slow and uncertain recovery, Tunisia’s macroeconomic policies should adapt to changes in the international environment so as to support growth as effectively as possible. The committee recently established by the authorities to monitor international economic developments will have an important watchdog role to play to alert the competent authorities in a timely manner on the need for macroeconomic and financial policy adjustments. It is reassuring to note that the authorities still have some room for maneuver, in both the fiscal and monetary policy areas, to address potential external risks.

11. The target of 3.8 percent real GDP growth in 2010 could be achieved, provided that there are no other lagged effects from the global crisis. Growth can be expected to be supported by a recovery of industrial activity and investment. Following the substantial increase in imports of capital goods in the first months of 2010, the recovery of exports and foreign direct investment should also continue. Furthermore, unlike some competing tourist destinations and countries in the region, Tunisia’s revenues from tourism and transfers from Tunisians abroad have remained stable. The current account deficit is nonetheless expected to widen in 2010, while a large number of emerging economies are set to see their current account deficits narrow in 2010 and 2011.

12. Growth in Tunisia’s traditional partners’ economies is expected to be moderate over the medium term (1.5 to 2 percent) and as such will not be a source of external demand for Tunisia as robust as in the pre-crisis period. In that context, growth in Tunisia is projected to reach an average of around 5 percent over the 2010-14 period, provided that the policies and reforms outlined by the authorities to develop new markets and identify new sources of growth in high value-added sectors yield results rapidly.

13. The very uncertain international environment poses a risk for these projections. First of all, there is a real possibility that the global recession and worsening unemployment in European partner countries could lead to a drop in earnings from tourism in both the high and low season months, as well as in the volume of transfers from Tunisian workers abroad. Secondly, weaker domestic demand in European partner countries could drive down demand for Tunisian exports.

B. Macroeconomic Policies

14. The mission supports Tunisia’s macroeconomic policy stance, which in the short term has successfully mitigated the impact of the crisis on growth and unemployment. This was possible because prudent macroeconomic management in the past had created the necessary room to deal with the worsening of the international environment. However, the weaker growth prospects of the country’s main trading partners, in particular within the European Union, present a major challenge for maintaining high growth rates and reducing unemployment in Tunisia over the medium term. In that context, the mission commends the authorities for their efforts to pursue reform policies aimed at diversifying the economy and creating access to new markets for Tunisian products and services.

Fiscal policy

15. The mission supports the authorities’ fiscal stance for 2010, aimed at keeping the deficit under control while providing further support for economic activity and maintaining room for maneuver needed to address the risks associated with the international environment. The 2010 budget law maintains a relatively expansionary fiscal policy to ensure that the current economic recovery is not undermined by a withdrawal of the fiscal stimulus measures introduced in 2009. The fiscal deficit should be maintained at around 3 percent of GDP in 2010. The relative budget revenue shortfall should be offset by lower net lending. The mission encourages the authorities to remain vigilant and to stand ready to make the necessary fiscal policy adjustments should the situation prevailing in European partner countries worsen. With that in mind, the 2010 budget has built in additional flexibility with an unallocated expenditure cushion of around 1½ percent of GDP that could be used if needed in the second half of 2010. The budget deficit financing needs could still be covered by the domestic market. Despite planned measures to control the fiscal deficit in 2010, the public debt ratio could edge up slightly to 43½ percent of GDP as a result of a possible appreciation of the U.S. dollar and the yen vis-à-vis the euro and the dinar.

16. As the economic recovery strengthens, the need to maintain the fiscal stimulus will fade and will allow the authorities to revert to fiscal consolidation starting in 2011 as they seek to accelerate the decline in public debt. Having fallen sharply over the past decade, the public debt ratio is slightly below the average for comparable emerging markets, and has converged towards the average for emerging economies outside the MENA region with similar sovereign debt ratings, while remaining above the average for that group of countries. The government’s objective of reducing public debt to 40 percent of GDP by 2014 will help preserve a fiscal space to use as the need arises. To achieve that goal, gradual reduction of the fiscal deficit to around 2½ percent of GDP by 2014 should go hand in hand with early debt repayment. If conditions in the international climate turn out to be better than expected, the authorities could possibly aim at achieving a more ambitious medium-term fiscal deficit reduction target, while continuing to keep public investment spending at sufficiently high levels to sustain the reforms aimed at increasing the growth potential of the Tunisian economy.

