IMF Executive Board Concludes 2021 Article IV Consultation with Tunisia

February 26, 2021

Washington, DC: The Executive Board of the International Monetary Fund (IMF) concluded the Article IV consultation [1] with Tunisia.

The Covid-19 pandemic hit Tunisia hard and led to an unprecedented economic downturn. Real GDP is estimated to have contracted by 8.2 percent in 2020, the largest economic downturn since the country’s independence. The unemployment rate jumped to 16.2 percent at end-September, disproportionally affecting low-skilled workers, women, and youth, and fueling social discontent. Inflation slowed because of the contraction in domestic demand and lower international fuel prices. The current account deficit narrowed to 6.8 percent of GDP, driven by lower import demand and resilient remittances, despite a strong hit on exports and collapsing tourism receipts.

The fiscal deficit and public debt increased sharply in 2020. The fiscal deficit (excluding grants) is estimated to have reached 11.5 percent of GDP. Revenue dropped because of a lower tax intake. Additional hiring (about 40 percent of which was in the health sector, including to combat Covid-19) pushed the civil service salary bill to 17.6 percent of GDP, among the highest in the world. Higher outlays were offset by lower investment spending and energy subsidies. As a result of the increase in the fiscal deficit and contraction in GDP, central government debt is estimated to have increased to nearly 87 percent of GDP.

GDP growth is projected 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 projection, given the uncertainty from the duration and intensity of the pandemic and the timing of the vaccination. The medium-term outlook depends critically on the future path of fiscal policy and structural and governance reforms.

Executive Board Assessment [2]

Executive Directors agreed with the thrust of the staff appraisal. They noted that the COVID-19 crisis is exacerbating Tunisia’s socio-economic fragilities. They commended the authorities' policy response to the crisis. Directors noted that while growth is expected to recover modestly in 2021, downside risks dominate. They agreed that the immediate priority is to save lives and livelihoods and stabilize the economy until the pandemic wanes. Economic policy should also focus on restoring fiscal and debt sustainability and promoting inclusive growth.

Directors recommended that fiscal policy and reforms should aim to reduce the fiscal deficit. In this context, they underscored the need to lower the wage bill and limit energy subsidies while prioritizing health and investment expenditure and protecting targeted social spending. Directors noted that Tunisia’s public debt would become unsustainable, unless a strong and credible reform program were adopted with broad support. They also called on the authorities to make taxation more equitable and growth-friendly and encouraged action to clear the accumulated arrears of the social security system.

Directors emphasized that broad ranging reform of state-owned enterprises (SOEs) is necessary to reduce contingent liabilities. They encouraged the authorities to adopt a plan to reduce fiscal and financial risks of SOEs, strengthen corporate governance, and improve financial reporting and transparency.

Directors stressed that monetary policy should focus on inflation by steering short‑term interest rates, while preserving exchange rate flexibility. They urged the authorities to avoid monetary financing of the budget. Directors advised the authorities to implement the roadmap to inflation targeting and prepare a gradual and conditions-based plan for capital account liberalization, while closely monitoring financial sector soundness.

Directors underscored that promoting private sector activity is key to increasing potential growth and making it more job-rich and inclusive. Reform efforts should focus on lifting monopolies, removing regulatory hurdles, and improving the business environment. They welcomed the efforts to increase financial inclusion and leverage digital technologies. Directors emphasized that strengthening governance is important and called for effective implementation of anti-corruption and AML/CFT regimes. They also emphasized that COVID-related expenditures should be effective and transparent. Directors welcomed the objective to invest in renewable energy to combat climate change.

It is expected that the next Article IV consultation with Tunisia will be held on the standard 12-month cycle.

Table 1. Tunisia: Selected Economic Indicators, 2017–20

Population (2019): 11.8 million

Per-capita GDP (2020, US$): 3,323

Quota (2020): SDR 545.2 million

Literacy rate (2019): 82.3 percent (est.)

Main exports: electronic

and mechanical goods, textiles, energy, olive oil, tourism

Poverty rate (2015): 15.2 percent

Key export markets: France, Italy, Germany

2017

2018

2019

2020

Prel.

Economic activity

Real GDP growth (percent)

1.9

2.7

1.0

-8.2

Unemployment (end of period, percent)

15.5

15.5

14.9

…

Inflation (average, percent)

5.3

7.3

6.7

5.7

Central government finances (percent of GDP)

Total revenue (incl. grants, percent of GDP)

24.6

26.0

27.7

26.9

Total expenditure and net lending (percent of GDP)

30.6

30.5

31.6

37.5

Overall balance (incl. grants, percent of GDP)

-6.0

-4.5

-3.9

-10.6

Gross central government debt (percent of GDP)

70.9

77.5

71.8

87.6

Money and credit

Broad money (percent change)

11.4

6.6

10.1

11.8

Credit to the private sector (percent change)

12.7

9.3

3.6

6.8

Balance of payments

Current account (percent of GDP)

-10.3

-11.1

-8.4

-6.8

Foreign direct investment (percent of GDP)

2.0

2.5

2.1

1.6

Reserve coverage (months of next year's imports of GNFS)

2.6

2.5

4.3

4.1

External debt (percent of GDP)

84.6

97.4

92.8

94.7

Exchange rate

REER (end of period, percent change, "-": depreciation)

-10.9

-7.7

10.7

…

Sources: Tunisian authorities, IMF staff estimates and projections, and World Bank Development Indicators.


[1] Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board.

[2] At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. An explanation of any qualifiers used in summings up can be found here: http://www.IMF.org/external/np/sec/misc/qualifiers.htm .

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