On September 30, 2015, the Executive Board of the International Monetary Fund (IMF) concluded the Article IV Consultation with Tunisia1.
Tunisia’s economy has been resilient throughout a protracted political transition and a difficult international economic environment. The country has been facing headwinds from security threats and social tensions, which are offsetting the benefits from the successful conclusion of the political transition, lower international oil prices, and a recovering Europe.
After successfully recovering from the trough of 2011, growth momentum has waned in early 2015, with GDP growth averaging 1.2 percent (y-o-y) for the first semester as activity in the manufacturing, tourism, and mining sectors slowed significantly. At the same time, unemployment has been persistently high. Headline inflation dropped to 4.2 percent in July, reflecting lower food prices and a prudent monetary policy.
External imbalances remain high. Weak tourism receipts, buoying imports (especially energy and capital goods imports), and declining oil and phosphate exports widened the current account deficit to 8.8 percent of GDP in 2014, its highest level since the 1980s. Exceptional olive oil exports and declining energy imports narrowed the deficit in the early part of 2015, but this improvement is not expected to last as tourism revenues–which were significantly impacted by the Bardo and Sousse attacks–are expected to drop this year. Reserve buffers are holding up, helped by a successful international bond issuance earlier in the year.
The fiscal situation improved, with the structural fiscal deficit declining to 3.3 percent of GDP in 2014 due to strong revenue collection. However, the budget composition weakened as public investment–which is necessary to sustain growth–has reached record lows of 4.2 percent of GDP while the wage bill–representing about 60 percent of revenues–rose. The 2015 revised budget accommodates the short-term fallout of the recent economic slowdown, including through increased security expenditures and transfers to SMEs.
The banking system remains fragile, with the system’s capital adequacy ratio below the minimum regulatory requirement. At 15.8 percent, non-performing loans of the banking sector continue to be high. Low deposit growth is keeping public banks structurally illiquid, increasing banks’ recourse to CBT refinancing. Against this background, private sector credit growth remains modest, with its level well below potential.
The medium-term prospects remain favorable–with growth projected to increase to 4.7 percent by 2020. They hinge on reduced security risks and easing of social tensions, and the successful and quick implementation of comprehensive reforms that improve the business climate and foster private sector development.
Executive Board Assessment2
Executive Directors agreed with the thrust of the staff appraisal. They commended the authorities for maintaining macroeconomic stability in the context of a prolonged political transition and a difficult international economic environment. While all quantitative performance criteria under the Fund-supported program have been met, progress on structural reforms has been challenging. Directors regretted the recent terrorist attacks, which weakened confidence and growth in 2015, and expressed their support for the authorities’ response. Directors agreed that the successful completion of the political transition represents an opportunity for the authorities to press ahead with efforts to strengthen the fiscal position, complete financial sector reforms, and accelerate structural reforms to improve growth and employment prospects.
Directors considered the modest fiscal loosening to respond to weaker economic activity in 2015 to be appropriate, but stressed that a return to fiscal consolidation from 2016 onwards is needed. In this regard, Directors urged the authorities to improve budget composition by containing the growing wage bill through civil service reform and by reducing energy subsidies in a sustainable manner through the implementation of a new automatic fuel price formula. They also noted the importance of using fiscal space for priority social spending and stepping up the implementation of public investment from its currently low level.
Directors stressed the importance of growth-friendly fiscal reforms. They welcomed the government’s commitment to adopt a tax reform that increases equity, efficiency and permanent revenues. Strengthening public financial management and public enterprise monitoring would help reduce fiscal risks. Directors also commended the authorities’ commitment to pension reform.
Directors welcomed the authorities’ prudent monetary stance. They were encouraged by the recent move towards positive real interest rates and the central bank’s readiness to raise the policy rate further if inflationary pressures materialize. Directors looked forward to further efforts to strengthen the monetary policy framework and to the adoption of the central bank law which will strengthen its independence and clarify its objectives. They supported the authorities’ commitment to move toward greater exchange rate flexibility–supported by efforts to deepen the foreign exchange market–which will help strengthen reserve buffers and reduce imbalances.
Directors welcomed the steps being taken to modernize and strengthen the banking system and its governance. They called for the swift completion of the recapitalization of all public banks and stressed the importance of ensuring regulatory compliance throughout the restructuring period. They also emphasized the importance of modernizing the banking resolution framework, strengthening banking supervision and regulation, and introducing an effective bankruptcy law to support the resolution of nonperforming loans.
Directors stressed that a better business environment is key to bolster growth and job creation and strengthen competitiveness. They welcomed the adoption of the competition law, and called on the authorities to step up efforts to revamp the regulatory environment–including through adopting long-standing legislation on investment–and to initiate labor market reforms aimed at addressing the high levels of unemployment.
It is expected that the next Article IV consultation with Tunisia will be held in accordance with the Executive Board decision on consultation cycles for members with Fund arrangements.
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