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Tunisia

Author(s):
International Monetary Fund
Published Date:
July 1997
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Tunisia: Basic Data

Area, population and GDP per capita
Area165,154 square kilometers
Population
Total (1994)8.8 million
Growth rate1.8 percent
GDP per capita (1996)SDR 1,247

Includes all economic agents except the Central Government

Includes the social security system.

Consolidated operations; payment-order basis.

199119921993199419951996
(In millions of dinars)
Gross domestic product at 1990 market prices11,23812,11512,38112,78913,09013,990
Agriculture and fishing1,9372,0431,9391,7461,5732,035
Mining1031028491114124
Hydrocarbons666710652618598638
Electricity and water224233249264282289
Manufacturing1,8982,0202,1202,2922,3862,451
Of which: food processing386400402439421429
Construction and public works437501562622607625
Services4,7175,1305,3325,6185,9126,141
Indirect taxes minus subsidies1,2571,3771,4441,5381,6181,686
Gross domestic product at current market prices12,02913,70614,66315,80717,01218,971
Private sector consumption 1/8,0689,0309,69210,45811,39412,371
Consolidated central government consumption 2/1,4301,6241,7871,9562,1332,355
Gross fixed capital formation2,8923,7294,1224,2684,1144,634
Changes in stocks235273165−3996737
Resource gap−596−950−1,103−475−695−425
Gross national product11,51713,07813,78914,88916,17418,103
Gross national disposable income12,03113,57714,38315,59216,90918,836
Gross national savings2,5342,9232,9043,1783,3824,110
Prices (percentage changes)
GDP deflator7.05.74.74.45.14.4
Consumer prices8.25.84.04.76.33.7
Government finance 3/
Total revenue3,4964,0384,4424,9595,1215,667
Tax revenue2,8873,2883,5903,9614,2634,737
Nontax revenue617750852998858930
Grants335753634543
Total expenditure and net lending4,1914,5685,0585,3365,8646,550
Current expenditure3,1883,5453,9274,2094,6365,209
Capital expenditure1,0269031,0119871,1031,276
Net lending−2412012014012565
Overall deficit including grants−655−473−563−314−698−840
Foreign financing (net)319141175218490444
Domestic financing (net)33633238896208396
Of which: banking system (net)45−166−47−78−89−102
(In millions of dinars)
Money and credit (end of period)
Foreign assets (net)5265475618858431,138
Domestic credit6,7417,4788,0758,5689,28610,470
Central government (net)853687640562473371
Other agents5,8886,7917,3658,0078,81310,099
Money and quasin-money (M2)5,5075,9036,3186,8117,2218,212
Money2,6402,7812,9153,2143,5274,001
Quasi-money2,8673,1223,4033,5973,6944,211
Other items (net)1,7612,1222,3182,6422,9073,395
(In millions of SDRs)
Balance of payments
Exports, f.o.b.2,7112,8502,6833,2433,6053,801
Imports, f.o.b.−3,577−4,316−4,123−4,337−4,916−5,044
Trade balance−866−1,466−1,440−1,094−1,311−1,243
Services and transfers (net)445613521638764845
Current account balance−421−854−919−457−547−398
Capital account (net)367941910818635662
Grants895874724642
Direct foreign investment (net)121404390308194163
Medium- and long-term loans18998239404363324
Other333812073431133
Overall surplus or deficit (-)5487−836188264
Gross official reserves
(end of period)5596646471,0141,0911,338
Total External debt
Disbursed and outstanding
(end of period)5,3565,4445,6106,0586,6256,692
Terms of trade (percentage changes)
Export prices (in SDRs)0.26.9−9.52.28.08.0
Import prices (in SDRs)0.96.7−9.65.36.64.5
Terms of trade−0.70.20.2−3.01.23.4
Exchange rates (period averages)
Dinar/SDR (avg.)1.2651.2461.4021.4481.4351.413
Dinar/US. dollar (avg.)0.9250.8841.0041.0120.9460.973
Nominal effective exchange rate
(percentage changes)−0.11.6−3.20.60.30.7
Real effective exchange rate
(percentage changes)1.12.3−3.70.72.10.5

Includes all economic agents except the Central Government

Includes the social security system.

Consolidated operations; payment-order basis.

Includes all economic agents except the Central Government

Includes the social security system.

Consolidated operations; payment-order basis.

Tunisia: Basic Social and Demographic Indicators, 1980-96

All lower
middle
MENAincome
198019851994countriescountries
1/1/
Population characteristics
Total population (in millions)6.6 2/7.38.82671,097
Urban population (in percent of total population)5253575656
Birth rate (per thousand)35 2/3124
Death rate (per thousand)8 2/76
Life expectancy at birth (years)6265686667
Population growth (in percent)2.72.41.82.61.3
Income and wages
GDP per capita (in 1990 dinars)1,215 2/1,2731,534 3/
GDP per capita (in current dinars)631 2/9442,081 3/
GDP per capita at current prices (in SDRs)1,090 2/1,1151,472 3/1,4071,193
Minimum wage (SMIG in current dinars per hour)0.30 2/0.460.78 4/
Poverty incidence (headcount index,
in percent of households)1177
Health
Infant mortality (per thousand per live births)7255404836
Population per physician3,6942,1621,7573,064
Education
Literacy rate (in percent)46586863
Of which: female475950
Primary enrollment (gross; in percent103116118
of school age population)
Secondary enrollment (gross;2739525963
in percent of school age population)
Pupils per teacher (primary school)39322526
Labor force
Total labor force (in millions) 6/1.82.1 5/2.4
Unemployment rate (in percent)16.4 5/15.3
Sources: IBRD, Social Indicators of Development, 1996, Republio of Tunisia-Poverty Alleviation; 1995; Ministry of Plan and Regional Development, INS, Enquête nationale population emploi 1989, 1991; VIIIème Plan de développement 1992-1996,1992, Volume I; Budget économique, 1994,1995; Recensement général de la population et de I’habitat 1994, principales caractéristiques démographiques de la polupation 1995; and IMF staff estimates.

Most recent estimates, 1989-94 unless otherwise indicated.

Data for 1981.

Data for 1996.

Data for December 1996.

Data for 1984.

Data for 1989.

Sources: IBRD, Social Indicators of Development, 1996, Republio of Tunisia-Poverty Alleviation; 1995; Ministry of Plan and Regional Development, INS, Enquête nationale population emploi 1989, 1991; VIIIème Plan de développement 1992-1996,1992, Volume I; Budget économique, 1994,1995; Recensement général de la population et de I’habitat 1994, principales caractéristiques démographiques de la polupation 1995; and IMF staff estimates.

Most recent estimates, 1989-94 unless otherwise indicated.

Data for 1981.

Data for 1996.

Data for December 1996.

Data for 1984.

Data for 1989.

I. Introduction

1. In recent years, Tunisia managed to sustain a solid growth rate, averaging 4.5 percent during 1992-96, while further consolidating macroeconomic stability. Public expenditure emphasized support for basic social services, and social indicators are among the best in the region. At the same time, economic growth fell short of the ambitious targets set under the recent 5-year development plans (6 percent annual average for 1992-96) and unemployment continues to hover around 15 percent. The reasons for these shortcomings are complex, but likely include the relatively gradual pace of structural reforms, and shortfalls in public sector saving from targeted levels in virtually every year.

2. The following studies which serve as background to the 1997 Article IV consultation, attempt to shed more light on recent economic developments in Tunisia. They aim to identify more closely obstacles to higher growth and to draw lessons from past experience to help formulate the economic strategy for the coming years, taking into account the prospective evolution of the exogenous environment.

3. Chapter II reviews issues related to the further integration of Tunisia into world markets. Against the background of the relatively modest trade liberalization in recent years, which leaves Tunisia still a quite highly protected economy, it identifies the challenges arising from the comprehensive trade liberalization being pursued under the Association Agreement with the European Union (AAEU) as well as global liberalization under the WTO.

4. Chapter III reviews recent trends in investment, highlighting the divergent evolution of investment in different sectors as well as shifts between public and private investment. Investment regulations may explain these trends in part, as sector-specific incentives were in recent years replaced by benefits applying uniformly across sectors. An econometric exercise attempts to identify the main policy variables that seem to be correlated with investment levels.

5. Chapter IV looks at the agenda for future regulatory reform. The focus is on obstacles to the functioning of goods markets (price and sometimes also marketing controls) and factor markets (labor regulations, land issues). However, the weaknesses regarding data on employment and unemployment as well as on wages do not permit to establish a strong link between labor market regulations and the evolution of unemployment.

6. Chapter V explores the consolidation of public finances, the core area of future macroeconomic adjustment. It depicts the recent evolution of public finances, going to the extent possible beyond the central government budget, and identifies the key areas for fiscal reform. On the revenue side, the challenge confronting the Tunisian authorities will be to stabilize revenues in the face of steadily declining import tax receipts, given the dismantling of tariffs under the AAEU, as well as declining revenue from the hydrocarbon sector as oil and gas fields are gradually depleted. On the expenditure side, the challenge will be to reform the civil service in line with a changing role of the state in the economy, and to overhaul an expensive food subsidy system that partly benefits middle- and upper- income groups.

7. Chapter VI reviews Tunisia’s record of financial sector reform. The challenge for the coming years is to narrow the remaining gap vis-à-vis the top performers among developing countries including through the strengthening of the financial soundness of the banking system, the establishment of functioning clearing and settlement mechanisms to give depth to secondary markets in government paper, and laying the ground for the full liberalization of all capital account transactions.

8. In a related context, Chapter VII discusses issues of the exchange system and exchange rate policy. It reviews the operation of the interbank foreign exchange market and the conduct of exchange rate policy which for a number of years has aimed successfully at keeping the real effective exchange rate of the Tunisian dinar broadly unchanged.

9. The final Chapter VIII returns to the central theme of economic growth. After reviewing the recent growth experience, including in an international context, a growth accounting exercise tries to identify the different sources of growth and examines the evidence of linkages between economic policies and capital and productivity growth.

10. Annexes provide basic economic and financial statistics and an updated description of the tax system.

II. Association Agreement with the European Union

Background

11. Recent studies have highlighted the empirical association between increased openness of an economy and higher growth performance (Sachs and Warner (1995)). While causality does not go exclusively in one direction, evidence indicates that policies aimed at greater integration in the world economy raise productivity through the acquisition of new technology and improved cost discipline and innovation arising from increased competition (Pack and Page (1994); Sarel (1996)).

12. Tunisia has been opening up its economy mainly since 1986. At that time, its development strategy shifted from import substitution and state intervention toward a more market-based and export-oriented policy. The policy shift aimed to improve the competitiveness of the economy through better resource allocation while narrowing the external imbalance. Over the past ten years border protection has been lowered significantly, as Tunisia reduced tariffs and quantitative restrictions, including within the framework of its formal accession to GATT in 1990 and the WTO in 1995.

13. In the years ahead, a main impetus for further trade liberalization will come from the Association Agreement that Tunisia concluded with the EU in June 1995 as part of the broader Euro-Med partnership initiative. The Association Agreement has become a catalyst for Tunisia’s overall economic reform strategy by committing the country to a course that can be completed successfully only through the implementation of a range of supplementary economic policy reforms.

Trade liberalization: 1986-96

14. As of 1985, the Tunisian economy was inward oriented and highly protected. High levels of oil export revenue and foreign borrowing had fueled an investment boom, mainly by public enterprises and with emphasis on creating employment (Morrison et al. (1996)). The inefficiencies that resulted implied high production costs that necessitated extensive import protection, and were partly offset for consumers through subsidies and price controls and for exporters through extensive tax concessions and other benefits. Only 18 percent of imports requiring payment in foreign exchange were exempt from prior authorization requirements and less than 10 percent of local production was without protection in the form of quantitative import restrictions. Custom duties ranged from 5 percent to 236 percent, with the average rate exceeding 40 percent. The rate of effective protection in 1986 was 70 percent on average and 124 percent for manufacturing (World Bank (1995b)). Control over import flows was further enhanced as a result of government monopolies for food imports, the magnitude of procurement by the state, and the weight of public enterprises in the economy.

15. By end-1996, significant trade liberalization had been achieved. Quantitative import restrictions wore limited to a negative list that provided protection for an estimated 8 percent of local production. Import duty rates ranged from 0 percent to 53 percent with a weighted average of 32 percent; however, receipts from import duties during 1996 amounted to only 10.3 percent of total imports, reflecting the importance of the off-shore sector, which took in 32 percent of total imports, and exemptions extended to imports entering the domestic economy. The average rate of effective protection in 1995 was estimated at 56 percent.

16. Building the necessary consensus at each phase of the liberalization process took longer than envisaged. The original goal under the 1986 structural adjustment program called for the removal of all quantitative restrictions and the establishment of a uniform rate of effective protection of about 25 percent by 1991. An initial phase (1986-88) saw significant accomplishments including: (i) the merging of tariff schedules; (ii) a narrowing of tariffs to a range of 10-43 percent; and (iii) a reduced prevalence of quantitative restrictions, in particular on equipment goods and inputs in order to streamline protection and remove the anti-export bias. Notwithstanding the lowering of tariffs, protection for locally produced goods was largely maintained. By 1990, still only 26 percent of domestic production was without protection in the form of quantitative import restrictions. The subsequent reduction of such restrictions in several steps, beginning in 1991, was each time accompanied by the introduction of transitional compensating duties (droits compensatoires provisoires or DCP) on finished and semi-finished goods, ranging from 10 percent to 30 percent and to be phased out over three years, thus temporarily reversing the decline in the top import duty rate that had taken place in the late 1980s (see also GATT (1994)). The DCP were largely eliminated by January 1997.

17. As of 1996, the distinguishing characteristics of import protection might be summarized as follows:

  • The average duty rate on textiles, apparel, and leather was 50 percent and the effective rate of protection of domestic production of wearing apparel was estimated at over 100 percent. High tariffs prevailed on many agricultural products, reflecting the government’s objectives of food self-sufficiency and income support for rural areas.
  • An active and generous export promotion policy has been in place since 1972. This policy, in conjunction with the availability of low cost labor, at least initially, and proximity and preferential access to the European market allowed the rapid development of “offshore” processing facilities. Exports and imports of goods and nonfactor services in relation to GDP rose from 61 percent in 1986 to 85 percent in 1996, and the share of manufactured products in total exports rose substantially. However, offshore enterprises produce limited value added, have developed few linkages with the domestic economy, and have provided minimal competition on the local market which has remained sheltered (World Bank (1994)).
  • Prior import authorization requirements1 remain on: (i) passenger cars, owing to implications for the mechanical industry sector through partnership arrangements; and (ii) certain other goods including boats, marble, glassware, lamps, jewelry, refined petroleum, footwear, and fertilizer.
  • Some imports are protected through multiple mechanisms. Imports of grain, edible oil, and citrus (which are export products) are protected through tariffs and are further controlled as a result of an effective import monopoly by the public sector.

18. How does trade liberalization in Tunisia compare with developments elsewhere? With the exception of South Asian countries, Tunisia appears to have moved more slowly and to have kept higher average tariff protection than several other comparable countries and regions. East Asian and Latin American countries generally moved faster during the 1980s and Central European countries during the 1990s in bringing down tariff protection (Hoekman (1995)). By 1996, Tunisia’s weighted average tariff level (32 percent) exceeded that of other MENA countries (e.g., 20 percent in Morocco) and was higher than the average for developing countries (21.4 percent). The average for East Asia was 21 percent, Latin America and subsaharan Africa about 15 percent, and for the world economy 8.2 percent (Havrylyshyn (1996)).

19. Multilateral agreements have played an important role in trade liberalization in Tunisia. Consistent with its new outward looking policy, Tunisia formally acceded to the GATT in 1990 and made a further round of commitments in 1993 under the Uruguay Round. As a result, total bindings represent about 60 percent of all tariff items (100 percent in agriculture), which is comparable to what developing countries have offered. The tariff levels bound are quite high and well above actually applied tariffs. On textiles, a uniform rate of 90 percent will be bound starting in 1996 and will decline gradually to 60 percent in 2005. In connection with the entry into force of the WTO Tunisia replaced its QRs on agricultural products by tariffs in 1996: all agricultural items were bound at tariff rates varying between 25 percent and 200 percent, with some limited tariff reductions on these products to be phased in through the year 2004. The consultation process with the GATT/WTO Committee on Balance of Payments Restrictions has been instrumental in the reduction of quantitative import restrictions in the 1990s.

20. Regional integration has encountered substantial obstacles. With the aim of strengthening regional ties, Tunisia has since 1960 established links to several Arab and sub-Saharan African countries through bilateral trade agreements that specified either preferential or most-favored-nation treatment. A more extensive multilateral arrangement with Algeria, Libya, Mauritania, and Morocco was formed as the Arab Maghreb Union (AMU) in 1989. The ambitious goals under the AMU included the establishment of a free-trade area by end-1992 and a customs union by 1995. However, trade relations continue to be governed by bilateral agreements as reaching consensus at the AMU level on a list of commodities that will circulate freely and on harmonization of tariffs with nonmembers has not yet bean accomplished. Factors responsible for the slow progress include: political differences, unequal progress in different member countries in pursuing economic adjustment policies and in removing distortions from state intervention and price controls, and concern about the cost of trade diversion. Tunisia’s trade flows with other AMU countries represent about 7 percent on the export side, mainly semi-processed goods, and about 4 percent of its imports, mainly energy products from Algeria.

Association Agreement with the EU

21. Underlying the signing of the Association Agreement by Tunisia and the EU is the shared view that the dismantling of tariff protection in Tunisia over a 12 year period as required for the establishment of a free trade area in nonagricultural products, combined with a harmonization of trade-related regulations and stepped-up financial and technical assistance from the EU, will enhance prosperity and employment in Tunisia and thereby help ensure political stability and security on both sides of the Mediterranean.2

22. One limitation of the benefits of the agreement that has been emphasized is the absence of a significant increase in access for Tunisian products to the European market. This largely reflects the fact that Tunisia already had privileged access to the European market under the 1976 trade and cooperation agreement. In particular, the main agricultural exports, namely olive oil, citrus fruit, and wine benefited from export quotas at the Union’s support prices (i.e., were fully or partially exempt from tariffs and variable levies). However, these quotas were granted only for a limited period of time and were renegotiated from time to time in the context of new multi-year protocols. Exports of manufactured goods have been admitted free of duty either for unlimited amounts or, as in the case of textiles, for specified quotas under a bilateral “voluntary” agreement. Actual exports usually exceeded the quotas. Thus, a main concern on the Tunisian side during the negotiation of the agreement from 1992 onward was the need to firmly lock in guaranteed access for agricultural exports, in particular in light of the implications of the expansion of the EU to the North and eventually the East, and of the Uruguay Round.

