Press Release No. 18/104

IMF Executive Board Completes Second Review under the Extended Fund Facility (EFF) Arrangement for Tunisia

March 26, 2018

• The government’s reform program supported by the EFF arrangement aims at reducing high and growing macroeconomic imbalances, ensuring adequate social protection, and fostering private sector-led, job-creating growth.
• Growth-friendly and socially-conscious reforms will help stabilize public debt below 73 percent of GDP by 2020 and raise investment and social spending.
• Continued monetary tightening along with exchange rate flexibility will help contain inflation, improve competitiveness, and rebuild international reserves.

On March 23, 2018, the Executive Board of the International Monetary Fund (IMF) completed the second review of Tunisia’s economic reform program supported by an arrangement under the Extended Fund Facility (EFF). The completion of the review allows the authorities to draw an amount equivalent to SDR 176.7824 million (about US$257.3 million), bringing total disbursements under the arrangement to the equivalent of SDR 631.3661 million (about US$919 million).

In completing the review, the Executive Board approved the authorities’ request for moving towards quarterly reviews from the current semi-annual schedule. Overall disbursements available throughout the program remain unchanged. The Board also approved the authorities’ request for waivers of non-observance of end of December performance criteria on net international reserves, net domestic assets, the primary fiscal deficit, and current primary spending; and the non-observance of the continuous performance criterion on imposing or intensifying restrictions on the making of payments and transfers for current international transactions. It also granted approval for the retention of an exchange restriction barring trade credit for certain non-essential imports until December 31, 2018.

The four-year EFF arrangement in the amount of SDR 2.045625 billion (about US$2.98

billion, 375 percent of Tunisia’s quota) was approved by the Executive Board on May 20, 2016 (see Press Release No. 16/238). The government’s reform program supported by the EFF aims at reducing macroeconomic vulnerabilities, ensuring adequate social protection, and fostering private sector-led, job-creating growth. Priorities include growth-friendly and socially-conscious fiscal consolidation to stabilize public debt below 73 percent of GDP by 2020 while raising investment and social spending, reversing the recent trend of accelerating inflation, and continued exchange rate flexibility to support exports and strengthen international reserve coverage. Structural reforms supported under the arrangement focus on improving governance, the business climate, fiscal institutions, and the financial sector.

Following the Executive Board discussion, Mr. Mitsuhiro Furusawa, Deputy Managing Director and Acting Chair, made the following statement:

“Tunisia has experienced a modest recovery in 2017, but continues to face elevated macroeconomic vulnerabilities, and unemployment remains high. Debt has continued to increase, inflation has accelerated, and international reserve cover is now less than three months of imports. Decisive implementation of the policies under the Fund-supported program is necessary to sustain macroeconomic stability.

“The authorities have begun to address these challenges through a deficit-reducing budget for 2018, monetary policy tightening, and a renewed commitment to a flexible exchange rate. Structural reforms have started to improve governance, strengthen the business environment, modernize the civil service and pensions, and restructure public banks.

“Successful fiscal adjustment will require strong policy implementation. It will be critical to increase tax revenue in an equitable manner and reign in current spending to reduce debt and increase investment and social expenditure. The 2018 priorities are to strengthen tax collection, implement the voluntary separations for civil servants, not grant new wage increases unless growth surprises on the upside, and enact quarterly fuel price hikes. It will be as important to distribute the adjustment burden equitably across society and protect the vulnerable. Public-private partnerships should only proceed with adequate legal and regulatory frameworks.

“The Central Bank of Tunisia has demonstrated its commitment to low inflation through a widening of the interest corridor followed by a strong policy rate increase. Further hikes will be needed to move real interest rates into positive territory unless inflation quickly subsides.

“Building on the real exchange rate depreciation in 2017, exchange rate flexibility will remain critical to correct the remaining overvaluation of the real exchange rate, improve the current account deficit, and rebuild reserves. This will require adherence to the FX intervention budget and more competitive FX auctions.

“The authorities have increased near-term financing for social security. This should be followed by equitable and sustainable pension reforms. Finalizing the database of vulnerable households, which is critical for the targeting of social assistance, will help preserve the social contract.

“The authorities have made considerable progress on structural reforms. They established the High Anti-Corruption Authority and are building institutions in support of the investment code, including the one-stop shop. The legislation to facilitate the reduction of NPL portfolios will help public bank restructuring. Ongoing enhancements to the AML/CFT regime will address Tunisia’s deficiencies in this area.

“Significantly improved program implementation, supported by quarterly reviews, and the continued support of the donor community for Tunisia’s reform efforts will be critical in the time ahead.”