17. The mission supports the authorities’ plan to change the tax structure over the medium term so as to create a more business-friendly tax regime encouraging production. Tax reform could focus on reducing the tax burden on businesses, including the vocational training tax, while offsetting the impact of the loss of revenue by raising consumption taxes and broadening their base by eliminating exemptions. The authorities also intend to pursue the customs tariff reform efforts, launched several years ago, by reducing the number of rates from five to four by 2014 and bringing the maximum rate down to 15 percent.²

18. Another essential component to foster fiscal consolidation in the medium term should be the reduction of subsidies on commodities and fuel. The authorities plan to cap the total annual envelope for subsidies at 1,500 million dinars a year (compensation fund, fuel and transport), so as to decrease their share of GDP over time. The mission supports this initiative and encourages the authorities to continue their efforts to better target transfers and subsidies to the most vulnerable segments of the population.

19. A key element of the strategy to dampen the pressure on government spending in the medium term remains the need for reform of the social security system. The authorities are fully aware of this and discussions are underway with the social partners on reforming pension schemes by changing their main parameters. If possible, the authorities intend to submit a draft law to the Parliament in 2010 that will guarantee the financial viability of pension schemes over the next 20 years and ensure that these regimes are able to meet their financial commitments without additional tax increases or budget financing.

20. The mission also supports the various structural reforms envisaged by the Ministry of Finance to strengthen public financial management. These reforms include the adoption of international accounting standards for the presentation of the budget and for the budget accounts, as well as the adoption of a medium-term expenditure framework. The authorities also intend to set up a public investment bank (Caisse des Dépôts) to make better use of funds currently deposited at the Treasury to support investment efforts. Lastly, they plan to establish a Treasury Agency – an independent body that will be entrusted with the operational responsibility for managing the public debt and reducing borrowing costs. The IMF staff stands ready to consider any requests for technical assistance to support these reforms.

Monetary and exchange rate policy

21. The BCT’s successful efforts to sterilize the abundant liquidity should be pursued in 2010 by maintaining a close watch on the situation to ward off any resurgence of inflationary pressures or excessive growth in credit. Higher foreign currency inflows, fuelled by the upturn in exports of goods and services, as well as an increased presence on the securities issuance markets, primarily by the Treasury, are the main factors that will influence the bank liquidity position in the second half of 2010.

22. The mission also noted that the BCT’s performance in the area of monetary policy operations continues to improve. In the context of the modernization of money market instruments and with a view to diversifying its liquidity management tools, the BCT introduced, in early 2009, 24-hour lending and deposit facilities for banks to allow them to cover their liquidity needs or to place their temporary surplus liquidity. The rates for these facilities, fixed at 50 basis points around the reference rate, facilitated a greater flexibility in the money market rate. With the recent reduction of the excess liquidity, the money market could become even more active and could strengthen the role of the benchmark rate as a central tool for the conduct of monetary policy.

23. Efforts to modernize the monetary policy operational framework must be pursued to create the conditions necessary for the adoption of an explicit inflation targeting regime. In this regard, the BCT has concentrated its efforts on building the necessary capacities, as well as on reinforcing its understanding of the transmission mechanisms. The BCT has launched a twinning project with European central banks, financed by the European Commission, to capitalize on the expertise of the central banks of the European countries in the use of analytical tools and information systems dealing with the operational aspects of inflation targeting.

24. In this context, actions aimed at further easing the transmission of monetary policy through interest rates and identifying an appropriate inflation target could be undertaken. The mission also believes that improving the central bank’s communication tools would be an effective mean of influencing markets’ expectations. Thus, the BCT should consider publishing a periodic monetary policy report, as well as a financial system stability report.

25. The authorities are committed to achieving the goals of the President’s program, which include the convertibility of the dinar and the further liberalization of the capital account by 2014. As a first step, they will focus on setting up the main prerequisites, including strengthening the financial soundness of the banking system and deepening the foreign exchange market. At a later stage, the capital transactions could be gradually liberalized, while maintaining the necessary safeguards to prevent destabilizing capital movements.

26. The mission considers that inflation targeting, convertibility of the dinar, and liberalizing of the capital account are necessary and timely developments that will allow the Tunisian economy to boost its growth potential. The mission also supports the gradual approach envisaged by the authorities, while underscoring that it will be necessary to move forward on several fronts in order to facilitate the emergence of the market tools allowing regulators and economic agents to adapt. IMF staff stands ready to examine any request for technical assistance in these areas.

27. Exchange rate policy remains guided by the medium-term objective of a floating exchange rate and fewer interventions by the BCT on the foreign exchange market. These interventions were relatively stable in 2009 and 2010 and occurred in both directions. Against the backdrop of high volatility among the major currencies, the exchange rate policy led to a stabilization of the real exchange rate of the dinar, which remains in line with its fundamentals.