Fiscal implications

23. Estimates indicate a gradually rising revenue loss as a result of the agreement from 0.2 percent of GDP in 1996 to 0.5 percent in 1997 and further to 2.4 percent of GDP by 2008, when the agreement will be fully implemented. These estimates are based on the simplifying assumption of no change in the geographical origin and level of imports and of GDP from their 1995 magnitudes.3 Revenue from custom duty in 1995 was 4.3 percent of GDP. Hence, nearly half of custom duty receipts would still remain owing to the exclusion from the agreement of some non-exempt imports (such as industrial commodities with agricultural content) and the fact that an estimated 31 percent of imports subject to taxation originates from outside the EU. In comparison, collection of value added tax (VAT) amounted to 5.2 percent of GDP and excise taxes to 3.5 percent of GDP in 1995, while tax revenue (excluding social security contributions) was 20 percent of GDP and total central government revenue (including social security contribution) 30 percent of GDP. Thus, the estimated revenue loss, once the agreement is fully in place, corresponds to slightly more than one fourth of the receipts of VAT and excise taxes combined. It should be noted, however, that the revenue loss is likely to be higher if account is taken of the impact of trade diversion and a possible transitional setback in industrial production.

24. Absent compensating fiscal measures, the tariff reduction is expected to aggravate external and domestic imbalances. Fiscal neutrality, however, could be preserved by raising the rates or broadening the base through removal of exemptions of domestic indirect and direct taxes. At first sight, the revenue loss of the government is the gain of the nongovernment sector which benefits through lower prices for imported goods. In practice, however, instituting compensating revenue measures may be complicated if the incidence of the tax break and the tax hike falls on different groups of consumers and producers. Furthermore, regional (more than multilateral) liberalization carries the risk that a portion of the foregone fiscal revenue could be captured by EU exporters to the extent that they have the market power to raise their export prices (see Panagarya (1995)), thereby causing a deterioration of Tunisia’s terms of trade. Such considerations have been advanced to help underpin the case for stepped-up financial assistance from the EU. Alternatively, fiscal neutrality could be preserved through expenditure reduction, which would also be consistent with reducing the size of the government sector in the economy.

25. The early experience with compensating fiscal measures in 1996 and 1997 seems to indicate that the authorities find it difficult to compensate fully for the fiscal losses incurred. The estimated revenue loss from trade liberalization (including the reduction of DCP under the WTO and the lowering of duties on a multilateral basis) in 1996 amounted to TD 55 million. Revenue measures taken in 1996, inter alia with a view to offsetting this loss, amounted to about TD 80 million, equivalent to 145 percent of the loss, and included the removal of VAT exemption on certain imported capital goods at the beginning of the year and an increase in the VAT rate on tourism from 6 percent to 10 percent from September 1996 onward. Although the extent of compensation appears high, tax revenue fell to 19.9 percent of GDP from 20.5 percent in 1995, suggesting that the measures taken would have been needed in any event to sustain fiscal revenue, even in the absence of the AAEU. For 1997, the estimated loss (compared with the 1995 base) is TD 136 million, including the impact of the elimination of DCPs, equivalent to 0.7 percent of GDP. By comparison, revenue from compensating measures taken in 1996 and from those included in the 1997 budget are estimated at TD 125 million.

Impact on economic growth and employment

26. Estimates in the literature of the overall welfare gains for the Tunisian economy as a result of the full implementation of the AAEU range from a small loss to a net increase in overall welfare of up to 4.6 percent of annual GDP once the agreement is fully implemented. The high welfare gains estimated in some studies (in particular, Rutherford et al. (1995)) derive from the inclusion of various dynamic gains. Traditional static analyses of the benefits of trade creation net of trade diversion as a result of the reallocation of factors of production to areas of comparative advantage find magnitudes that are positive and range up to 1.6 percent of GDP.

27. Estimated benefits rise by about 3 percentage points of GDP annually as a result of “deeper integration” elements in the Association Agreement that go beyond trade liberalization. The harmonization of Tunisian product standards, customs arrangements and competition rules with those of the EU and the liberalization and upgrading of financial and other services with EU assistance are expected to enhance productivity and lower costs. Contractual assurances of access for Tunisian exports to European markets and the enhanced credibility of the Tunisian authorities’ economic reform commitment are expected to stimulate domestic and foreign investment and accelerate the transfer of technology with additional gains estimated in a range of 2 percent to 3 percent of GDP.

28. The “static gains” increase in welfare results from a process involving job destruction and creation as the economy reallocates labor and capital to sectors of comparative advantage. Different methods have been used in the literature to capture the social cost of the transition. Computational general equilibrium models that assume full employment seek to measure the magnitude of shifts in the sectoral composition of production and the accompanying movement of labor. One model (Rutherford et al. (1995)) equates the cost of shifting and retraining labor to one year of salary per worker who moves to a different industry. Total adjustment costs have thus been calculated as the equivalent of 4 percent of GDP. This is a one-time cost spread over the full 12-year period and beyond. Other models examine the employment that can be expected to be created as a result of the agreement. In one such study (Mahjoub (1995)) the overall impact is a modest 1 percent increase in employment, which however rises substantially once it is assumed that the AAEU will spur large foreign investment inflows and economic growth.

29. The process of upgrading Tunisian industrial enterprises and the environment in which they operate in order to enable them to meet increased foreign competition in their home market and abroad (mise à niveau) has been estimated to cost up to TD 2.5 billion for 1996-2000 (equivalent to 2 percent of GDP annually). Of this total, TD 1.5 billion would need to be spent on strengthening individual enterprises through modernization of equipment, recapitalization, and debt restructuring; the balance on infrastructure and support activities. Most of these outlays will occur as part of enterprises’ investment programs and the public investment program under the IXth Plan. Specific public programs aimed at facilitating technology transfers, strengthening vocational training, and retraining programs, and diffusing knowledge about technologies and export possibilities via sectoral “technical centers” are expected to be financed through a combination of own resources of the enterprises, foreign grants, and budgetary expenditure. A program granting subsidies of 10 percent to 20 percent for investment projects aimed at technological upgrading, amounting to an estimated TD 180 million, is being implemented. The EU is likely to contribute to the financing of such programs; other EU-supported programs aim at reducing the social cost of restructuring.

30. Apart from the specifically designed mise à niveau program, there is widespread consensus that the net benefits of the agreement can be maximized through a coherent and credible reform package that is well understood by the markets. Flexible labor market arrangements, combined with well designed social safety net provisions for labor redundancy, and reforms conducive to the provision of modern financial services at internationally competitive costs would allow economic agents to react swiftly and freely to the new incentive structure for the reallocation of resources. In addition, regulatory reform that confers an increased role to market forces and reduced government intervention in the allocation of resources, including through stepped up privatization and increased competition in the provision of basic services (transportation and communication), should allow improvements in productivity and spur domestic and foreign investment, with its attendant benefits for technological upgrading.

31. What is the likely impact of the EU agreement on the balance of payments?4 The reduction in the average effective tariff level from 10.5 percent to an estimated 6.0 percent (or even lower if trade diversion is significant) implies a reduction in import prices by 4 percent or more. This can be expected to raise demand for imports. Depending on the elasticity of export supply, a real exchange rate depreciation of up to 4 percent might thus be required to restore the current account to its initial level (in foreign currency terms); the required depreciation would be less the higher the elasticity of export supply.

32. The above estimate, however, represents an upper bound, and currency depredation may, in fact, not be required. First, the implementation of fiscal policy measures with a view to neutralizing the adverse budgetary impact will dampen import demand. Second, the agreement can be expected to also exert positive shocks on the balance of payments. These include additional inward portfolio investment and foreign direct investment and additional aid flows, to the extent they do not imply corresponding levels of additional imports. To give some perspective to the amounts involved, the EU assistance Tunisia expects to receive during 1997 in the context of the EU-Mediterranean partnership, inter alia to help meet the costs of the trade liberalization, overall amounts to roughly SDR 100 million, which corresponds to about 2 percent of imports. Third, in the longer term, the adverse balance of payments impact would be reduced further as a result of improved export competitiveness stemming from reduced input prices and the indirect benefits of harmonization of standards and lower cost services. Taking all this into account, market pressure toward a currency appreciation rather than depreciation may also be a possible outcome.

Remaining issues

33. Tunisia has implemented significant, yet limited trade liberalization over the past ten years. Skillful export promotion has been important in overcoming the drawbacks of a still fairly protective environment. The AAEU has engaged Tunisia much further in the direction of trade liberalization than had been achieved through multilateral channels (WTO), and its full and timely implementation is likely to bring considerable benefits. The closer anchoring to the EU through contractual assurance of market access and stepped-up cooperation with the EU including in customs, competition policy, and harmonization of standards, as well as the greater credibility of policy reform commitments and the reduced market protection can be expected to raise economic growth and investment. Nevertheless, the question arises whether further complementary policy steps by the authorities could address some of the limitations of the agreement and help attain its full benefits.

34. First, additional trade liberalization beyond the framework of the AAEU will be important. The relatively long transitional period under the AAEU, while allowing to spread out the adjustment cost, also delays the benefits and could be counterproductive. Furthermore, the sequencing of the tariff reductions, with reductions of tariffs on capital goods and inputs phased in faster than tariffs on locally produced consumer goods, will enhance the rate of effective protection during the early years. The backloading of the more difficult adjustment, in the wake of a slower-than-originally-expected pace of trade liberalization during 1986-96, and combined with the possibility of a slowing of the implementation of the agreement under the various safeguard provisions could leave some uncertainty about the pace of implementation of the agreement, particularly in later years. Accordingly, within the agreed 12-year time frame, the authorities should consider deciding unilaterally to move at a faster pace, to reduce high effective rates of protection.

35. Second, the AAEU is a second-best solution and should serve as a stepping stone towards more universal liberalization. East Asian countries have been successful without entering into preferential trade agreements. The AAEU could divert imports away from more efficient non-EU sources, thereby reducing the benefits of trade liberalization. By contrast, the unilateral reduction of tariffs by Tunisia from all geographical sources on a most favored nation basis would allow the full benefits of the competitive impact. One study (Rutherford et al. (1995)) calculated that this measure would raise welfare by the equivalent of a further 0.7 percent of GDP annually. The net additional cost in terms of labor dislocation would be relatively small because the adjustment costs deriving from trade diversion are avoided under this scenario. Generalizing the agreement to non-EU sources would require compensating fiscal measures to be 22 percent higher than under the EU agreement.5 If full-fledged extension of the tariff reduction is difficult for political reasons, one way for Tunisia to reduce the scope for trade diversion would be to unilaterally align its tariffs on non-EU imports to the external tariff schedule of the EU, pari passu with the implementation of the free trade agreement over the 12 year transition period of the Association Agreement.

36. Third, the deferment of negotiations of liberalization of trade in agricultural products until the year 2000 is largely explained by the political difficulties of reforming the EU’s common agricultural policy and resistance on the part of European countries who compete with Tunisia’s export products. Tunisian agricultural production is also heavily protected through tariff and non-tariff barriers, and liberalization would require major adjustment, for example in the cereal sector. Reciprocal liberalization of agriculture would provide Tunisia further benefits, possibly including increased access for olive oil at EU support prices, although this advantage might be offset as a result of closer correspondence of the latter with world market prices. At the same time, faster liberalization of agriculture even unilaterally (only limited steps are programmed under WTO rules) would help avoid new distortions that may result if resources flow from the relatively unprotected industrial sector into agriculture.

37. Fourth, Tunisia would derive additional benefits from increased market access for its industrial exports to other AMU and EU association countries. The greater market would allow economies of scale and would enhance the attractiveness of Tunisia as a central location for foreign investors, and limit adverse “hub-and-spoke” effects on foreign investment. Thus, concluding free trade agreements with other countries outside the European Union would be mutually beneficial. A free trade agreement with Morocco is already under discussion and may help to advance the transformation of AMU into a well-functioning free trade area.

38. Fifth, beyond trade liberalization, complementary policy reforms could help ensure the attainment of the important dynamic gains of the agreement, help minimize the transitional costs, and bolster the credibility of the authorities’ strategy. Specific measures could include: (i) further deregulation by easing restrictions on foreign investment especially in the service sector; (ii) increased flexibility in the labor market combined with stepped-up social safety net provisions; (iii) a greater role for the private sector and stronger competition in the financial system; and (iv) a bold privatization program and increased competition in key service sectors such as transportation and telecommunications.

39. Finally, Tunisia needs to ensure that trade liberalization does not come at the expense of macroeconomic stability. The adverse budgetary impact should be fully offset through high quality measures of revenue enhancement and expenditure cuts and external stability should be preserved consistent with the authorities’ intention to lower the external debt/GDP ratio. Enforcement of hard budget constraints on state enterprises and civil service reform, consistent with the altered role of the government, as well as further reform of the food subsidy system, should be the focus on the expenditure side. On the revenue side, efforts should concentrate on a streamlining of the VAT system and the curtailing of income tax exemptions as discussed more fully in Chapter V below.

III. Investment—Recent Experience And Prospects

40. During 1960-96, capital accumulation is estimated to have contributed about half of Tunisia’s GDP growth (Chapter VIII), with the capital stock growing on average by about 6 percent a year. Increased levels of investment continue to hold the key to higher growth in Tunisia, and raising both private and public investment levels is a central tenet of the IXth Economic Development Plan. This chapter reviews the past behavior of investment with a view to identifying the economic policies required to stimulate investment, in particular in view of the relatively weak levels registered in the private manufacturing sector in the most recent years.

Recent trends in investment patterns

Overall investment

41. Investment levels have varied considerably over time. Following independence (1956) investment was initially low, but the ambitious, public sector-led development strategy pursued led to more than a doubling of the average investment ratio to 22 percent of GDP during the 1960s (Table 1 and Chart 1). The public sector on average accounted for about two-thirds of total investment during this period. As Tunisia was a net energy exporter (until the mid-1990s), the two oil shocks during the 1970s provided the state with additional resources and the investment ratio rose further during the 1970s and early 1980s, peaking at 34 percent of GDP in 1982; investment by public enterprises reached 14 percent of GDP in that year.

Table 1.Investment Indicators(In percent of GDP; unless otherwise stated)
1961-701971-851986-9219931994199519961993-96
(Period averages)
Gross fixed capital formation22.027.023.628.127.024.224.425.9
Households2.74.04.34.23.93.9
Central Government7.94.85.15.35.66.1
Enterprises11.318.214.218.617.414.2
Public6.610.36.79.57.45.4
Private4.77.97.59.110.08.8
By economic sectors:
Agriculture4.63.63.53.33.33.54.03.5
Industry (manufacturing)2.44.63.83.73.63.43.43.5
Industry (nonmanufacturing)3.25.92.94.05.43.13.34.0
Mining, electricity and water1.52.91.52.22.21.22.32.0
Hydrocarbons1.72.91.51.93.31.91.12.0
Construction4.52.62.52.82.82.93.12.9
Services7.210.210.914.211.911.210.612.0
Of which:2.04.23.66.24.53.83.74.5
Transport & telecommunications
Total22.027.023.628.127.024.224.425.9

Chart 1Tunisia: Gross Fixed Capital Formation by Type of Investor, 1961-95

(In percent of GDP)

Sources: Tunisian authorities; and IMF, International Financial Statistics.

42. Investment levels of this magnitude became unsustainable in subsequent years as the economic environment turned less favorable with the fall in oil prices, more frequent and severe droughts especially after 1988, and a decline in workers’ remittances because of dismissal of expatriate workers from a neighboring country. While investment by households (mainly for housing) and the central government rose further during 1982-85, enterprise investment fell from 25 percent of GDP in 1982 to 17 percent in 1985, with the bulk of the decline taking place in public enterprises. During the period of Fund-supported adjustment programs (1986-92), household and central government investment remained broadly stable, while enterprise investment trended upwards.

43. During 1993-95, overall investment levels rose further, mainly reflecting the two large foreign financed projects (Gazoduc and Miskar) in the energy sector which in 1993 alone accounted for about 3 percent of GDP. Private sector investment (including Miskar) trended upwards and government investment also rose. Overall investment in 1996 is estimated at about 24 percent of GDP, unchanged from 1995.

Sectoral composition of investment

44. The sectoral allocation of investment has remained relatively stable in recent decades. Investment in services, including transportation and telecommunications, has dominated total investment (Charts 2 and 3) throughout, and in fact increased its share at the expense of investment in agriculture and in the hydrocarbon sector. The recent surge in 1991-93 reflects inter alia the construction of a second transmediterranean pipeline (Gazoduc) and a high rate of investment in telecommunications. An upward trend in manufacturing investment through 1985 has given way to a broadly constant level at around 4 percent of GDP since.

Chart 2Tunisia: Gross Fixed Capital Formation by Economic Sector, 1961-95

(In percent of total)

Source: Tunisian authorities.

Chart 3Tunisia: Gross Fixed Capital Formation by Selected Economic Sectors, 1961-95

(In percent of GDP)

Sources: Tunisian authorities; and IMF, International Financial Statistics.

Public versus private investment

45. There has been a shift in the last two decades from public enterprise investment to private enterprise investment (Chart 4). The share of the overall public sector in total investment (including housing) declined steadily from a peak of 74 percent in 1965 to 48 percent in 1995, in the main driven by a slowdown in central government investment in the 1970s and a decline in public enterprise investment in the 1980s and 1990s. Data for the composition of sectoral investments between public and private sector are available only through 1991. On this basis, public enterprises have invested mainly in capital-intensive sectors such as transport and telecommunications, manufacturing, mining, electricity and water. Private investments have been highly concentrated in housing, the hydrocarbon sector (mainly foreign enterprises), agriculture, and tourism (Chart 5). The shift in investment from public to private enterprises would thus reflect mainly the strong expansion of certain services (such as tourism) that are dominated by private enterprise, and more recently also strong growth in private manufacturing.

Chart 4Tunisia: Gross Fixed Capital Formation by Type of Investor, 1961-95

(In percent of total)

Source: Tunisian authorities.

