Press Release No. 18/337

IMF Reaches Staff Level Agreement on the Fourth Review of Tunisia’s Extended Fund Facility

August 31, 2018

• There are some encouraging signs that economic activity is picking up.
• The authorities’ commitment to reducing fiscal imbalances is also bearing fruit.
• It will remain particularly important to pursue reforms of untargeted energy subsidies, manage carefully the public wage bill, and put the public and private pension funds on a sustainable basis.

An International Monetary Fund (IMF) staff team, led by Björn Rother, visited Tunisia from August 15–31 to discuss the authorities’ policy plans under the Fourth Review of Tunisia’s economic reform program supported by a four-year IMF Extended Fund Facility (EFF) arrangement (see Press Release 16/238) . At the end of the visit, Mr. Rother issued the following statement:

"The Tunisian authorities and the IMF team reached a staff-level agreement on the policies needed to complete the fourth review of Tunisia’s EFF. The Tunisian authorities emphasized their intention to continue to act decisively to contain the budget deficit, which would allow the IMF’s Executive Board to consider the Fourth Review at the end of September. Completion of the review would make available SDR 177 million (about US$257 million), bringing total disbursements under the EFF to about US$1.5 billion.

"There are some encouraging signs that economic activity is picking up. The Tunisian economy grew 2.6 percent (year-on-year) in the first half of this year, with robust performance in agriculture, tourism, and services. The number of tourists visiting Tunisia since the start of the year is the highest since 2010. The authorities’ commitment to reducing fiscal imbalances is also bearing fruit. The execution of the budget in the first six months of 2018 is consistent with achieving a significant deficit reduction this year. Containing deficits will help reduce Tunisia’s high public debt that burdens the economy and future generations.

"Although growing, the economy remains too dependent on consumption and imports. Investment has again been weak this year. Unemployment among the young and women, especially those who are well-educated, remains very high. Additional economic reforms, which include strengthening governance and enforcement in the government’s anti-corruption fight, are necessary to overcome investor reluctance and build confidence. These efforts will help unleash the potential of private sector and generate more opportunity and jobs for all Tunisians.

"Long-standing economic imbalances continue to pose significant risks to the Tunisian economy. Inflation declined marginally in July, but at 7.5 percent, it remains considerably higher than in previous years. Money and credit have continued to increase rapidly and the dinar has depreciated further, which will likely create new inflationary pressures in the months ahead. Moreover, the expected improvement in the current account deficit has been delayed: imports are still too high relative to exports and other inflows of foreign currency. Foreign exchange reserves are therefore still below levels commonly seen in other emerging-market economies.

"In addition, Tunisia’s external environment is witnessing new challenges. Oil prices are significantly higher than projected at the beginning of the year and international financial markets have become more volatile. Risk premia for a broad range of emerging markets have increased.

"Staying the course on reducing the fiscal deficit this year and next is critical to stabilize debt and reduce excessive demand for imports given the recent increase in global oil prices. It will remain particularly important to pursue reforms of untargeted energy subsidies, manage carefully the public wage bill, and put the public and private pension funds on a sustainable basis. These steps will help to contain expenditure that disproportionately benefits the better-off. They will also make more resources available for public investment, which will boost growth and jobs, to the benefit of the young and the unemployed. The IMF team welcomes the government’s intention to further increase social spending, which it views as critical to protect the poor and vulnerable in the period ahead.

"The Central Bank of Tunisia is right to remain vigilant, as the recent decline in inflation could be temporary. If inflation were to pick up again in the months ahead, additional increases in interest rates would be necessary to anchor inflation expectations and maintain economic stability.

"The IMF team met with the Minister of Finance Chalghoum, Minister of Investment Laâdhari, Minister of Major Reforms Rajhi, and Central Bank Governor El Abassi as well as their staff. It also had discussions with representatives of the private sector, civil society, and the diplomatic community. The mission would like to thank the authorities and all those with whom it met for their warm welcome and constructive discussions."