Press Release No. 21/15

IMF Staff Completes Article IV Consultation Mission with Tunisia

January 23, 2021

• Tunisia faces two immediate challenges: saving lives and livelihoods until the pandemic wanes, and starting to bring economic imbalances back to a sustainable trajectory.
• A broad-based and credible reform plan backed by Tunisian society and international development partners is critical to help achieve durable and inclusive growth over the medium term.
• IMF staff encourages the authorities to continue to strengthen social safety nets and enhance public investment.

Washington, DC: An International Monetary Fund (IMF) staff team led by Chris Geiregat conducted a remote mission from December 9 to 18, 2020 and January 4 to 13, 2021 in the context of the 2020 Article IV consultation with Tunisia.

At the conclusion of the mission, Mr. Geiregat issued the following statement:

“Covid-19 has hit Tunisia hard. The IMF mission wishes to express its condolences and solidarity with all Tunisians who have been impacted by the pandemic, and applauds those who have worked incessantly to save the lives of their fellow citizens.

“The authorities responded pro-actively to the Covid-19 outbreak, providing immediate support to the health sector, affected people and firms. Yet, IMF staff estimates that real GDP has contracted by an unprecedented 8.2 percent in 2020, resulting in higher poverty and unemployment. The current account deficit is expected to have narrowed in response to a sharp drop in import demand and resilient remittances, in spite of a strong hit on exports and collapsing tourism receipts. The fiscal deficit is estimated to have widened to 11.5 percent of GDP, including because of lower revenue, a higher wage bill, and additional transfers to state-owned enterprises.

“IMF staff expects GDP growth to rebound to 3.8 percent in 2021 as the effects of the pandemic start to wane. However, there are considerable downside risks around this baseline projection, especially given the uncertainty from the duration and intensity of the pandemic and the timing of the vaccination.

“IMF staff and the authorities agree that Tunisia currently faces the dual challenge of saving lives and livelihoods until the pandemic wanes, while starting to bring fiscal and external imbalances back to a sustainable trajectory. Thus, it is essential to strictly prioritize spending on health and social protection, while exerting control over the wage bill, ill-targeted energy subsidies, and transfers to state-owned enterprises. The 2021 budget aims to strike this balance, with the fiscal deficit projected to narrow to 6.6 percent of GDP. However, specific measures are needed to back this objective, and in their absence, staff projects a higher deficit of over 9 percent of GDP. Staff encourages the authorities to continue to strengthen targeted safety nets and favor growth-enhancing public investment.

“The medium-term outlook and public debt sustainability depend on the authorities’ adoption of a credible and well-communicated reform plan that benefits from the Tunisian society and international development partners’ strong buy-in. To this end, it would be critical to gain support from the relevant stakeholders on issues within their remit. Such a “social compact” could cover the civil service wage bill (currently among the highest in the world), subsidy reform, the role of state-owned enterprises in the economy, the informal sector, tax equity, anti-corruption reforms, and the business environment.

“Several large state-owned enterprises (SOEs) are saddled with debt, have accumulated arrears, and benefit from government guarantees, all of which pose fiscal and financial risks. Staff welcomes the authorities’ efforts to start to disentangle and resolve some of the cross-arrears, and encourages the authorities to adopt a medium-term reform plan that: (i) ‘triages’ SOEs based on their financial viability, strategic importance, and nature of their activities; (ii) centralizes their oversight in a single entity; (iii) strengthens corporate governance; and (iv) improves transparency and financial reporting. Improving the financial position of the social insurance system would also reduce fiscal risks.

“The Central Bank of Tunisia’s (CBT) monetary policy has helped support credit and liquidity, while inflation continued to fall. Staff urges the authorities to avoid future monetary financing of the government, as it risks reversing the gains achieved in terms of lowering inflation, could weaken the exchange rate and international reserves, and undermine financial stability. Monetary policy should continue its focus on inflation by steering policy rates, while preserving two-sided exchange rate flexibility. The CBT should closely monitor the financial sector, as the full impact of the pandemic on the financial sector is yet to be observed.

“Raising potential and inclusive growth will require more private sector initiative and competition, including by removing monopolies and other distortions. Staff welcomes the authorities’ objective to cover at least 30 percent of its energy needs through renewables by 2030, which would help combat climate change and diversify energy supply. Reforms advancing anti-corruption, good governance, and transparency should be cross-cutting themes for the years ahead.”

The IMF team would like to thank the Tunisian authorities and representatives of the public and private sectors and civil society with whom it had the opportunity to meet for their cooperation and productive discussions.

Background information

Since 2013, Tunisia benefited from two arrangements (a Stand-By Arrangement and Extended Fund Facility) with the IMF. On April 10, 2020, the IMF Executive Board approved a Rapid Financing Instrument disbursement to support Tunisian authorities’ response to the pandemic.