Chart 5Tunisia: Gross Fixed Capital Formation by Economic Sector and Type of Investor

(In percent of total; averages 1961-91)

Source: Tunisian authorities.

1/ Excludes hydrocarbons.

Comparison with other countries

46. Gross fixed capital formation in Tunisia, at an average of about 27 percent of GDP during 1980-96, exceeded the average for the Middle East and North Africa (MENA) region (20 percent of GDP) and was closer to the levels prevailing in the fast growing regions of Asia (Chart 6). However, in contrast to most high-growth developing countries, Tunisia’s gross fixed capital formation has been heavily dominated by the public sector, while private sector investment at about 13 percent of GDP during the 1990s was well below the levels prevailing in Asia in recent years (21-22 percent of GDP).

Chart 6MENA Region. Public versus Private Investment, 1980-95

(In percent of GDP)

Source: Tunisian authorities; and World Economic Outlook.

Efficiency of investment

47. The evaluation of capital productivity is complicated by data insufficiencies, including statistical breaks in the time series for GDP and investment. The overall ICOR seems to have been on a downward trend, indicating increasing capital efficiency (Chart 7). Total factor productivity has also been rising (Chapter VIII). The analysis in Chapter VIII provides furthermore some evidence that investment by the public sector was less efficient than private sector investment (see also Morrisson et al. (1996)).

Chart 7Average ICOR for Selected Countries, 1980-95 1/

Source: World Economic Outlook.

1/ ICOR for a given year is defined as the 3-year average ratio of gross fixed capital formation to GDP divided by the 3-year average growth rate of real GDP.

Investment under the IXth Development Plan

48. The IXth Development Plan aims to raise investment to 28 percent of GDP by 2001, with a growing share expected to take place in the private sector. The emphasis will be on productivity enhancing investment in infrastructure, transportation and services, including through build-operate-transfer contracts with private operators. Public investment programs will be specified each year as part of the budget, while structural reforms will be the main instrument to achieve the targeted levels of private investment.

Investment incentives

49. Investment was highly regulated during the 1970s and 1980s. Under the 1969 investment law, all investment required prior government approval. The law provided the same fiscal incentives for all sectors, such as temporary income tax holidays, investment tax credits, exemptions from import duties on imported capital goods, and government guarantees facilitating access to bank loans. It also allowed the government to grant additional advantages for large projects, including a monopoly position and protection from competing imports. During the 1970s, a special incentive system to promote exports was developed, and during the 1980s incentives were further differentiated between sectors and regions, and were extended to include preferential interest rates. Thus, the effective tax rate was virtually nil in agriculture and tourism, while it approached the statutory 35 percent in manufacturing destined for the local market (World Bank (1995b)). The fiscal cost of the tax exemptions under the various investment codes reached an estimated 1 percent of ODP during the 1980s; additional social costs arose because of the resulting distortions of the incentive system. The incentive structure is likely to have favored investment in relatively capital-intensive technology, biased the sectoral allocation of capital, notably toward tourism, and favored debt over equity financing.

50. A new industrial investment code in 1987 eliminated the need for prior authorization for industrial investments that did not seek fiscal benefits under the various codes. However, to date investments in certain service activities, as well as mining and energy production, remain subject to authorization by the relevant authorities. Investment subject to authorization still exceeded 40 percent of total investment in 1993 (World Bank (1995)). Foreign investment in the offshore sector is unrestricted and enjoys national treatment, except in agriculture. Foreign companies or individuals may not own agricultural land, but a system of long-term leases has been developed. In other—mostly services—sectors, foreign direct investment beyond 50 percent of capital in a company requires approval by the Investment Commission (Commission supérieure d’investissement).

51. Fiscal benefits were again harmonized under a new investment code (code unique) introduced in 1993, which replaced the various sectoral codes and most other investment incentive schemes. Most incentives do not discriminate among sectors of production, and are linked to economy-wide objectives such as protection of the environment, promotion of technology, and human capital formation. Tax benefits include accelerated depreciation, reduction of certain taxes (tariffs, VAT, and excises) on imported capital goods, and income tax exemptions on reinvested income. Various subsidy schemes are aimed at encouraging absorption of new technology: under the mise à niveau program launched in 1996, industrial enterprises may obtain subsidies of up to 20 percent of the cost of investments aimed at upgrading production technology, within the context of an approved restructuring plan underwritten by a Tunisian bank.

52. Some sectors continue to benefit also from specific incentives. Agricultural investment is eligible for certain subsidies, and selected agroprocessing activities may qualify for additional benefits. Firms that qualify for full export status (manufacturing or services producers exporting at least 80 percent of output, or agricultural producers exporting at least 70 percent of output) qualify for offshore-status Benefits include a 10 year income tax holiday followed by imposition at 17.5 percent (half the standard rate), as well as full exemption from all taxes on imported inputs or capital goods. Such enterprises may sell up to 20 percent (30 percent in the case of agricultural producers) in the local market, unless their product competes with that of domestic producers. In the latter case, such firms may sell in the domestic market only up to the equivalent of their purchases of local inputs. Partially exporting firms receive similar tax incentives in proportions related to their exports, except that incentives for reinvesting profits are limited to the general tax benefits available for all firms, and refunds of import duties are granted only if there is no locally produced similar equipment available.

53. While the incentive system has contributed to the strong growth of Tunisia’s offshore sector in recent years, it has also introduced some distortions between totally and partially exporting firms. The authorities are currently preparing the operational modalities for implementation of a recent decision to liberalize some of the restrictions on sales in the domestic market by offshore firms. More importantly, to the extent that special export incentives were designed to offset distortions arising from import protection, trade liberalization under the AAEU will reduce the need for these incentives schemes.

Quantitative analysis of private investment behavior

54. One of the central elements of Tunisia’s development strategy is a greater role of the private sector in economic activity. Accordingly, under the IXth Plan, the share of the private sector in overall investment is targeted to increase. In order to identify and quantify the main determinants of investment by households and private firms in Tunisia, a simple regression analysis was carried out. The initial specification of the function for private investment as a share of GDP draws on the recent literature on determinants of investment in developing countries,6 and includes the following explanatory variables: (1) the growth rate of the flow of bank credit to the nongovernment sector, to capture the influence of domestic borrowing constraints on investment; (2) the real effective exchange rate (REER)—the expected sign of which is ambiguous as a depreciation encourages investment in the traded goods sector, but also results in a higher relative price for imported capital goods; (3) the one-period lagged private investment ratio, to capture adjustment lags and other inertial factors; (4) the real growth rate of GDP, lagged one period, to capture demand effects;7 (5) the real interest rate, lagged one period, measured by the nominal rediscount rate of the central bank adjusted by the GDP deflator, as a proxy for the real cost of capital; (6) the terms of trade, measured by the income effect of changes in export and import prices,8 (7) the ratio of public investment to GDP (defined as government plus public enterprise investment) to examine possible complementarity or substitutability between private and public investment; and finally (8) the foreign exchange premium (defined as the ratio of the parallel market rate to the official rate), as a measure of macroeconomic uncertainty.9

Empirical results

55. The regression results are reported in Table 2, underlying data in Table 4. Estimates of the private investment function including all potential explanatory variables yielded implausible (wrong-signed) and insignificant parameter estimates for several variables (foreign exchange premium, import, and export price shocks). An initial specification of the investment function, excluding these variables was then estimated (equation 1); subsequently, statistically insignificant explanatory variables—public investment, and terms of trade shocks—were successively removed, to arrive at the final specification of the investment function (equation 3). The lack of significance of public investment, which holds both for central government and public enterprise investment separately, as well as the sum of the two—is somewhat surprising, given that some degree of correlation between government and nongovernment investment would appear likely.10 The overall results of equation 3 nevertheless appear robust, with over 70 percent of private investment explained by its determinants, and the significance of the estimated coefficients quite high11

Table 2.Investment Function - Specification Search 1/2/3/(Dependent variable: gross fixed private investment/GDP, in logs)(OLS estimates)
EQ1EQ2EQ3EQ3EQ3
Constant2.063**2.076**2.151**3.858*6.907**
(2.79)(2.88)(3.01)(2.24)(2.72)
Growth rate of credit flows to the nongovernment sector0.0010.001*0.001*0.00040.0003
(1.74)(1.76)(1.96)(1.03)(0.88)
REER (level, in logs)−0.355**−0.349**−0.340**−0.611*−1.405*
(−2.68)(−2.75)(−2.71)(−1.98)(−2.66)
Lagged dependent variable0.742**0.755**0.712**0.556**0.839**
(5.37)(5.91)(5.98)(3.41)(4.29)
Real GDP growth (lagged one period)0.022**0.022**0.021**0.022**0.010
(3.44)(3.56)(3.48)(2.98)(0.81)
Real interest rate (level, deflated with GDP deflator,−0.012*−0.013**−0.013**−0.012−0.018
lagged one period)(−2.06)(−2.18)(−2.35)(−1.36)(−0.77)
Terms of trade shock (in percent of GDP)0.1790.155
(0.98)(0.96)
Public investment/GDP (in logs)0.021
(0.303)
Number of observations2525251510
Adj.R-sq0.700.720.710.730.76
S.E.E.0.100.100.100.090.10
F-statistic9.0**11.1**13.2**8.61**6.57**
Breusch-Godfrey serial correlation test0.890.950.741.131.62
White’s test for heteroscedasticity0.390.530.336.92**
Jarque-Bera test for normality of residuals0.650.740.901.190.72
Period1971-951971-951971-951971-851986-95

Values in parentheses under the coefficients represent t-statisttcs; the stars indicate significance with *=10%, and **=5%.

Tests for serial correlation, heteroscedasticity, and normality were conducted and produced results implying that no correction to the least squares specification is needed, except in EQ3 estimated for the period 1971-85, where standard errors and t-statistics were computed using White’s heteroscedasticity-consistent-variance-covariance estimator.

An ADF test for unit roots on the residuals of EQ3 indicated stationarity of the residuals at the 1 percent level.

Values in parentheses under the coefficients represent t-statisttcs; the stars indicate significance with *=10%, and **=5%.

Tests for serial correlation, heteroscedasticity, and normality were conducted and produced results implying that no correction to the least squares specification is needed, except in EQ3 estimated for the period 1971-85, where standard errors and t-statistics were computed using White’s heteroscedasticity-consistent-variance-covariance estimator.

An ADF test for unit roots on the residuals of EQ3 indicated stationarity of the residuals at the 1 percent level.

Table 4.Data Underlying Regressions
PrivatePercent Change inReal EffectiveReal GDPReal
Enterprise InvestmentCredit Flow toExchange RateGrowthInterest Rate
(In percent of GDP)Nongovernment
Sector
19706.078.8201.37.52.2
19715.543.5200.811.6−0.2
19727.057.2195.617.21.7
19738.636.7194.10.5−3.4
19748.190.4178.110.0−13.2
19758.726.7180.08.1−0.7
19768.2−42.8177.88.23.1
19776.740.9171.54.9−3.4
19787.4−6.5158.06.2−0.8
19797.9−13.3152.97.2−4.6
19809.0143.6150.69.4−3.3
198111.174.2149.66.5−4.3
198211.09.3148.4−0.5−9.0
19839.24.7145.94.7−2.3
19849.0−19.8145.75.7−0.4
19858.121.3144.75.74.4
19866.5−42.9123.8−1.46.1
19875.710.6106.26.72.5
19886.3−14.5104.20.10.7
19897.5363.8102.82.63.7
19908.3−74.6100.07.16.6
19918.967.5102.13.94.8
19929.583.6104.57.85.7
19939.1−46.0100.52.24.1
199410.019.3101.23.33.8
19958.826.7103.42.44.0
Sources: Data provided by the Tunisian authorities; INS; IFS; and Fund staff estimates.
Sources: Data provided by the Tunisian authorities; INS; IFS; and Fund staff estimates.

56. The regression results point to the fact that the following domestic policy variables were the main determinants of private investment in Tunisia:

  • The lagged real interest rate has a negative effect on private investment. An increase in the real interest rate of 1 percentage point, from recently observed levels of about 4 percent, would reduce investment in the order of 0.3 percentage point of GDP.
  • The rate of growth of domestic bank credit to the nongovernment sector has a positive but very small effect, which may reflect biases deriving from the inclusion of public enterprise credit in the explanatory variable.
  • The real effective exchange rate is found to have a small negative effect. An exchange rate depreciation of 10 percent in real effective terms would increase the private investment ratio in the order of 0.3 percentage points of GDP. This would suggest that any negative “cost” effect of a real depreciation by raising the real price of imported investment goods would be more than offset by the positive “competitiveness” effects for the economy as a whole, notably by raising the profitability of the tradable goods sector.
  • The lagged real growth rate of GDP exhibits sizable positive effects on the private investment ratio. A 1 percent increase in the rate of growth in economic activity in the preceding year would raise the private investment ratio in the order of 0.5 percentage point of GDP. This effect of lagged growth may not only operate through increased economic activity, but may also play an important role on private sector expectations of short-term growth and the investment climate.

57. While the preferred equation tracks the observed path of investment reasonably well, the model misses some turning points, for example in the period 1993-95, and overpredicts investment during the late 1980s (Chart 8). This may reflect the rote of uncertainty—not captured in equation 3—on investment. The period 1986-95 was marked by comprehensive structural reform, likely associated with considerable uncertainty. As a result, the incentive for investors to wait before embarking on irreversible investments may have been strong.

Chart 8Tunisia: Actual and Estimated Private Investment, 1971-95

(In percent of GDP)

Stability of the estimated coefficients

58. The implementation of structural reforms in Tunisia since 1986, including liberalization of most domestic prices, financial sector reforms, an outward-oriented trade strategy, as well as weather-related shocks may have altered the way in which investment responded to policy changes. Accordingly, in order to investigate how sensitive the estimated coefficients are to changes in the sample period, the stability of the estimated investment function over time has been examined via forward recursions, based on an initial sample of 1971 to 1980, to which annual observations were added until reaching the full sample (Chart 9). This exercise points to considerable stability in coefficient estimates for all the explanatory variables except for credit to the nongovernment sector.12 Furthermore, the dear reduction in the standard errors as observations for the late-1980s and early 1990s are included further substantiates the robustness of the estimated coefficients.

Chart 9Tunisia: Recursive Least Square Estimates of Private Investment Equation

(Slope Parameters in Forward Recursions) 1/

1/ Recursive least squares estimates were based on samples starting in 1971 and ending in the year displayed on the time axis.

Forward recursions added annual observations one-by-one to an Initial sample covering 1971-80.

59. The analysis also points to some limited structural change in the coefficients. The impact of the real effective exchange rate on investment declines somewhat when observations after 1986 are included while the significance of the coefficient increases; tins may indicate that with greater openness, and a growing share of manufacturing in GDP, the (negative) effect of a real appreciation via its impact on the relative price of imported capital goods became stronger. By contrast, the negative effect of the real interest rate on private investment increases as observations are added after 1986, consistent with a more market-based allocation of credit through interest rates rather than quantity controls.

60. However, there is only limited evidence of a structural change in the determinants of private investment during the “pre-adjustment period” (1971-85) and the period starting with the implementation of Fund-supported programs (1986-95). Estimating the preferred equation for these periods separately (Table 2) preserves the signs of all the coefficients, and implies an even stronger role of the real exchange rate in determining investment. However, the limited number of observations makes clear-cut inferences difficult.

Explaining the performance of private investment

61. To assess how policy and exogenous factors influenced private investment, the preferred investment equation has been used to decompose the estimated change in private investment into the contribution of each explanatory variable. Table 3 presents this decomposition for four subsamples based on different phases of the private investment cycle: first growth stage (1971-75), second growth stage (1977-81), strong decline (1981-87), and recovery (1987-94).

Table 3.Tunisia: Contribution of Explanatory Variables to the Changes in the Private Investment(Based on equation 3, Table 2, 1971 to 1995)
1971-751977-811981-871987-94
Explanatory VariableEstimated

Coefficient
Estimated

Change in

PI/GDP
Share

explained

1/
Estimated

Change in

PI/GDP
Share

explained

1/
Estimated

Change in

PI/GDP
Share

explained

1/
Estimated

Change in

PI/GDP
Share

explained

1/
Growth of credit flows to the nongovernment sector0.001−0.06−20.147−0.2560.031
REER (level, in logs)−0.3400.2870.41190.91−230.125
Lagged dependent variable0.7121.67430.6329−1.85471.7266
Real GDP growth (lagged one period)0.0210.40100.2311−1.78450.5521
Real interest rate (level, deflated with GDP deflator, lagged one period)−0.0131.58410.7635−0.99250.208
Total3.871002.17100−3.961002.62100
Actual change in PI/GDP3.184.39−5.374.29
Prediction error0.69−2.221.41−1.67

In percent of total estimated change.

In percent of total estimated change.

62. A common feature of all subperiods is that the growth of credit to the nongovernment sector contributed little, whereas the real effective exchange rate contributed significantly to changes in private investment. The early 1970s were marked by significant fluctuations in the explanatory variables. Declining real interest rates, accompanied by a real effective depreciation of the Tunisian dinar, and high growth rates fueled the rise in private investment from 1971 to 1975. Similar trends during the period 1977-81 with, in addition, increased growth of credit flows to the nongovernment sector caused private investment to surge by almost 4.5 percent of GDP. However, only 50 percent of the change in investment between 1977 and 1981 is explained by the equation. Moreover, the equation underpredicts the path of actual investment for the period 1978-81.

63. The sharp decline in the private investment-to-GDP ratio from its peak of 11 percent in 1981 to 5.7 percent in 1987 is attributable to a large extent to the decline in GDP growth over the period, coupled with an increase in the real interest rate, which was only partially offset by the continued depreciation of the Tunisian dinar in real terms. The economic reforms beginning in 1986 coincided with a recovery in private investment. Both domestic price liberalization, which helped stabilize real interest rates, and other financial and external sector reforms may have contributed to the increased economic growth, which in turn contributed to the recovery in private investment and to the investment climate in general.