Financial System Stability

28. The banking system’s profitability and solvency indicators continued to improve in 2009, continuing a trend that has been observed for several years now. The nonperforming loan (NPL) ratio, in particular, dropped to 13.2 percent at end-2009, and provisioning for NPLs increased to 58 percent on average. This overall situation continues to include widely varying situations of individual banks. The General Directorate of Banking Supervision has adopted an individualized approach aimed at encouraging banks to produce concrete plans for reducing their NPL ratios and increasing their provisioning. For its part, the General Directorate of Financial Stability and Risk Prevention closely monitors loans granted to the level of each sector. These efforts to ensure the efficient surveillance of credit institutions will contribute to keeping the downward trend of NPLs which, despite the substantial progress achieved, remain relatively high.

29. The President’s program includes as an objective the strengthening of the financial system. The program focuses on four major themes (consolidation of the fundamentals, increasing banks’ presence in the economy and improving banking services, restructuring the banking system, and promoting the presence of Tunisian banks abroad – see Box below). Its objectives include raising the minimum capital requirement for banks to 100 million dinars, and lowering the NPL ratio to less than 7 percent by 2014, by urging banks to increase the efficiency of their loan recovery efforts and to take vigorous action on their portfolio of non-performing loans. In addition, provisioning should be facilitated by a total and definitive tax exemption for provisions introduced in 2010. The authorities have also decided to implement the Basel II framework, starting with the standardized approach, and to establish a deposit guarantee fund financed by the banks.

30. The mission noted the substantial progress made in the area of banking supervision and overhauling of the financial system and encourages the authorities to continue in that direction. A more forward-looking approach to risk assessment, particularly in the context of the adoption of Basel II standards, would be useful. The mission encourages the relevant banking supervision authorities to formalize and systematize stress-tests in order to better assess the resilience of the Tunisian financial system under adverse scenarios. Upgrading the database, including by developing price indices for different asset classes, would also help the authorities to better identify potential risks.

C. Structural Policies and Other Issues

31. Despite the international economic crisis, Tunisia continues to see its policy of economic opening as key to achieving high growth rates. The authorities are seeking to expand trade beyond traditional markets in order to reduce Tunisia’s dependence on the European Union, which currently accounts for 80 percent of its exports and faces less promising growth prospects over the next few years. Tunisia has therefore concluded a preferential trade arrangement with the West African Economic and Monetary Union (WAEMU) and is in talks with the Central African Economic and Monetary Community (CEMAC) as well as with several countries in Sub-Saharan Africa and in the Near and Middle East. Bilateral negotiations are also ongoing between Tunisia and the European Union to open the Association Agreement to services and agricultural and agri-food products. With that in mind, the government has begun developing a program to upgrade business services, health, transport, and information technology and telecommunications sectors to increase their productivity before they are opened up to international competition. Tunisia is also actively engaged in the Maghreb integration process. The mission encourages the government to pursue its efforts aimed at stimulating growth through trade diversification and access to new markets.

32. In the context of its medium-term reform programs, Tunisia has chosen to maintain its policy focus on improving the business climate. Work is ongoing to modernize the customs administration with the implementation of a new information system and the simplification of customs tariffs. Improvements in customs procedures, which have already resulted in shorter customs clearance times, are also being pursued with the new Customs Code that came into force in 2009. As a result of all these reforms Tunisia was placed 41st in the Davos World Economic Forum external trade facilitation ranking. Further reinforced by two new programs to support the improvement of the business climate and competitiveness, with funding from the World Bank, the African Development Bank, and the European Commission, these advances will serve to preserve and increase Tunisia’s attractiveness to investors.

33. The development of high value-added services sectors by making a more efficient use of the available pool of skilled labor is seen by Tunisia as an essential element for the new phase of diversification of its economy. To develop such sectors, the authorities have begun reforming the university system with a view to producing more science and technology experts. Reform of the education system is part of an ambitious program to develop the high-end value-added services sectors, such as information technologies, health, logistics, and business services. This effort will be supported by a program with the World Bank to upgrade companies in these sectors. The authorities also intend to support the modernization of the services sector by implementing an infrastructure development program that is expected to facilitate the establishment of new investors.

34. The mission commends the government’s decision to publish this aide-mémoire as usual and on the participation of the Central Bank in the “Coordinated Compilation Exercise for FSIs.”

35. It was agreed that the next Article VI mission would take place in May-June 2011.

Table 1. Selected Economic and Financial Indicators, 2008–15

¹ Incentives include lowering of the corporate tax rate from 35 to 20 percent for companies issuing an initial public offering (IPO) by 2014.

² The 7 percent rate was eliminated in 2010.