Conclusion

64. Notwithstanding data insufficiencies that limit the preceding quantitative analysis, it appears that real interest rates and access to credit matter for private investment, pointing to the importance of prudent fiscal policies to leave sufficient resources for private investment. The importance of the real effective exchange rate indicates that profitability in the tradables sector, where most of private investment is likely to occur, also semis to be crucial. These findings thus support the macroeconomic strategy adopted by the authorities under the IXth Plan. The impact of structural parameters, including the investment incentive system, could not be quantified. However, the increase in the investment ratio during 1987-94, may well be related to growth-enhancing structural reforms during this period, including the overhaul of investment incentives. Some of the impact of time reforms is picked up through the growth-variable, but its positive impact may have been much larger, given that investment rose much more than predicted by the estimated equation. Again, this underscores the importance of bold structural reforms to achieve the targets of the IXth Plan.

IV. Regulatory Framework Issues

Overview

65. Since abandoning a state-centered development strategy in the late 1960s, Tunisia has implemented substantial reforms to establish an institutional and regulatory framework conducive to the functioning of goods and factor markets, integrating the economy with world markets, and allowing the private sector to act as an engine of growth. To a large extent, price and marketing controls have been removed, except in agriculture, where they remain linked to socio-political concerns and the subsidization of basic food staples. The gradual liberalization of the trade and exchange system (Chapter II) has established a closer linkage of the structure of domestic relative prices to international prices. Financial sector reform has improved the allocation of capital, although important reforms have yet to be taken (Chapter VI) and foreign investment remains restricted in a number of areas. The functioning of land markets, in particular for agricultural land, is improving as weaknesses in the titling system are being addressed. Important reforms such as the modernization of the commercial code, a strengthening of creditors’ access to collateral, and the clarification of legal issues falling under several national jurisdictions, are under way. However, only recently has the divestiture of the large public enterprise sector—a legacy from the state-centered development strategy of the past—gained momentum, its pace determined by the socio-political constraints the government feces. Furthermore, restrictions on worker lay-offs and binding minimum wages, motivated by the strong concern of the government to preserve social peace and enlist support of Tunisia’s labor union for economic reform, may partly explain relatively high unemployment.

66. Tunisia’s reforms, while gradual, never suffered serious reversals, and have contributed, together with generally prudent and responsible macroeconomic policies, to a growth performance among the best in the region, though it fell well short of East Asia’s most successful economies (Chart 10). The shortfall is essentially explained on account of lower levels of investment and lesser gains in total factor productivity (Chapter VIII), reflected also in relatively low levels of foreign direct investment outside the energy sector.

Chart 10Per Capita GDP, 1970-95

(In current U.S. dollars)

Source; IMF, International Financial Statistics; WEO for Tunisia.

67. This points to an important unfinished agenda for future reform. Most importantly, there is a need to further reduce the role of the public sector in production and distribution, eliminate remaining price and marketing controls and rigidities in factor markets, and relax entry restrictions notably for foreign investors in sectors that will be crucial for future export growth. Without such reforms, adjustment to increased import competition from the implementation of the AAEU, and to increased competition on export markets because of globalization and the reduced importance of preferential access to the EU, may be costly in terms of output and employment.

Current labor market regulations

68. Current labor market regulations are the result of a long-standing social dialogue (tripartite) between the government, the labor union (Union générale des travaitteurs tunisiens-UGTT) and the employers association (Union tunisienne de I Industrie du commerce et de I ‘artisanat-UTICA). This dialogue became institutionalized in 1989, and succeeded in putting an aid to the often turbulent relations of preceding periods, thus ensuring social peace and broad-based support for economic reform. Wage and workplace-related issues have been dealt with by the tripartite in the context of 3 year sectoral agreements within the framework of an overall national agreement; the third such agreement, covering 1996-98, was concluded in mid-1996 and covers 48 sectors and an estimated 80 percent of the workforce. As during the negotiations of previous agreements, the government played a role in arbitrating between the positions of employers and workers, notably to contribute to an outcome which was consistent with its broader macroeconomic objectives. Changes in the social security system and labor legislation usually complemented the sectoral agreements.

69. The current labor code features a number of provisions that substantially affect the functioning of the labor market, although greater flexibility was introduced in 1996. Strict firing regulations stipulate that any dismissal for economic reasons is subject to prior notification and consultation with the Inspection du travail; its recommendations can be appealed to the Commission de contrôle du licenciement (CCL), a tripartite body.13 Both institutions typically propose alternative solutions often developed in lengthy negotiation involving the CCL, the employer, and the employees concerned, such as early retirement for older workers (with the cost borne by the social security fund), or higher severance pay than the minimum levels stipulated in the labor code. Frequently, these negotiations involve substantial delays.14 Revisions to the labor code in July 1996 clarified the role of both institutions, and fixed at 15 days the maximum statutory delay for the Inspection du travail and the CCL to issue their recommendations, respectively. The revisions also eased some of the other remaining labor market constraints, by eliminating the requirement to obtain approval for new hiring from the official employment agency.15 Under the revised code, fixed-term employment contracts may be freely concluded, but may not exceed a total of four years (renewals included).16 The revisions to the code also increased the employers’ flexibility regarding holidays, vacation, and length of the work week.

70. Another important feature of Tunisia’s labor market is the strict enforcement of minimum wage laws. The government sets minimum hourly wages for the non-agricultural sector (SMIG)17 and minimum daily wages for workers in agriculture (SMAG).18 The lower wage for agriculture refects the difference in cost of living between rural and urban areas but is also consistent with an estimated 20 percent difference in labor productivity (Hakim (1995)). In international comparisons, minimum wages in Tunisia tend to be rather high as a share of per capita income. Minimum wages in real terms have trended downward during the 1980s, but have been broadly constant during the 1990s (Chart 11). Although the salary grid established in the triennial wage rounds is based on the minimum wages, time is little evidence of minimum wages influencing the average wage over the longer term; wages appear to be broadly in line with productivity developments (Azam (1995)). Differentials between administratively set wages (SMIG, SMAG, and public sector wages) have been broadly constant in the last decade. The 1996 revisions also provided somewhat greater scope for firms to link wages at the firm level to individual productivity, as long as the resulting salaries are not lower than those established in the framework agreement.

Chart 11Wages Real Wage Indicators, 1981-96 1/

(1981=100)

Source: Tunisian authorities; and staff estimates.

1/ Nominal wages deflated by CPI.

2/ Minimum wage in the nonagricuttural sector.

3/ Minimum wage in the agricultural sector.

71. Finally, nonwage costs are important. Until recently, employers were charged a 17.5 percent payroll tax to the social security fund (Came nationale de sécurité sociale (CNSS))19 while the levy on employees was 7.75 percent. The employers’ contribution was lowered effective October 1996 to 15.5 percent, and a planned increase in the contribution of workers was canceled. While these contributions are generally lower than in Europe, the demographic dynamics are likely to enable the CNSS in coming years to record a modest surplus, while maintaining benefits, which currently include health care,20 pensions, family allowances and some direct transfers to the poorest, but no unemployment benefits. A new law was adopted in November 1996 which, inter alia, extended social security coverage for up to one year to unemployed members dismissed for economic reasons; the law also established that the CNSS will ensure payment of severance benefits in the case of insolvent enterprises. At the same time, the legal framework is being developed to allow employers to reduce their contributions provided they contract group health insurance for their employees with private insurers. Less favorable demographics for the civil service will, however, likely require adjustments in the operation of the CNRPS over the medium term.

72. An assessment of the employment impact of labor regulations in Tunisia is hampered by insufficient data. Labor market surveys are conducted only every few years in the context of a census or a comprehensive living standards survey (most recently in 1989 and 1994); unemployment data from the 1994 survey have not yet been made public.21 While the methodology and classifications underlying labor statistics corresponded to prevailing international norms in the 1960s, the definition of the labor force has since been modified to include actifs marginaux (unemployed workers not actively seeking a job but who were partly or fully employed in the three months preceding the poll) and actifs partiels (household workers who would accept some additional salaried employment, but are not actively seeking it).22 At the same time, Tunisian labor statistics differ also from international norms in not including among the unemployed job seekers of less than 15 or more than 60 years of age. Thus, while official statistics point to fairiy stable unemployment rates of around 15-16 percent in recent years (Table 5), applying international norms to the same data would indicate a lower rate of unemployment at around 11 percent as of 1989 (Rama (1995)). For less-qualified workers and/or first-time job seekers, available data point to particularly inefficient labor intermediation, as both vacancies and unemployment rates are high. Also, labor market regulations are likely to have contributed to the emergence of an informal sector, which according to the 1989 survey employs nearly 25 percent of the work force.

Table 5.Tunisia: Wage and Employment Indicators, 1981-96
1981198419861988198919911993199419951996
Participation rate 1/34.234.434.034.234.635.235.936.4
Of women:9.910.09.99.910.110.310.711.0
Unemployment rate 2/12.916.416.215.3
Total wage bill (TD 000 000s) 2/1,3592,4252,5503,0323,4274,2825,3885,832
Agriculture126139140146168195208
Other1,4871,4511,7702,0212,5533,2753,503
Number of wage earners (000s). 9771,1191,1731,2281,2621,3211,3951,433
Agriculture155155157158159160162
Government267283294303321339347
Other697735777801841896924
Average annual wage (TD)1,3912,1672,1742,4692,7163,2413,8624,070
Agriculture8128998919221,0571,2211,284
Government3,0413,3903,8164,1594,8645,6556,113
Other2,1341,9752,2782,5233,0353,6553,791
Average annual wage (percent change)6.5−4.66.310.010.35.55.4
Real average annual wage (percent change) 3/(8.3)(1.9)(10.2)(0.9)2.11.91.50.6
SMAG (in dinars per day)1.9082.642.9003.2003.2133.7614.3614.4614.6614.861
SMIG (in dinars per hour)0.2990.4570.4810.5290.5490.6010.6970.7070.7410.780
SMAG (in real terms, 1981 = 100) 3/100102.498.693.887.488.893.791.489.990.2
SMIG (in real terms, 1981 = 100) 3/100113.1104.398.995.390.595.592.591.292.3
Average real wage (1981 = 100)100115.3101.399.2101.3105.0113.8114.5
Agriculture wage as percent of average wage37.541.336.133.932.631.631.5
Government wage as percent of average wage140.3155.9154.6153.1150.1146.4150.2
Other sectors’ wage as percent of average wage98.590.892.392.993.694.693.2
SMIG as percent of avenge wage50.653.151.448.544.543.341.7
Sources: Ministry of Economic Development; World Bank; and Fund staff estimates.

Labor force as percent of population; World Bank data (SID).

Labor surveys and census; 1981 column corresponds to 1980 survey; 1994 data are preliminary estimates based on 1994 census.

Deflated by the average annual increase in the consumer price index.

Sources: Ministry of Economic Development; World Bank; and Fund staff estimates.

Labor force as percent of population; World Bank data (SID).

Labor surveys and census; 1981 column corresponds to 1980 survey; 1994 data are preliminary estimates based on 1994 census.

Deflated by the average annual increase in the consumer price index.

Agenda for later market reform

73. The analysis points to a number of ways to improve the functioning of the labor market and thereby raise the potential for economic growth. More flexible labor market policies will be essential to help the Tunisian industry adjust to the removal of trade protection under the AAEU by facilitating the reallocation of labor toward sectors of comparative advantage. In this context, a better monitoring of developments in the labor market is required to provide policymakers with the statistics necessary to formulate well-informed policy responses. High unemployment among the young/nonqualified points to the need to exercise caution in setting minimum wages that may represent insurmountable hurdles for low-productivity job seekers. Building on Tunisia’s good record in providing education, training could be even more attuned toward requirements of the economy; in particular vocational training, traditionally geared toward absenting dropouts from the school system, should address better the needs of enterprises. Easier lay-off procedures and more touted severance benefits would make hiring less irreversible and mistakes in hiring less costly, and thus reduce existing disincentives for offering employment. The collective bargaining system could leave more room for decentralized negotiations at the subsector/firm level; in particular, to broaden the scope for trade-offs between various benefits, firms could be allowed to negotiate wage agreements outside the conventions collectives, without being required to offer better conditions in all areas. Increased scope for fixed-term contracts and for temporary reassignment of workers could further enhance the functioning of the market.

Price controls

74. As part of its overall strategy to allow market forces a greater role in the allocation of resources, Tunisia in the mid-1980s started a process of gradually liberalizing the pervasive system of price control. Adoption of a new price and competition law in 1991 accelerated the process. The law establishes that prices are free unless explicitly regulated, and stipulates rules to prevent collusive behavior and combat restrictive practices, while promoting full disclosure of conditions governing commercial transactions. A consultative body (Conseil de la concurrence) was set up; it may initiate investigation of anti-competitive behavior, can be approached by firms or individuals who consider to have been affected by anti-competitive practices, and may be consulted by the Ministry of Commerce when deciding on the approval of mergers or acquisitions that could result in excessive market concentration. The law also specifies that the government may reinstate price controls for a period of up to six months, if necessary to protect low-income groups or in cases of insufficient competition. The number of remaining price control systems was reduced to two: (1) under the cost-plus system, which is applicable either to the production and distribution stages or to the production stage only, the government establishes a price for a certain product that applies to all producers and distributors in the sector or only to a given enterprise; and (2) under the automatic cost-plus system, which is applicable only to the distribution sector, enterprises establish their prices by applying a maximum margin set by the government. A law on domestic trade introduced in mid-1991 abolished the requirement that traders obtain authorization before engaging in retail and wholesale trading activities, thereby easing entry into the sector. New rules for the marketing of agricultural and fishing products, and establishment of a commerce register, were promulgated in 1996; and a supervisory agency (Observatoire national de l’approvisioimement et des prix) was set up to monitor the evolution of supplies and prices in Tunisian markets.

75. The list of items subject to price controls was reduced in annual tranches during 1991-95, and by end-1995 about 13 percent of domestically produced goods (measured by value added) remained controlled at the production stage; price controls at the retail stage were reduced to 19 percent of total sales. Remaining controls at the production stage mainly affect certain basic commodities, notably subsidized consumer staples including bread, flour, couscous, edible oils, sugar, powder milk—accounting for about 40 percent of goods under price control; certain goods produced or distributed by state monopolies, such as tea, coffee, tobacco, alcoholic beverages, and cement, altogether accounting for another 40 percent of controlled products; medicine, subsidized paper and books, gasoline, and motor vehicles; and finally services such as medical fees, passenger transportation, water and electricity, port handling and telecommunication services. At the retail level, controls apply to the above-listed products, as well as fruits and vegetables—despite high competition among small traders and no controls at the production stage—and cars, to limit the scope for oligopolistic profits under the protection of existing import controls.23

Subsidies

76. Tunisia has phased out consumer and input subsidies on a wide range of items, most recently on fertilizers and animal feed; consumer subsidies remain only on certain basic food staples (cereals, edible oils, sugar, milk) and on school books for social reasons. Efforts have been made to improve the targeting of subsidies by limiting them to variants of the product that are predominantly consumed by the poor. As a result, the amount of subsidies remained constant at about 2.2 percent of GDP during 1994-96. As nominal budgetary outlays for subsidies were tightly limited under the VIIIth Plan, the government accumulated arrears toward the public enterprises (mainly Office des céréales (OC), and Office national de l’huile (ONH)) who administer the subsidies; this quasi-fiscal part was financed by banks, mainly the Banque nationale agricole (BNA). Since 1996 most of the operations are handled directly by the Ministry of Commerce while before they were administered through the Caisse générale de Compensation (CGC). However, the subsidy system remains closely interrelated with a web of marketing and entry controls in the agricultural sector.24

77. The Agency for Cereal Marketing (OC) collects the local harvest through two cooperatives at administratively set prices (which have exceeded world market prices since the mid-1980s). Its quasi-monopoly for cereal imports was abolished in 1996 with the elimination of quantitative restrictions on cereal imports, but given the low fixed prices for subsidized cereals products, private imports remain unprofitable. The OC sells the cereals purchased or imported to private millers, below cost, with the difference covered by a subsidy from the CGC. Millers must sell the flour eligible for subsidy to bakeries and other food processors at a fixed price, which is below their cost (including a fixed profit margin), with the difference covered by another subsidy from the CGC, administered through the OC. Producers must sell subsidized bread, couscous, and pasta at the official price, which is set to cover cost and a fixed margin, and they do not receive subsidies. Extensive controls are aimed at preventing leakages of the subsidy, in particular diversion of subsidized flour for use in bread or pastry that is not subject to price controls.

78. Similarly, the ONH maintained until mid-1996 the monopoly on grain-based oil imports, as well as a dominant role in olive oil exports, as it is charged with administering the export quota granted by the EU. For basic varieties of edible oil covered by the subsidy scheme, the ONH allocates imported raw oil for processing to private refineries; this allocation takes place on the basis of traditional quotas reflecting capacity, rather than competitive bids, and thus does not seek to minimize costs. A practice to subsidize transportation to refineries located far away from ports (péréquation) was abolished in 1996. The ONH sells the refined grain oil to retailers at a fixed price below cost; the difference is covered by a subsidy from the CGC.

79. Three parastatals dominate the sugar sector. The Office du commerce de la Tunisie is the sole importer of refined white and unrefined brown sugar; the Société tunisienne du sucre refines brown sugar and local sugar beet and the Complex sucrierde Tunisie produces white sugar for industrial use. The latter two enterprises have to sell their output at regulated pices, and as the CGC pays the difference between total revenues and total documented costs, they have no financial incentives to be cost efficient.

80. Two parastatals (Société des industries laitiéres and Tunisie-Lait) dominate imports, processing, and distribution of milk reconstituted from milk powder although their formal import monopoly was abolished in 1990. Both receive a subsidy to cover the difference between the controlled sales prices and their cost; private distributors/importers are not eligible for the subsidy. By contrast, the government instituted in 1980 a fixed unitary subsidy for fresh local milk paid to producers, for which private factories are also eligible.

Entry restrictions

81. The current subsidy system has sustained the existence of public marketing controls or monopolies in the agricultural sector, either de jure or de facto. Cereal marketing remains largely restricted to the OC and a few cooperatives; the management of the EU export quota by the ONH has strengthened its de facto monopoly on olive oil exports; and state trading monopolies remain for tobacco and alcohol imports. Public monopolies or restrictions on private sector access are also maintained in the utilities sector such as air transport on certain lines (charter flights are liberalized), certain shipping lines, and port handling.25 It is estimated26 that resulting inefficiencies in the transport/port sectors have added about 17 percent to the transport cost of Tunisian exports, or 1.2 percent of average export value, implying a serious impediment for Tunisia’s export competitiveness.

82. Outside agriculture and public utilities, restrictions on investment have been substantially liberalized over the past ten years, although controls are maintained in a number of areas, (see Chapter III for the evolution of investment regulations). Tax incentives for investment since 1993 are granted on a horizontal basis, although certain sector-specific incentives persist. A number of additional restrictions apply to foreign investment in certain sectors.

Land markets

83. The land tenure system is an important constraint on the further development especially of agriculture (World Bank (1995)). Many existing titles are outdated as recent changes in ownership have not been recorded in titles, although regional commissions were set up in 1992 to resolve tilts issue, in the context of new legislation aimed at speeding up the process of changing title. The law specifies that from 1998, only changes in ownership recorded in title will be legally recognized. Large areas of government land are awaiting title registration.27 Farmers in any area may register their land and obtain title by paying a small fee. In addition, in rural areas, selected lands—particularly in irrigated areas—are being registered in newly established cadastres free of charge under specific programs spelled out in the five-year plans. A program initiated in 1991 that leases prime state land formerly managed by cooperatives to private farmers or cooperatives has been highly successful in boosting productivity.

Reform agenda

84. Ensuring high growth in the coming years, despite the drying up of traditional sources of growth (hydrocarbon discoveries, preferential access to European markets), and despite likely transitional strains in the industrial sector as tariff protection is dismantled under the AAEU, will require an acceleration of structural reforms to achieve the private investment levels and gains in factor productivity called for to achieve the objectives of the IXth Development Plan (1997-2001).

85. A number of reforms are already under way in the context of the mise à niveau program supported by the EU, as well as reforms supported by World Bank lending. For example, in the context of a World Bank-supported program, Tunisia committed to specific targets for 1997 to accelerate privatization, lift restrictions on private sector access to shipping and port handling; revise the corporate law notably to modernize merger and takeover rules, and clarify the legal basis for holding or single-shareholder companies; adopt a new Private International Law to clarify legal rules for cases that fall under several national jurisdictions; and prepare by mid-1997 a medium-term strategy for the telecom sector that would include incorporation of Tunisia Telecom (currently a government body) as an autonomous public enterprise, while opening certain services using the public network to the private sector. Preparatory work is also under way to modernize the commercial law (especially as regards payment rules, and regulations for new type of commercial contracts such as factoring and franchising), and strengthen real and private property regulations to allow better enforcement of creditor rights. Efforts to facilitate the functioning of land markets are underway.

86. Other reforms would be needed to complete the transition to a market-based, private sector-driven economy. These include notably abolition of remaining price controls. Abuses could be dealt with through the anti-monopoly commission, while accelerated import liberalization can also help to reduce the scope for domestic market power, which seems anyway rather limited for most of the food products still under price control. Remaining controls in marketing will need to be removed concurrent with subsidy reform. If food subsidies were to be maintained, the authorities could explore ways to move to a system of fixed unitary subsidies for the varieties consumed by the poor, and payment of subsidies could furthermore be made dependent on world market prices exceeding certain thresholds. This would establish transparent and binding budgetary envelopes for subsidies outlays, and would allow to: (i) eliminate controls on the collection of cereals from farmers; (ii) fully liberalize the importing and refining of edible oils; and (iii) enhance competition in the sugar industry.

87. Remaining entry controls in the transportation sector constitute serious handicaps for the overall economy. For public utilities more generally, a bolder pace in involving the private sector in the provision of such services (including through build-operate-transfer agreements) would improve infrastructure services. Finally, investment controls in particular sectors, including on foreign investment, run counter to Tunisia’s aim to boost investment levels and accelerate technology transfer, and likely constrain Tunisia’s export opportunities. While it may be politically too difficult to lift controls on foreign land ownership soon, other controls could be eliminated swiftly. Environmental, health, or moral concerns motivating such restrictions can be addressed more efficiently through economy-wide regulations that need to be strictly enforced.

V. Fiscal Policy Over the Medium Term

88. Fiscal policy remains at the center of Tunisia’s efforts to consolidate macroeconomic stability and achieve higher economic growth. Generally prudent budgetary policies in recent years have contributed to sustainable macroeconomic balances and resulted in a declining trend of public debt in relation to GDP. At the same time, during the period of the VIIIth plan (1992-96), the deficit exceeded the budget target each year, which may have contributed to the shortfall in economic growth performance compared with plan objectives. This chapter analyzes Tunisia’s fiscal profile and compares it with that of high growth countries in other regions. It also describes the authorities’ fiscal objectives for 1997-2001 and discusses the challenges for achieving them.

Current fiscal profile

89. The deficit of the consolidated central government operations amounted to 4.7 percent of GDP in 1996 (Table 6). The concept used includes the social security system, takes into account the quasi-fiscal outlays of the public food agencies, but excludes grants.

Table 6.Tunisia: Consolidated Financial Operations of the Central Government, 1991-96 1/
Prel.
199119921993199419951996
(In millions of dinars)
Revenue and grants3,5294,0954,4955,0225,1665,710
Revenue3,4964,0384,4424,9595,1215,667
Tax revenue2,8783,2883,5903,9614,2634,737
Social security contributions426478510678771958
Taxes on foreign trade587679715754799766
Other1,8652,1312,3652,5292,6933,013
Nontax revenue618750852998858930
Grants335753634543
Expenditure and net lending4,2484,5685,0585,3365,8646,550
Expenditure4,1074,4484,9385,1965,7396,484
Current expenditure3,1883,5453,9274,2094,6365,209
Wages and salaries1,1651,3101,4501,6091,7761,969
Goods and services265314337347357385
Interest payments421456539587684831
Domestic debt 2/174210258267339473
External debt246246281321345358
Subsidies and other current transfers1,3371,4641,6021,6661,1202,024
Social security benefits472532602666747874
Consumer subsidies by CGC 3/289338321319346418
Other576594679681727732
Capital expenditure9199031,0119871,1031,276
Direct investment546600681663746837
Capital transfers373303330324357439
Net lending14212012014012565
Overall deficit (-) including grants−719−473−563−314−698−840
Financing719473563314698840
Foreign (net)286141175218490444
Domestic43333238896208397
Banking system 4/45−166−47−78−89−102
Nonbank388497435174297498
of which: arrears of the CGC15538895155302
(In percent of GDP)
Revenue29.129.530.331.430.129.9
Tax revenue (excluding social security)20.420.521.020.820.519.9
Social security contributions3.53.53.54.34.55.0
Nontax revenue5.15.55.8635.04.9
Expenditure and net lending35.333.334.533.834.534.5
Current expenditure26.525.926.826.627.327.5
Capital expenditure7.66.66.96.26.56.7
Net lending1.20.90.80.90.70.3
Overall deficit (-) including grants−6.0−3.4−3.8−2.0−4.1−4.4
Overall deficit (-) excluding grants−6.2−3.9−4.2−2.4−4.4−4.7
Primary balance, excluding grants−2.8−0.5−0.51.3−0.3−0.3
Public debt 5/60.755.559.359.057.655.1
Foreign40.536.238.939.038.536.8
Domestic20.219.320.420.019.118.3
Source: Data provided by the Tunisian authorities.

Includes special funds, fonds de concours, operations financed abroad, net treasury operations and the social security funds.

Includes interest on arrears related to operations of the consumer subsidy fund (CGC).

Includes arrears of the consumer subsidy fund.

Excludes social security system.

Includes government debt instruments held by the social security system; excludes debt of the social security system.

Source: Data provided by the Tunisian authorities.

Includes special funds, fonds de concours, operations financed abroad, net treasury operations and the social security funds.

Includes interest on arrears related to operations of the consumer subsidy fund (CGC).

Includes arrears of the consumer subsidy fund.

Excludes social security system.

Includes government debt instruments held by the social security system; excludes debt of the social security system.

90. Government revenue stood at 30 percent of GDP, including social security contributions and non tax revenue (mainly investment income and operating surpluses of government enterprises) equivalent to 5 percent of GDP each (Table 7). Receipts of central government taxes amounted to 20 percent of GDP, comprising direct tax revenue of close to 5 percent of GDP. Indirect taxes included import tax receipts of 4 percent of GDP, with the balance consisting mainly of VAT receipts on imports and domestically produced goods (5.3 percent of GDP) and excises on petroleum products, alcohol, tobacco and luxury items (3.4 percent of GDP).

Table 7.Tunisia: Consolidated Revenue and Grants of the Central Government by Main Categories, 1991-96
Prel.
199119921993199419951996 1/
(In millions of Tunisian dinars)
Revenue3,4964,0384,4424,9595,1215,667
Tax revenue2,8783,2883,5903,9614,2634,737
Taxes on income and profits501562698734807891
of which: petroleum sector827569405847
Social security contributions426478510678771958
Taxes on payroll345157586259
Property taxes697887656873
Taxes on goods and services1,1831,3541,4421,5861,6431,855
VAT6798008438558991,010
Excises401443479.2589596644
Other103111120142148202
Taxes on international trade and transactions597691763771815766
Import Taxes576670706745790758
Export taxes12991098
Other10111216417
Other tax revenue6875707097135
Nontax revenue606747849994855903
Petroleum sector254296301349302309
Other nontax revenue351451549645535594
Capital revenue12334327
Grants335753634543
Total revenue and grants3,5294,0954,4955,0225,1665,710
(In percent of GDP)
Revenue29.129.530.331.430.129.9
Tax revenue23.924.024.525.125.125.0
Taxes on income and profits4.24.14.84.64.74.7
Social security contributions3.53.53.54.34.55.0
Taxes on goods and services9.89.99.810.09.79.8
of which: VAT5.65.85.75.45.35.3
Excises3.33.2333.73.53.4
Taxes on international trade and services5.05.05.04.94.84.0
of which: import duties4.84.94.84.74.64.0
Other tax revenue 2/1.41.51.41.31.41.4
Nontax revenue5.25.55.86.35.04.8
Petroleum sector2.12.22.02.21.81.6
Other 3/3.13.33.84.13.23.2
Sources: Ministry of Finance; and Fund staff estimates.

Breakdown of included earnmarked revenue between categories is based on staff estimates.

Includes taxes on payroll and property taxes.

Includes capital revenue.

Sources: Ministry of Finance; and Fund staff estimates.

Breakdown of included earnmarked revenue between categories is based on staff estimates.

Includes taxes on payroll and property taxes.

Includes capital revenue.

91. Central government expenditure amounted to 34 percent of GDP in 1996—about 30 percent of GDP, excluding social security benefits (Table 8). Capital expenditure amounted to about 7 percent of GDP, mainly for direct capital formation but also including capital transfers to public enterprises. Current expenditure of the central government, totaling 23 percent of GDP, consisted mainly of wages and salaries (10 percent of GDP), transfers to households, including for food subsidies through the budget or extra-budgetary food agencies, and to public sector and parastatal agencies such as local governments, schools, hospitals, regulatory bodies (6 percent of GDP), and interest payments (4 percent of GDP).

Table 8.Tunisia: Economic Classification of Consolidated Expenditure of the Central Government, 1991-1996 1/
Prel.
199119921993199419951996
Current expenditure3,1883,5443,9274,2094,6365,209
Wages and salaries1,1651,3101,4501,6091,7761,969
Goods and other services265314337347357385
Interest on public debt421456539587684831
Foreign debt246246258321345358
Domestic debt174210281267339473
Subsidies and other current transfers1,3371,4641,6021,6661,1202,024
Of which:
Social security benefits472532602666747874
Transfers to households399474464478513580 2/
Of which: food subsidies289338321319346418
Subsidies to nonfinancial public enterprises393143413925 2/
Subsidies to financial institutions282833------ 2/
Transfers to government entities and parastatals 3/336366391421450465
Capital expenditure9199031,0119871,1031,276
Direct investment546600681663746837
Capital transfers373303330342357439
Of which: to nonfinancial public enterprises251272298299330400 2/
Total expenditure4,1074,4474,9385,1965,7396,484
(In percent of GDP)
Current expenditure26.525.926.826.627.327.5
Wages and salaries9.79.69.910.210.410.4
Goods and other services2.22.32.32.22.12.0
Interest on public debt3.53.33.73.74.04.4
Subsidies and other current transfers11.110.710.910.510.710.7
Of which:
Social security benefits3.93.94.14.24.44.6
Transfers to households3.33.53.23.03.03.1
Of which: food subsidies2.42.52.22.02.02.2
Subsidies to nonfinancial public enterprises0.20.20.30.30.20.1
Subsidies to financial institutions0.30.20.2
Transfers to government entities and parastatals2.82.72.72.72.72.5
Capital expenditure7.66.66.96.26.56.7
Direct investment4.54.44.64.24.44.4
Capital transfers and equity3.12.22.32.12.12.1
Of which: to nonfinancial public enterprises2.12.02.01.91.92.1
Total expenditure34.132.433.732.933.734.2
Source: Ministry of Finance

Includes all expenditure in the treasury accounts, extrabudgetary operations financed by external assistance, and expenditure of the social security funds.

Estimated.

Includes local governments, établissements publics à caractère administratif and établissemtnts à caractère industrial commercial non-marchands.

Source: Ministry of Finance

Includes all expenditure in the treasury accounts, extrabudgetary operations financed by external assistance, and expenditure of the social security funds.

Estimated.

Includes local governments, établissements publics à caractère administratif and établissemtnts à caractère industrial commercial non-marchands.

Recent evolution of government finances

92. The deficit in 1996 is broadly comparable to the average for 1991-96 (4.3 percent of GDP). However, this similarity masks a trend involving a steady reduction in the deficit to a low of 2.4 percent in 1994 that was reversed thereafter. On the expenditure side, the decline in capital transfers during 1992-94 was followed by substantial budget overruns for food subsidies during 1995 and 1996 and rising interest payments, partly reflecting the payment of interest on arrears related to food subsidies. However, the principal cause of the widening deficit during 1995-96 is found on the revenue side where increased social security contributions were more than offset by a sharp decline in petroleum revenue and profit transfers from public enterprises to the central government, lower investment income of the social security fund, and by the impact of import tariff reductions.

Comparison with fiscal trends in other regions

93. Tunisia’s fiscal deficit, while lower than the average for the Middle East and Europe, in recent years exceeded that of Asian and Western Hemisphere countries (Table 9). Western Hemisphere countries lowered their fiscal deficit from over 4 percent of GDP during 1983-89 to near balance during 1990-95; their average real GDP growth (at 2.7 percent during 1990-95) was however well below that registered by Tunisia. Asian countries, by contrast, recorded an average deficit equivalent to 2.3 percent of GDP while registering real GDP growth of 8 percent on average, performing better than Tunisia on both accounts.

Table 9.Developing Countries: Budgetary and Economic Indicators by Region(Annual averages; in percent of GDP unless otherwise noted)
1975-821983-891990-95
Asia
Central government fiscal balance 1/−3.1−3.4−2.3
Central government revenue 1/19.318.215.6
Central government expenditure22.421.617.9
Current expenditure17.515.913.1
Real GDP 2/6.87.78.0
Middle East and Europe
Central government fiscal balance 1/−3.2−12.2−7.2
Central government revenue 1/40.328.927.3
Central government expenditure43.541.134.5
Current expenditure26.626.326.2
Real GDP 2/3.52.73.8
Western Hemisphere
Central government fiscal balance 1/−2.3−4.4−0.3
Central government revenue 1/10.214.117.5
Central government expenditure12.618.417.8
Current expenditure10.915.515.4
Real GDP 2/4.22.02.7
Tunisia
Central government fiscal balance 1/−5.1−3.3
Central government revenue 1/33.730.5
Central government expenditure38.833.8
Current expenditure27.326.7
Real GDP 2/5.63.64.4
Source: WEO, May 1996.

Including grants.

Annual percent change.

Source: WEO, May 1996.

Including grants.

Annual percent change.

94. The share of the central government in the Tunisian economy is much larger than in Asian or Western Hemisphere countries, where central government expenditure averaged about 18 percent of GDP during 1990-95, and current outlays ranged between 13-15 percent. In Tunisia, current outlays were far higher, in line with the higher levels in the Middle East and Europe region.

Fiscal policy and growth

95. The relationship between the fiscal policy stance and longer term growth is complex and operates through a number of channels28 The net contribution will depend, inter alia, on the extent to which government expenditure is directed toward increasing the stock of productive physical and human capital; the extent to which the provision of government services complements private sector activity; the extent to which fiscal deficits crowd out private sector investment; the effects of fiscal deficits on macroeconomic stability in general; and the effect of complementary structural reforms needed to elicit the private sector’s supply response. There is empirical evidence that capital expenditure on transport and communication has a strong positive impact on growth, while public investment in agriculture has a negative and investment of public enterprises no effect (Easterly (1993)). A comparison of countries ranked by the size of fiscal deficits,29 confirmed that the group of countries characterized by small fiscal deficits during 1983-95 had typically much higher growth rates than countries that had moderate or large deficits.

Quality of government expenditure and revenue in Tunisia

96. Relatively low levels of government expenditure in high growth countries often reflect well-designed and efficiently allocated outlays on infrastructure and human capital development. In Tunisia, the share of education and health in total government expenditure has been consistently high, at 6 and 2 percent of GDP, respectively, and has contributed importantly to productivity growth and improved social indicators (Table 10). By comparison, for a group of countries covered in a recent study, expenditure on education amounted to an average of 3.6 percent of GDP and that on health to 1 percent (Mackenzie et al. (1997)). Substantial capital outlays have also been directed at the agricultural sector and the building of infrastructure, especially in the area of transportation and ports, with a view to supporting and complementing private sector investment. On the other hand, despite progress in recent years, consumer subsidies remain high and partly benefit the better off. Tunisia’s wage bill as a share of GDP is about twice the average of the group of countries mentioned above. Moreover, there remains room for enhancing the efficiency of government outlays in education by reducing drop-out rates in basic education, and in the health sector by improved targeting of free health care to the needy and increasing cost recovery (World Bank (1995a)).

Table 10.Tunisia: Functional Classification of Central Government Total Expenditure, 1991-95 1/
19911992199319941995
(In millions of Tunisian dinars)
Total40924394485151015584
General public services432424454449472
Defense241256277301324
Public order and security241287315353382
Education6667708389031024
Of which:
Higher education148159116194120
Health262294316359392
Social security and welfare558641699809891
Housing and infrastructure207240328291273
Culture, recreation and religious affairs100128161160156
Economic services9799179519251015
Of which:
Agriculture, forestry and fishing369337352382456
Transportation and communications96103165110120
Other405437512553635
(In percent of GDP)
Total34.032.133.132.332.8
General public services3.63.13.12.82.8
Defense2.01.91.91.91.9
Public order and security2.02.12.12.22.2
Education5.55.65.75.76.0
Of which:
Higher education1.21.20.81.20.7
Health2.22.12.22.32.3
Social security and welfare4.64.74.85.15.2
Housing and infrastructure1.71.82.21.81.6
Culture, recreation and religious affairs0.80.91.11.00.9
Economic services8.16.76.55.96.0
Of which:
Agriculture, forestry and fishing3.12.52.42.42.7
Transportation and communications0.80.81.10.70.7
Other3.43.23.53.53.7

Excludes quasi-fiscal outlays related to food subsidies.

Excludes quasi-fiscal outlays related to food subsidies.

97. With major tax reforms enacted in 1987-90, Tunisia has established an efficient and modern tax system based on a uniform treatment of the various categories of spending and sources of income. By broadening the tax base and rationalizing the tax and tariff structure, the reforms also contributed to increasing the equity and elasticity of the tax system. However, several distortions remain, resulting from various exemptions, in particular regarding import duties; suspension regimes and multiple rates under the VAT system; different treatment between imports and domestic goods for certain excise taxes; and the deductibility of investment from taxable profits reserved for newly issued equity. In addition to its distortive effects, the tax benefits under the investment code result in a substantial loss of revenue.

98. Flow of funds data allow to situate the government in the total economy and show how the operations of the government, the banking system, the nongovernment sector and the rest of the world are interrelated (Table 11). They indicate the contribution of the government and nongovernment to the external current account balance and its financing, and highlight the role of the government in the intermediation of financial resources. Owing to data constraints, a consolidation of the government with parastatals and public enterprises, with a view to present the relations between a comprehensive public sector and the private sector, is not possible. However, as the level of retained earnings by the public enterprises is likely low, the extension of the analysis to the whole public sector would largely leave public sector saving unchanged. Also, with the addition of capital transfers and net lending to government investment, most of public sector investment would be captured.

Table 11.Tunisia: Flow of Funds in 1996
TotalGovernmentNongovernmentBanking system
(In percent of GDP)
Investment24.64.420.20.0
Saving 1/21.72.619.00.0
Saving-investment gap 1/−3.0−1.8−1.20.0
Financing3.01.81.20.0
Foreign financing3.02.3. 2.2−1.6
Capital grants0.70.00.70.0
Loans 2/0.92.30.1−1.6
Direct investment1.30.01.30.0
Domestic financing−0.6−1.01.6
Banking system 3/−0.5−1.01.6
Deposits0.0−5.45.4
Credit−0.56.8−6.2
Other0.0−2.42.4
Nonbanks 4/0.00.0
Capital transfers−2.32.3
Net lending−0.30.3
Arrears1.6−1.6
Treasury bills2.5−2.5
Negotiable treasury bonds0.1−0.1
Equipment bonds
(placed by banks)−0.10.1
(placed directly by Treasury)−0.10.1
National treasury bonds−0.10.1
Deposits with CENT (Savings Bank)0.1−0.1
Other 4/−1.31.3
Sources: Data provided by the Tunisian authorites; and staff estimates.

Based on external current account.

For banking system, consists of changes in net foreign assets.

For government, reflects changes in the net position of the central government excluding social security system with the banking system.

For all subcategories except “other” and equipment bonds placed directly by the Treasury, the social security system is included in nongovernment. “Other” includes the social security system’s financing.

Includes changes in the deposit position of public entities with the Treasury.

Sources: Data provided by the Tunisian authorites; and staff estimates.

Based on external current account.

For banking system, consists of changes in net foreign assets.

For government, reflects changes in the net position of the central government excluding social security system with the banking system.

For all subcategories except “other” and equipment bonds placed directly by the Treasury, the social security system is included in nongovernment. “Other” includes the social security system’s financing.

Includes changes in the deposit position of public entities with the Treasury.

99. Reflecting the government’s transfer of resources in the form of capital transfers and net lending to public enterprises and parastatals for investment purposes, the saving-investment gap is considerably smaller than the overall deficit including grants. In 1996, the gap amounted to 1.8 percent of GDP, accounting for 60 percent of the external current account deficit. Investment of the government represented slightly more than one fifth of total investment, or about the same as the average for the period 1991-96; government saving accounted in 1996 only for about one seventh of the total, well below the average during the same period.

100. The government’s role in financial intermediation is illustrated by its borrowing abroad in excess of its financing needs, and the transfer of funds to public enterprises and other entities financed through the placement of treasury debt instruments with the nonbank sector. In 1996, the excess foreign financing allowed a further reduction in the government’s indebtedness to the domestic banking system which helped the latter to increase its net foreign assets. While there was no net flow of funds between the government and the nongovernment sector, funding of the capital transfers and net lending by the government to public enterprises was provided in part by the placement of treasury paper with the nonbank public.

Medium-term fiscal strategy

101. The medium-term macroeconomic framework under the IXth Plan aims at raising government saving as a ratio to GDP from 2.6 percent in 1996 to 6.0 percent in 2001, and at shifting the saving-investment balance of the central government from a gap of 1.8 percent of GDP in 1996 to a surplus of 0.2 percent in 2001 (Table 12). Consistent with these targets, the plan calls for a reduction in the deficit of central government operations from 4.7 percent of GDP to 1.7 percent over the plan period.

Table 12.Tunisia: Medium-Term Macroeconomic Scenario, 1992-2001
Outturn

VIIIth Plan
Prel.IXth Economic Development Plan
1992-96199619971998199920002001
Annual
Averages
(Percentage change)
Real GDP growth4.56.95.75.56.26.56.6
Consumer prices4.93.73.93.93.63.53.5
(In percent of GDP; unless otherwise indicated)
Gross national saving20.621.722.422.923.924.925.9
Consolidated central government 1/3.82.64.34.64.85.46.0
Rest of the economy16.819.018.118.319.119.519.9
Gross investment26.424.625.325.726.527.428.0
Consolidated central government 1/4.44.45.25.35.55.65.7
Rest of the economy22.020.220.220.321.021.822.3
Saving-investment gap−5.9−3.0−3.0−2.8−2.6−2.5−2.2
Consolidated central government 1/−0.7−1.8−0.9−0.8−0.7−0.20.2
Rest of the economy−5.2−1.2−2.0−2.0−1.9−2.3−2.4
Overall fiscal deficit 1/−3.9−4.7−2.9−2.5−2.9−2.2−1.7
Revenue30.229.929.929.829.729.629.6
Expenditure and net lending34.134.532.832.732.431.831.2
Total central government debt 2/57.455.153.351.148.746.043.2
External current account−5.7−3.0−3.0−2.8−2.6−2.5−2.2
External debt53.952.049.347.444.942.640.3
Debt service ratio (in percent of current receipts)19.318.918.919.018.719.916.8
Non-energy export volume (percentage change)4.8−3.68.06.97.48.18.6
Source: Tunisian authorities.

Central government, including the social security system.

Excludes debt by the food agencies related to food subsidies and guaranteed by the government, equivalent to about 4.7 percent of 1996.

Source: Tunisian authorities.

Central government, including the social security system.

Excludes debt by the food agencies related to food subsidies and guaranteed by the government, equivalent to about 4.7 percent of 1996.

102. The authorities intend to achieve the envisaged fiscal consolidation by a gradual reduction in expenditure and net lending, while revenue would decline marginally to 29.6 percent of GDP during 1997-2001. The reduction in the expenditure ratio will be concentrated on current expenditure which is targeted to decline by 3.7 percent of GDP. The reduction in outlays for wages and salaries is predicated on the pursuit of comprehensive administrative and civil service reforms, consistent with adapting the role of the government to a private sector-led economic growth strategy. While civil service reform and the pruning of unproductive outlays would result in budgetary savings, there will also be a need for upgrading the civil service, necessitating additional training, and improving the quality of government services. Reform efforts will need to be stepped up to reduce outlays for food subsidies, including through better targeting, while containing the growth of social security benefits in the context of ongoing efforts to extend the scope for private insurance and guaranteeing only a minimum coverage through the public system. Capital expenditure, mostly on infrastructure and equipment, is projected to increase during the IXth Plan by about 1 percent of GDP.

103. Under the plan, revenue will be adversely affected by several developments, which will require the adoption of new revenue measures. Revenue related to the activities of the petroleum sector is projected to decline in line with the gradual reduction in domestic crude oil production as reserves are depleted, which is not expected to be fully offset by revenue from the temporary expansion of the output of natural gas. Net proceeds from privatization, while increasing, will remain modest, reflecting in part the costs associated with the privatization process such as the settlement of public enterprise debts. In addition, revenue from the transfer of dividends and profits from state enterprises may be affected by the costs of further restructuring, as well as the sale of profitable enterprises. The gradual elimination of import tariffs in the context of the AAEU would result in a loss of tax revenue, which is estimated to reach gradually the equivalent of 1.7 percent of GDP by 2001 (Chapter II). In the circumstances, the authorities envisage introducing a series of revenue measures to keep the tax revenue to GDP ratio unchanged as provided under the plan.

104. The 1997 budget has made a start in implementing this fiscal program. It aims to reduce the overall deficit to 2.9 percent of GDP through a reduction in expenditure while revenue would remain constant, both as a percent of GDP. The reduction in expenditure would be achieved mainly by a cut in consumer subsidies resulting from increases in administered prices and lower world food prices. The effect of a cut in employer contributions to social security would be offset by an increase in energy taxes and revenue from the VAT.

Agenda for fiscal reforms

105. As indicated above, the plan envisages a considerable strengthening of the fiscal position, with a narrowing of the deficit by about 3 percent of GDP and an increase in investment. Such strengthening will be critical for achieving the growth objective of 6 percent: 40 percent of the increase in gross investment and 80 percent of the improvement in the saving rate is to come from the government. In addition, the fiscal strategy will also need to enhance the role of the private sector in economic activity and productive investment.

106. A more rapid reduction in the government deficit than envisaged under the IXth Plan would increase the likelihood for achieving these objectives. First, a more rapidly declining deficit would result in a faster increase in national saving and stimulate higher private investment through lower real interest rates, including through a reduction of risk premia by lowering future levels of government debt. Second, farter consolidation could further strengthen the confidence of foreign investors and thus raise foreign investment. Third, it would create a larger margin of maneuver in the case of unforeseen events. The positive impact on growth of a more rapid reduction in the government deficit could be further enhanced to the extent that it is achieved by restraining unproductive expenditures.

107. On the revenue side, the main challenge will be to replace the revenue lost through the removal of import duties in the context of the free trade arrangement with the European Union, while continuing supporting growth through a broadening of the tax base and the removal of distortions.

108. For indirect taxes, the main efforts will need to be directed at further streamlining the VAT. Specific measures could include the gradual elimination of multiple rates and their consolidation at the normal rate, presently set at 17 percent; the reduction of exemptions and the elimination of suspensions; and the establishment of a system for the early and unlimited settlement of VAT credits and the elimination of the outstanding stock of such credits. A simultaneous implementation of the various measures would be beneficial as they are mutually supportive: while removing distortions in resource allocation, eliminating multiple rates would also help reduce VAT credits; and the introduction of full and early settlement of tax credits would facilitate the elimination of suspensions, especially for capital goods. Excise taxes should be applied without attempting to discriminate against imports. Increases in excise taxes on petroleum products would help reach revenue targets and contribute to reducing pollution.

109. Receipts from income and profit taxes could be increased substantially by eliminating the tax advantages granted under the investment code. Any negative impact of the phasing out of such benefits on the level of investment could be more than offset by further improvements in the regulatory and legal framework that affect the overall investment climate, as well as by the tariff reduction under the AAEU which will make exemption from import taxes superfluous. The removal of advantages to specific activities would further strengthen the nondistortionary nature of the tax system and, in particular, contribute to an equal treatment between export and import competing enterprises. The phasing out of the income and profit tax benefits could be accompanied by a further increase in the minimum tax obligations of enterprises benefiting from these advantages. In addition, the minimum profit tax under the general regime could be raised.

110. A further strengthening and modernization of the tax and customs administrations would assist in preserving the growth of tax revenue even while import duties are scaled back. Actions will need to be undertaken to further improve tax assessment and increase the effectiveness of collection procedures, including the stepping up of the pursuit of noncompliance together with tightening of sanctions. Tax auditing performance could be increased by targeting more of the available resources on large enterprises. A better distribution of tasks between collection and control units, and an enhanced collaboration between the customs and tax administrations would increase overall productivity in revenue raising. Furthermore, a closer monitoring of the use of various exemptions and other tax advantages is required.

Main reform measures on expenditure side

111. To adapt the civil service to changes in the role of the government and slow the growth of the wage bill, the civil service reform (mise à niveau de l’administration) will need to be accelerated. A redefining of government tasks would allow a reduction in overhead, transfer of activities to the private sector, and a redeployment of staff to areas of highest priority such as education and health. In addition, in the latter sectors, the cost effectiveness of public institutions could be enhanced and the role of private institutions enlarged. Similar reforms need to apply to the parastatal entities, and would reduce transfers from the budget to parastatal agencies as these are primarily used to help fund their outlays for wages and salaries.

112. Critical to the slowdown of government expenditure will be the containment and gradual reduction of food subsidies. Further measures need to be taken to strengthen the targeting of benefits under the program to low income groups, pursue the gradual adjustment in prices, and step up efforts to increase the efficiency of program administration. To better restrict the scope of the program the product differentiation approach could be enhanced. In this context, the liberalization of the import and marketing of more expensive goods may help divert the demand of wealthier households away from subsidized commodities. In the implementation of regular price adjustments, higher increases could be introduced for products with a relative larger consumption by high income groups. Another measure to reduce the overall subsidy cost would be to extend the system of unitary subsidies introduced for milk products to other goods, especially cereal products; this would also strengthen incentives for efficient production. With a view to reducing costs of administering the program, it could be envisaged to subsidize directly the milling and oil refinery enterprises, instead of dealing through the parastatals in charge of cereals and vegetable oil. The system of direct income support, presently used to compensate targeted groups for the effects of increases in prices of subsidized commodities, could be strengthened and ultimately replace generalized food subsidies by direct, well-targeted support.

VI. Financial Sector Issues

Background

113. There is considerable evidence that financial sector development and economic growth go hand in hand. A large body of literature sees the causality as running mainly from financial sector reform to growth, operating through channels such as the level of savings mobilized, the volume of resources intermediated through the financial system, and the efficiency with which resources are allocated towards the most productive use.30 An important aspect of the latter is the ability of financial institutions to monitor the performance of borrowing enterprises and impose necessary adjustments quickly.

114. Experience in Tunisia conforms with this view. While reforms started later and are even now not yet as advanced as in the most successful East-Asian countries, time is evidence that the important financial sector reforms undertaken in the last 15 years haw contributed to higher levels of savings and greater efficiency of the financial system, though evidence of a direct impact on growth seems more difficult to establish31 As in many other countries, the reforms involved essentially a gradual reduction in financial repression, and in particular a lesser role of the state in directing financial resources toward particular uses. Financial reform was thus part of Tunisia’s broader move toward a strategy of market-based and private-sector driven growth, and away from the state-centered development strategy adopted after independence, with its focus on elements of central planning such as control over prices and investment, and the building of a large public enterprise sector under heavy trade protection.

Reforms and results

115. Financial sector reforms at first centered on the banking system, as the backbone of the financial system. During the 1980s and early 1990s, interest rates were gradually liberalized; competition between banks was enhanced, including through relaxing requirements that enterprises deal with specific banks (“domiciliation”) and other regulations32 that effectively had compartmentalized the banking system. The central bank authorized several offshore banks as well as a major international bank to establish subsidiaries in Tunisia. Direct credit controls were phased out, and the Central Bank of Tunisia (BCT) moved to employing more indirect instruments of monetary control, such as reserve requirements and repurchase agreements to refinance commercial banks. These reforms were underpinned by the treasury’s move to a more market-based financing of the budget, concomitant with fiscal consolidation, which allowed for the elimination of elements of financial repression such as obligations for banks and other financial institutions to hold minimum amounts of government paper. As banks obtained greater freedom in their lending decisions, the authorities complemented these measures with enhanced banking supervision and prudential regulations while specific restructuring plans were applied to some problem banks.33

116. In the early 1990s,34 Tunisia also moved to strengthen financial services outside the banking system. Based on reforms of the legal and regulatory framework of the stock market in 1989 and 1994, banking and brokerage functions were separated, and management of the Tunis bourse was transferred to the brokers’ association. More recently, the clearing house of the bourse (Société des dépôts, de compensation et de règlement) has adopted the electronic settlement system of the Paris bourse. An independent supervisory commission (Conseil du marché financier) was set up to ensure transparency of transactions in the stock market and to enforce disclosure and prudential requirements of publicly traded firms. The need for treasury approval of private debt issues was abolished in 1993 while recent efforts have focussed on reforming the design of government paper and on strengthening the clearing and settlement mechanisms to deepen the secondary market for treasury bonds.

117. Narrow measures of the depth of financial markets confirm the progress made but also highlight the remaining distance from more advanced financial systems. Real interest rates have been positive since the mid-1980s, and have broadly converged during the 1990s with rates in partner countries (Chart 12), although the absence of a systematic premium over, say, French rates,35 may reflect some remaining market distortions and capital controls. Credit to government in recent years declined rapidly as a share of total bank credit (Chart 13 and Table 13). This reflected both a relatively prudent fiscal stance in recent years, and the move to nonbank domestic and foreign financing for the budget. The ratio of broad money (M2) over GDP, a commonly used indicator of financial deepening, shows that while on an increasing trend through 1990—when the introduction of excessively liquid treasury paper (bans cessibles) led to some substitution of both deposits and savings accounts—the ratio remained well below most comparable countries (Chart 14). A broader measure, including the bans cessibles in the measure for money (M4), indicates for recent years a degree of financial depth approaching the level of a country like France (Chart 15).36 The efficiency of the banking system, as measured by the ratios of reserve money to broad money, indicates a trend-improvement in the efficiency of the banking system through 1990, and broadly unchanged efficiency since (Chart 16). Stock market capitalization and turnover in Tunisia have surged since 1993, stimulated also by the recent acceleration of privatization (Chart 17 and Table 13).

Chart 12France and Tunisia: Real and Nominal Refinancing Interest Rates, 1970-96 1/

(In percent)

Source: International Financial Statistics.

1/ Real interest rates are deflated using CPI.

2/ Taux de prise en pension.

Chart 13Tunisia: Nongovernment and Central Government Domestic Credit, 1970-96

(In percent of total credit)

Source: International Financial Statistics.

Chart 14M2 to GDP Ratios, 1970-96 1/

(In percent)

Source: IMF, International Financial Statistics.

Chart 15Tunisia: M3 and M4,1970-96

(In percent of GDP)

Source: IFS, and Central Bank of Tunisia, Statistical Bulletin.

1/ Estimate based on data available through third quarter 1996.

Chart 16Tunisia: Reserve Money, 1970-96

(In percent of broad money)

Source: IMF, International Financial Statistics, and staff estimates.

Chart 17Tunisia: Transaction Volume Index and Market Capitalization, 1990-96

(1990=100) (In percent of GDP)

Source: Bourse des Valeurs Mobilières de Tunis, and International Financial Statistics.

Table 13.Tunisia: Financial Sector Indicators, 1992-96
19921993199419951996 1/
(In billions of Tunisian dinars)
Bank credit outstanding 2/9.810.511.212.112.9
To government0.70.60.60.50.4
To the economy9.19.910.711.712.5
of which public enterprises 2/1.41.51.51.31.7
Treasury bills outstanding 4/1.61.92.32.42.9
Commercial paper0.4490.4350.4510.7610.677
Corporate bonds0.0090.0280.0500.019
Stock market capitalization0.81.02.54.03.9
Stockmarket turnover 5/0.10.20.50.90.6
GDP13.714.715.817.019.0
(In percent of GDP)
Bank credit 2/71.671.871.171.468.0
To government5.44.43.62.82.0
To economy66.267.467.668.666.0
o/w public enterprises 3/10.510.19.27.68.8
Treasury bonds outstanding 4/11.612.814.514.115.3
Commercial paper3.33.02.94.53.6
Corporate bonds0.10.20.30.1
Stock market capitalization5.86.816.023.320.5
Stockmarket turnover 5/0.91.13.45.43.3
Source: IFS, and Statistiques financières de la Banque centrale de Tunisie.

Data for credit to public enterprises, outstanding Treasury bonds and commercial paper refer to stocks at end-November 1996.

Including credit from development banks.

Excluding credit from development banks.

Including bons cessibles, bons nègotiables, and bons d’equipements.

Including off-floor transactions, and trades in bonds.

Source: IFS, and Statistiques financières de la Banque centrale de Tunisie.

Data for credit to public enterprises, outstanding Treasury bonds and commercial paper refer to stocks at end-November 1996.

Including credit from development banks.

Excluding credit from development banks.

Including bons cessibles, bons nègotiables, and bons d’equipements.

Including off-floor transactions, and trades in bonds.

118. Despite the progress achieved, Tunisia’s financial sector has not yet achieved the depth and dynamism of financial systems in the most advanced developing countries, and does not fully play its potential role in mobilizing, allocating, and monitoring the use of financial resources. For example, while the level of saving and investment increased following the reforms, it remained well below those of the high-growth countries in East Aria. Productivity measures also point to lower overall efficiency of investment.37 While contributing factors likely include regulation-induced distortions in labor and land markets, the prevalence of public enterprises in many sectors, and price controls and trade taxes, the lower productivity of capital may also reflect a less efficient financial system. This may partly explain why Tunisia’s growth performance, while respectable by regional standards, falls well short of the achievements of Asia’s high performers.

Stylized facts from high-growth countries 38

119. Some of the East Asian “miracle” countries have used government intervention in the financial sector similar to Tunisia. While in Hong Kong and Singapore intervention was very limited, most other “tigers” maintained, at least for some periods, controls over spreads between lending and deposit rates, and interfered with the portfolio choices of banks. Controls over spreads were motivated by concerns over abuse of banking power, given limited competition from other markets (such as bond or stock markets) in the early phases of financial sector development. Portfolio constraints were used to prevent banks from excessively risky lending (e.g., for real estate), and more generally to steer credit toward productive activity, sometimes also housing. Especially Japan and Korea also had extensive directed credit schemes, mostly in favor of export activity and for small and medium-sized enterprises. While similar schemes in some other Asian countries were considered a failure and were eventually abandoned, the programs in Japan and Korea seem to have boosted overall investment and nourished infant industries into competitive enterprises. The main ingredients for success semi to have been: a competent bureaucracy carrying out the programs; rapid withdrawal of government lending once firms had gained access to private financing on market terms; heavy concentration of directed credit in sectors where positive technological externalities were most likely; elements of market-contest in determining access to these resources (for example, through direct links to export performance); and a focus on lending mostly to the private sector. Furthermore, interest rate subsidies were modest (the main benefits for enterprises were to gain access to credit at all) and real interest rates relatively high, and always positive. As a result, repayment rates were high, and guided credit did not impair banks’ soundness.

120. In the case of Tunisia, by contrast, subsidized lending was heavily concentrated in the agriculture sector, often went to state enterprises, and was generally not linked to performance or elements of market contest. Furthermore, technological externalities in the targeted sectors were unlikely and there was no automatic exit mechanism for “graduating” from the scheme.

Tunisia’s current financial sector profile

121. Banking remains the institutional backbone of Tunisia’s financial system. At end-1996, the banking system included 12 deposit money banks (of which half are public banks, accounting in 1994 for 68 percent of total commercial bank loans to the economy, the others are private banks, 3 of which are jointly or majority-foreign owned), 8 development banks (of which 2 government-owned and 6 jointly owned by Tunisia and other Arab states, accounting for a fifth of bank assets but the bulk of long-term lending), 6 private tearing companies (mostly offsprings of commercial banks) and 8 offshore banks. Other financial institutions include an investment bank, a state-owned savings bank, the state-owned postal checking system, various mutual and investment funds and brokerage houses, and 23 insurance companies.

122. Banks have been exposed to increased competition and strengthened supervision. An amendment to the banking law in 1994 lowered the barriers that separate development banks from commercial banks. Development banks were authorized to accept deposits from their clients and were allowed to lend short term. Commercial banks may lend long term for up to the equivalent of 3 percent of their deposit bases; and both may provide financial services, competing with the investment banks that can be created under the new law. An obligation for commercial banks to open at least one rural branch for every four new branches was abolished in late 1996. Supervision by the Central Bank of Tunisia (BCT) has been strengthened since 1991, along with the adoption of prudential regulations following the Basle committee recommendations. Given the strict standards for loan classification, provisioning, and calculating net exposure adopted in the Tunisian regulations, the minimum capital-to-risk-weighted-assets ratio of 5 percent established by the BCT is considered broadly equivalent to the 8 percent Cooke-ratio (World Bank (1995)). Interest rate controls were abolished in 1994, except for preferential interest rates under a mandatory lending scheme39 which was abolished only in November 1996. Interest rates on sight deposits are limited to 2 percent, and on savings deposits are fixed at 2 percentage points below the money market rate. Rates on deposits of intermediate maturity are free, but may in effect be limited by understandings between banks (accords de place). The need to obtain a charter from the BCT remains the only formal requirement for the establishment of a new bulk, by either residents or nonresidents.

123. The legacy of past government intervention and distortions continues to weigh on the banking system, and especially on the public banks, although the partial restructuring of the government-owned agricultural bank (BNA) in 1996 (see below) removed a substantial proportion of problem loans from the banking system. The average pretax return on assets during 1987-93 at 0.7 percent corresponded roughly to OECD levels (0.3-1.0 percent) but private banks did much better (at 1.3 percent) than public banks (0.4 percent) (World Bank (1995)). However, the trend was upward for both private and public banks during 1990-95 (Table 14). Similarly, over 1987-93, the average return on equity, before taxes, was much higher for huge private than for the large public commercial banks (21 and 13 percent, respectively) and was quite low for the public development banks (4.7 percent). Given the limited provisioning of public banks against nonperforming loans during this period, the data likely understate the differences in performance between private and public banks.

Table 14.Tunisia: Indicators of Commercial Bank Performance, 1990-95
199019911992199319941995
(In percent)
Average return on assets
Private banks0.70.70.80.70.81.0
Public banks0.50.50.40.50.60.7
All banks0.60.60.60.60.70.8
Average return on capital
Private banks30.530.631.924.425.927.9
Public banks27.022.314.617.911.912.3
All banks28.425.720.220.315.516.8
Capital, reserves and provisions8.99.811.212.213.317.0
in percent of total assets
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.

124. While recent capital increases at major banks have served to dilute government ownership, the bulk of the banking system remains controlled by the state, and state banks’ lending may be influenced by government priorities. For example, the performance of the agricultural bank (BNA) was affected by the absorption of quasi-fiscal losses of public enterprises which had to subsidize basic foodstuffs in years of drought and surging international prices. More generally, weaknesses of banks’ portfolios are largely related to loans to public enterprises made in the past. The BCT has agreed with individual banks on action plans to phase in full compliance with the new prudential standards; and in the context of the 1997 Finance Law the BCT took over TD 969 million of loans to the offices from BNA and other banks.40 At end-1995, five commercial banks did not yet meet required minimum capital adequacy ratios, and the timetable for reaching those had to be recently extended through 1998. In 1996, public enterprises still accounted for an estimated 14 percent of the total stock of outstanding bank credit to the economy and a few vestiges of directed credit persisted until very recently. Under the RAP, banks had to lend at least 10 percent of total deposits to certain priority sectors (agriculture, export activities, and small- and medium-sized enterprises)41 at controlled spreads over the preferential rediscount rate applying to these sectors.42 Even after the abolition of the RAP, only lending to priority sectors can be used to obtain refinancing from the central bank through the repurchase auctions (appel d’offre). Another element of directed credit remains implicit in bank lending financed from ressources spéciales, essentially onlending by banks of resources provided by external lenders (such as the EU) or by various government funds; in 1995 it accounted for 10 percent of total commercial bank lending and 45 percent of development bank lending.

125. For their refinancing, banks continued until end-1996 to rely heavily on the central bank: net liquidity injected by the BCT roughly equaled recourse to the money market. The bulk of refinancing was provided through a repurchase auction mechanism (appel d’offre); loans to nonpriority sectors may be refinanced at a higher rate under the mise en pension facility, at the bank’s request, while overdrafts with the BCT carried a rate of 5 percentage points above money market rate. Refinancing through the central bank and recourse to the interbank market at least until late 1996 still seemed to involve some moral suasion and remained based on a bank-by-bank approach, as reflected in the rigidity of the money market rate relative to administratively set rates. However, after abolition of the RAP and the restructuring of the BNA’s portfolio at end-1996 the money market rate has become more flexible.

126. Since 1989, domestic financing of the budget mainly takes place through weekly Dutch-style auctions of treasury bills.43 The auctions replaced the former system of forced placement of treasury bonds which became inoperative in 1990, but was legally abolished only in 1994. In 1993, the authorities introduced longer term treasury bonds sold via public offering to banks and tradeable on the bourse (bons du Trésor négociables en bourse (BTNB)). However, few trades on the bourse have occurred so far. Given that the limited liquidity of these instruments is not compensated by sufficiently higher yields, demand for these bonds has been limited to mutual funds and other long-term investors.

127. Only basks have access to the treasury bill auctions, and as primary dealers may be expected to bid minimum amounts, similar to the explicit quotas that were imposed through 1991 to ensure that the treasury financing needs were always satisfied. In their bids, banks can submit noncompetitive bids on behalf of their clients for up to 30 percent of their own bids. Once all bids have been received, the treasury subtracts noncompetitive bids from its total target amount and allocates the balance by interest rate offered. Noncompetitive bids are satisfied at the weighted average of competitive bid rates. The bills are issued for maturities ranging from 13 weeks to 17 years, at interest rates that have differed by at most 1 percentage point between various maturities. Within the same maturity class, bills are often differentiated according to their amortization schedules (discount paper, annual repayment, bullet payment). The relative flatness of the yield curve partly reflects the practice of the control de liquidité (see below), but probably also informal rationing and moral suasion. The bills are dematerialized instruments and are inscribed in the banks’ name in an account at the central bank. No settlement system exists that would allow formal transfer of ownership to another bank or investor. Given the absence of a real secondary market for government paper, banks tend to bid for shorter maturities, and the average maturity of outstanding public debt has been declining from about 6 years in 1992 to 4.5 years in 1994, though it probably rose subsequent to the issuing of longer-term bons négociables.

128. To stimulate a secondary market in treasury bills, the central bank instructed banks who participated in the auctions to quote buy/sell rates for treasury bills to customers (contrat de liquidité)44 Although the circular specifies that all banks must quote to all investors (not only their own), the secondary market in treasury bills that developed subsequently in effect consists of 12 separate markets, one for each commercial bank, because treasury bills remain in the name of the bank who purchased them initially. Furthermore, banks have developed an interpretation of the control de liquidité which attempts to extend the tacit understanding to refrain from interest rate competition for deposits (the accords de place) to sales of treasury bills. Banks offer the same yield on treasury bills sold to investors, with the understanding that investors may resell the bonds to the bank at any time at the original price minus a small commission. As a result, the rates investors receive appear to be largely unrelated both to maturities and to the rates the banks receive from the treasury. Banks assume the full interest risk, and investors view such treasury bills as virtually completely liquid and akin to bank deposits. Indeed, treasury bills seem to be typically held for short periods only, as a way to circumvent the limits on deposit rates, and competitive pressures on banks to offer market-related yields has been rising as major investors (e.g., social security funds) are holding informal “auctions” for placing their funds with banks offering the highest yield.

129. The market for private paper—commercial paper (billets de trésorerie) and private bonds (emprunts obligatoires)—has expanded somewhat following the elimination in 1993 of prior authorization by the treasury for private bond issues and the recent overhaul of the stock market (Table 13). Commercial paper may be issued by firms with capital exceeding TD 1 million, provided the firm has published at least two approved financial statements and/or obtains a bank guarantee for the issue. There is no secondary market for these bearer instruments, which have maturities between ten days and five years. Corporate bonds require a bank guarantee and are tradable on the bourse.

Issues for future reforms

130. Both the indicators of financial deepening discussed above, and lessons from the Asian experience, support the view that the financial sector in Tunisia is not yet fully playing its role in mobilizing, allocating, and monitoring the use of financial resources, and thus contribute to moving the economy to a higher growth path. The main weaknesses that need to be addressed include establishing a more efficient banking system to enhance financial intermediation and creating a functioning secondary market for government paper. This would also provide impetus for the further development of other capital markets and private financial instruments.

131. The authorities have started to address remaining weaknesses in the banking system. Banking soundness is being strengthened by requiring provisioning for nonperforming loans, so as to respect international prudential norms. However, competition between banks needs to be further enhanced, and necessary provisioning should not be financed by implicit taxes on the users of financial services. This will require ending official tolerance for tacit understandings among banks to limit competition; encouraging foreign banks to establish resident subsidiaries; reducing restrictions on capital account transactions; removal of remaining controls on deposit rates; and divestiture of government-owned assets resulting in a true transfer of control to the private sector.

132. Establishment of a functioning secondary market for government bonds would facilitate the financing of the Treasury; reduce the interest rate cost to the budget by lowering the liquidity premium commanded by the current illiquid instruments; reduce the oligopolistic rents accruing to banks by creating instruments that compete with deposits; provide benchmarks for pricing other financial instruments, thereby stimulating commercial paper and corporate bond markets; and establish a meaningful market-determined yield curve to inform intertemporal decision making. An active interbank market in treasury bills is also a requirement for an efficient money market, by establishing a risk-free collateral for lending between banks, as well as for open-market operations of the central bank. This will require establishment of a functioning clearing and settlement systems for the trading of treasury bills between banks, for example by extending the existing book-entry system of the BCT. Together with enforcement of the original intentions of the regulations on “market-making” by the commercial banks (circular 91-21), this would create a true interbank secondary market for the trading of treasury bills, and would help restore the link between interest rates established in the primary auctions and yields in the secondary market. It would shift interest risk to private investors acquiring treasury bills, and reduce the liquidity risk for banks implicit in the open-ended commitment to buy back bons cessibles at the original price. Complementary reforms should include improving the forecasting of treasury cash needs and the regular publication of calendars for forthcoming treasury auctions, to allow investors to better plan their interventions and private issuers to time their own issues appropriately. A streamlining of the existing array of treasury instruments, including differentiation of securities by maturity rather than within maturities, would create broader categories of instruments and enhance liquidity. The introduction of tap issues for longer-term T-bills (bons du Trésor assimilables) directly through the bourse via a group of reputable underwriters is a step in this direction.

133. Recent stock market reform has been a success and as it takes hold, should help provide finance for mature enterprises and create more competition for the banking system. Establishing rules for basic derivatives (options and futures) would help smooth and regulate the market. At the same time, the current special tax incentives for investment in new equity issues45 should be removed. The real obstacles for stock market development, once technicalities of the clearing and settlement system are resolved, and provided the securities commission succeeds in enforcing transparency and accountability for listed firms, are mostly outside the financial sector: privatization needs to be accelerated, and foreign investment, including portfolio investment, needs to be further liberalized.

134. In the private paper market, the abolition of the requirement of bank guarantees for the issue of commercial paper and corporate bonds would also allow banks to reduce their risk exposure, while removing incentives to shift exposure off-balance sheet. Strict enforcement of disclosure requirements for firms that have issued such paper, a strengthening of settlement mechanisms at the bourse, and encouragement of private rating facilities will be required to support further expansion of this market.

VII. Exchange Rate Policy and Full Convertibility

Interbank foreign exchange market

135. In March 1994, an interbank foreign exchange market was established, replacing a system under which all foreign exchange operations were centralized at the central bank and the exchange rate was set administratively. Although the central bank continues to set a central rate for official transactions and accounting purposes, under the new system the exchange rate in the interbank market is freely determined by participants. The central bank has retained an important position in the market, reflecting the substantial foreign exchange flows—such as transactions related to official borrowing and debt service—that it handles, and it intervenes in the market with a view to keeping the interbank rate close to its target exchange rate (see below). In addition, banks are required to balance at the end of each trading day their foreign exchange positions in excess of small open positions, in accordance with prudential regulations, which may require them to sell or purchase foreign exchange at the central bank’s rate.

136. Close to 70 percent of foreign exchange operations in Tunisia are effected in the interbank market, involving mainly commercial banks (Table 15). The remaining transactions are conducted by the central bank and include operations involving a foreign exchange guarantee provided by the central bank, operations in currencies of the Arab Monetary Union (AMU) countries or currencies for which there is no significant interbank activity, and central bank transactions with commercial banks. In addition, the central bank conducts the foreign exchange operations of the government. The share of the central bank in operations in the main trading currencies has exceeded 20 percent of the total foreign exchange market, representing mainly sales of foreign exchange to the banks. As a result, the interbank market rate has remained within a margin of 1 percent of the exchange rate posted by the central bank. Despite these limitations, the exchange rate of the dinar has become more flexible as evidenced by deviations between interbank rates and the official central bank rate (Table 16).

Table 15.Tunisia: Structure of the Foreign Exchange Market, 1994-96
199419951996
March.-Dec.Jan.-Dec.Jan.-Nov.
(In millions of Tunisian dinars)
Interbank market4,4014,2963,083
Major currencies 1/3,7763,676
Other625620
Central Bank of Tunisia1,4671,9731,453
Major currencies 1/9771,100
Other490873
Total market5,8686,2694,536
Major currencies4,7534,776
Other1,1151,493
(In percent of total)
Interbank market75.068.568.0
Major currencies 1/79.477.0
Other56.141.5
Central Bank of Tunisia25.031.532.0
Major currencies 1/20.623.0
Other43.958.5
Source: Central Bank of Tunisia.

Includes operations in U.S. dollars, French francs, Deutsche marks, Italian lira, and Japanese yen.

Source: Central Bank of Tunisia.

Includes operations in U.S. dollars, French francs, Deutsche marks, Italian lira, and Japanese yen.

Table 16.Tunisia: Spread Between Interbank Rate and Rate Set By Central Bank of Tunisia, Dinar/U.S. dollar Exchange Rate, 1994-96 1/
199419951996
(End of period; in percent)
January0.840.59
February0.250.4
March0.16−0.79−0.32
April−0.150.260.43
May0.220.250.02
June0.610.27−0.01
July−0.18−0.11−0.45
August−0.11−0.46−0.18
September−0.030.20.24
October−0.080.02−0.07
November−0.150.590.3
December−0.040.140.23
Sources: Data provided by the Tunisian authorities; and staff calculations.

A positive spread indicates that the interbank exchange rate exceeds the central bank rate.

Sources: Data provided by the Tunisian authorities; and staff calculations.

A positive spread indicates that the interbank exchange rate exceeds the central bank rate.

137. The foreign exchange market in Tunisia offers only limited possibilities for hedging against foreign exchange risk. The central bank provides forward cover for current account transactions exceeding TD 10,000. The forward rate is calculated on the basis of interest rate differentials, and the maximum period of coverage limited to one year. The central bank has also established a system of foreign exchange options for a limited number of currencies with maturities for renewable periods from 3 to 12 months, limited to hedging exchange risk related to foreign borrowing. In addition, the central bank may provide exchange rate guarantees for long-term foreign borrowing contracted by the commercial and development banks at the direction of the central bank and onlent to domestic borrowers, in domestic currency. The premium charged is related to the difference between the interest rate earned by the bank on the domestic currency loan and the cost of borrowing in foreign currency.

Exchange rate policy of the central bank

138. Apart from smoothing rate fluctuations, the central bank’s intervention in the exchange market has been directed at broadly maintaining the real effective exchange rate of the dinar at its level at end-1987. To that effect, frequent changes are made in the nominal exchange rate to compensate for the inflation differential with the main trading partners and competitors included in the exchange basket underlying the calculation of the effective exchange rate.

139. Indications are that the pursuit of the real exchange rate rule over the past ten years has served Tunisia well, as evidenced by the insignificance of the parallel market in terms of spread and volume of transactions, the strengthening of the external position in recent years, and the decline in inflation, pointing to the appropriateness of the exchange rate level. While the exchange rate policy was aimed at keeping the economy competitive, targets for international reserves were set in the context of annual monetary programs. Weaknesses in the implementation of monetary policy contributed to the nonattainment of the target for international reserves in some years.

140. A successful implementation of the real exchange rate rule requires that the targeted rate is sufficiently close to the equilibrium rate, and that strong nominal anchors prevent an upward spiral of prices, wages, and currency depreciation. In particular, allowance should be made for variations in the equilibrium real exchange rate stemming from external and domestic shocks. In Tunisia’s case, the rate prevailing at the end of 1987, following a significant depreciation in 1986, contributed to a substantial improvement in the external position. No permanent major shocks seem to have occurred resulting in changes in the equilibrium rate. The terms of trade, after a decline in 1982-86 related to oil prices, have broadly stabilized since 1987. Although a substantial degree of trade liberalization has been undertaken, initially the effect was rather one of increasing effective protection as liberalization was first directed at raw materials and other inputs, while the subsequent removal of quantitative restrictions on consumer goods was accompanied by the introduction of complementary import tariffs, thereby reducing the impact of the liberalization.46

141. The potential for inflation and macroeconomic instability inherent in the adoption of a real exchange rate rule was largely contained by the generally restrictive financial policies pursued, as well as multi-year wage agreements which locked in generally modest wage increases, limiting the scope for wage-price spirals. Money expansion was generally kept below nominal GDP growth, through fight credit and refinancing policies, a policy that was facilitated by the absence of market-related private capital inflows.

Indicators of competitiveness

142. Available indicators confirm that the level of competitiveness was broadly maintained in recent years. The real effective exchange rate index as provided by the Fund’s Information Notice System (INS), which adjusts the nominal effective exchange rates by the consumer prices in Tunisia relative to those of its trading partner countries and other competitors and is broadly similar to the index used by the Central Bank of Tunisia, indicates broad stability since 1987 (Table A29). Three other indicators confirm this assessment. Based on unit labor cost in manufacturing, the real exchange rate remained fairly stable between 1989 and 1994, depreciating by 1.1 percent over the period. Unit labor costs (expressed in U.S. dollars) rose by an average of 3.1 percent per year, or slightly less than in partner countries. The increase resulted from an average annual increase in wages by 2.5 percent and a decline in average labor productivity of 0.5 percent. Similarly, based on estimates of the composition of output between tradables and nontradables and their respective deflators, the decline in the relative price of nontradables in relation to tradable goods by 3.8 percent between 1989 and 1994 provides another indication that the relative profitability of the tradable goods sector has changed little in recent years. Market share indicators also point to broadly stable competitiveness of the Tunisian economy. Between 1990 and 1996 Tunisia’s nonenergy exports in volume terms increased at an average annual rate of 4.7 percent, exceeding the import growth rate of 3.7 percent per annum in its major export markets.47 Similarly, in current prices, Direction of Trade (DOT) data show that Tunisia increased its share in EU imports from 0.26 percent in 1990 to 0.28 percent in 1996, while its share in world exports remained at around 0.11 percent during this period.

Overall evolution of external accounts

143. While the underlying current account position improved in 1991-96, year-to-year developments reflect the impact of two foreign-financed projects in the energy sector (the doubling of the capacity of the pipeline for Algerian gas to Italy (Gazoduc) and the development of a new offshore gas field (Miskar); fluctuations in agricultural production, mostly related to weather conditions, were also important (Table 17). The widening of the current account deficit in 1992-93 reflects mainly an increase in investment related to the gas projects and an accumulation of stocks of olive oil for export. With the completion of the energy projects and the export of the olive oil stocks, the current account deficit narrowed substantially in 1994-95 despite two consecutive years of drought which led to a large increase in imports of food products and a decline in other agricultural exports. The further narrowing of the current account deficit in 1996 to 3 percent of GDP, despite a decline in exports, reflects a large drop in imports of food products, made possible by the weather-related recovery of domestic food production, and a significant slowdown in import-intensive exports.

Table 17.Tunisia: Balance of Payments, 1991-96(In millions of SDRs)
199119921993199419951996
Current account−421−854−919−457−547−398
Trade balance−866−1,467−1,440−1,094−1,311−1,243
Exports, f.o.b.2,7112,8502,6833,2433,6053,801
Energy387432325305305398
Nonenergy2,3242,4182,3582,9383,3013,403
Imports, f.o.b.−3,577−4,316−4,123−4,337−4,916−5,044
Energy−289−319−326−326−356−445
Nonenergy−3,288−3,998−3,797−4,012−4,560−4,599
Total services445613521638764845
Nonfactor services(net)469753789870911968
Of which: Tourism500759795910922994
Factor services and transfers (net)−24−140−268−232−147−123
Of which:
Workers’ remittances417410428480496551
Interest on external debt−294−313−334−360−399−439
Capital account366941910817635662
Grants895874724642
Direct foreign investment (net)121404390308194163
Medium and long term loans18998239404363324
Disbursement8057278491,0411,0321,026
Amortization−615−629−610−638−669−702
Short term capital and other 1/−333822073330133
Overall surplus or deficit(-)−5487−836188264
Change in net official reserves
(increase-)54−878−361−88−264
Use of IMF resources5631−40−10−32
Other assets, net (increase-)−2−11812−361−77−232
(In units indicated)
Memorandum items
Current account deficit (-)
(in percent of GDP)−4.4−7.8−8.8−4.2−4.6−3.0
Exports, f.o.b. (in percent of GDP)28.525.925.629.730.428.3
Exports, f.o.b. excluding energy and
food (in percent of GDP)20.119.319.621.024.824.0
Imports, c.i.f. (in percent of GDP)37.639.239.439.741.537.6
Offshore exports (in percent of total)58.760.363.864.2
Offshore imports (in percent of total)26.929.831.032.0
Gross official reserves (in months1.81.81.92.82.73.2
of imports)
Debt-service ratio 1/23.820.220.418.618.418.9
Terms of trade (deterioration-)
(annual percentage change)−0.70.20.2−3.01.23.4
Real effective exchange rate (depreciation-)
(annual percentage change)1.02.3−3.70.72.10.5
Source: Data provided by the Tunisian authorities.

Includes changes in net foreign assets of commercial banks, and errors and omissions.

As a percent of current receipts; including IMF charges.

Source: Data provided by the Tunisian authorities.

Includes changes in net foreign assets of commercial banks, and errors and omissions.

As a percent of current receipts; including IMF charges.

144. Available data also point to an unchanged relative size of tradable goods production within the Tunisian economy during recent years, consistent with the virtually unchanged level of the real effective exchange rate and broadly unchanged levels of effective protection. Tunisia remains a rather open economy: the share of exports in GDP amounted to 28 percent in 1996, or the same as in 1991; however, excluding energy and agricultural products, it rose from 20 percent in 1991 to 23 percent in 1996, on account of the rapid growth in manufacturing exports. Exports have a high import content: the share of imported inputs in total exports remained constant at 44 percent during 1993-96, as the dependency of the offshore sector on imported inputs declined, while their share in total exports rose. Imports in relation to GDP in 1996 stood at 38 percent, unchanged from 1991. The share of imports of the offshore sector rose from 27 percent in 1993 to an estimated 32 percent, while imports of the domestic sector remained at about 28 percent of domestic demand during that period.

145. Tunisia’s external position remained clearly sustainable: the external debt to GDP ratio continued to decline in 1996, reaching 52 percent compared with 55 percent in 1991; and the debt service ratio fell from 21 percent of current receipts to 19 percent during the same period. The bulk of capital inflows, other than foreign direct investment, has been foreign borrowing undertaken by the government and public enterprises. Between 1986 and 1991 public borrowing was nearly exclusively from multilateral and bilateral official donors. Since then there has been recourse to financial markets, including the Japanese bond market and syndicated bank loans,48 and foreign financing has covered an increasing share of the government budget deficit. This shift enhanced the resources available to the private sector in the domestic market, thereby alleviating the effects of restrictions on inward investment flows and foreign borrowing.

146. The level of gross official reserves rose to the equivalent of 3.2 months of imports at the end of 1996, compared with 1.8 months at the end of 1991. At the end of 1996 reserves were equivalent to 120 percent of annual external debt service payments, compared with 70 percent in 1991. Excluding imports of the offshore sector, the import coverage of reserves at end-1996 was equivalent to 4.7 months.

Medium-term outlook for the external accounts

Outlook for the main current account components

147. The challenge for Tunisia is to step up its integration into the world economy while facing increased competition in its foreign and domestic markets in the context of the Association Agreement with the EU (AAEU) and world trade liberalization. An acceleration in the growth of exports is key to achieving the objective of higher economic growth envisaged in the IXth Development Plan.

148. The growth of exports will be facilitated by the prospective acceleration in real import growth in Tunisia’s main trading partner countries, to 6.4 percent per annum49. To consolidate its position in the European market, Tunisia will need to overcome the expected increase in competition from Eastern European and Asian countries, in part resulting from further European economic integration and global trade liberalization. Efforts to increase exports will benefit from the introduction of international standards, harmonization of trade-related regulations with EU practices, and the implementation of the mise à niveau program, which aims at strengthening enterprises and infrastructure so as to be able to meet increased foreign competition, including in the domestic market. It can be expected that more enterprises will become exporters and more products will become exportable. The ongoing implementation of the trade facilitation program including the liberalization of port, transport and insurance services would also contribute to strengthening the competitiveness of Tunisia’s export sector and raising the value added embedded in exports.

149. Imports over the medium term will be affected by various factors with opposite effects. The phasing of the tariff removal under the AAEU could result in an increase in effective protection dining the coming years, which would tend to offset the impact of the removal of the remaining quantitative restrictions and complementary import duties on consumer goods. Increases in imports following the removal of import duties on consumer goods in a later phase of the implementation of free trade with the EU will be partly offset by lower imports of the offshore sector, as the upgrading of domestic enterprises and the effects of deepening structural reforms should allow an increase in the supplies of domestic inputs to offshore exporters. The removal of tariffs on imported inputs would be an additional factor strengthening the competitive position of the domestic sector vis-à-vis the foreign suppliers of the offshore export sector.

150. However, once tariffs on final goods are fully eliminated under the AAEU, the implied strong reduction of effective protection could result in substantially higher imports. As a result, the trade balance is likely to be adversely affected until further productivity gains are obtained under the impact of the increased competition and other dynamic effects of the AAEU (Chapter II).

151. Prospects for continued growth of tourism receipts will be enhanced by the ongoing implementation of the program of diversification away from beach tourism, and improving the quality of tourism-related services. While construction in the tourist sector will be increasingly constrained by environmental factors, the upgrading of existing structures is envisaged. The implementation of investment programs in infrastructure and further liberalization, including of entry conditions, would support the expansion of exports of other services. Remittances in the future may be affected by a slowing in the growth of the number of Tunisian workers abroad owing to a tightening of immigration in receiving countries and a weakening of ties to the home country of Tunisian workers abroad.

Capital flows and capital account convertibility

152. The prospects for capital flows will partly depend on the pace of reforms regarding investment and capital account regulations. To achieve closer integration in the world economy Tunisia would have to take further steps toward liberalizing investment regulations and opening the capital account with a view to establishing full convertibility. Increased access to foreign savings, investment opportunities, advanced technology and more efficient financial services would help increase overall productivity, investment and growth of the Tunisian economy. Experience shows that significant progress in implementing structural reforms, together with macroeconomic stability are key factors in attracting capital flows. In particular, attracting foreign direct investment hinges critically on well functioning and flexible product and factor markets, and a transparent and reliable legal framework for private sector activity. Also, sufficiently developed financial markets are required to be able to intermediate capital flows and use funds efficiently, without overwhelming the domestic market.

153. The opening of the capital account, however, could render macroeconomic management more difficult as possible surges of capital flows, particularly portfolio investments, could result in increased volatility in interest rates and exchange rates, or international reserves. To reduce the risk of disruptive capital flows, there would be a need to further pursue prudent financial policies, strengthen the financial sector, and maintain an appropriate exchange rate. Faced with a surge of inflows, many countries have resorted to intervention in the exchange market and sterilization of the monetary impact. As such actions lose their effectiveness beyond the short run, longer term policy responses have included exchange rate appreciation, fiscal tightening allowing a decline in interest rates, additional trade liberalization, and further easing of controls on capital outflows. By contrast, unsustainable capital outflows in countries experiencing such problems were generally addressed by a tightening of monetary conditions, fiscal adjustments and exchange rate depreciation.50

154. Investment regulations in Tunisia in general are based on equal treatment of nationals and foreigners for direct investment except for certain services sectors where foreign ownership exceeding 50 percent of equity requires approval. Regarding portfolio investment, foreign ownership of ordinary shares in existing enterprises above 49 percent of equity also need approval. In addition, the following capital account operations remain subject to prior authorization of the central bank: subscription or acquisition by nonresidents of bonds or other debt instruments issued by the public and private sectors; and borrowing abroad by resident financial and nonfinancial enterprises in excess of TD 10 million and TD 3 million per year, respectively. Capital outflows other than repatriation of foreign direct investment and amortization of authorized borrowing remain highly restricted, with the exception of direct investment in representational offices and subsidiaries abroad by resident exporters, up to an annual maximum of TD 150,000.

155. Under a gradual removal of capital account restrictions, the least volatile types of inflows should be liberalized first. For example, the authorities could, at an early stage, move to eliminate restrictions on the acquisition by nonresidents of debt instruments issued in the domestic market; allow residents to freely borrow abroad from foreign financial institutions; and eliminate the limit on foreign ownership of equity in Tunisian resident enterprises. Regarding outward capital liberalization, limits on investment in subsidiaries abroad by residents could be eliminated early, followed by a general liberalization of direct investment. The liberalization of portfolio investment abroad for residents should intervene at a later stage; in a final stage nonresidents would be permitted to issue stocks and bonds in Tunisia following a sufficient deepening of the financial markets, while restrictions on nonresident borrowing from the domestic banking system would be removed.

156. An orderly liberalization of capital flows would be greatly assisted by a strengthening and deepening of Tunisia’s financial markets, as outlined in Chapter VI. Such a strengthening of the financial system would be needed to mobilize and efficiently absorb inflows, but also to ensure that a liberalization of outward capital would not result in unduly large outflows. Establishing the basis for open market operations would provide the central bank with the necessary instruments to engage in sterilization operations which can be useful on a temporary basis. At the same time, under the current exchange rate regime, a somewhat larger cushion of reserves may be useful to buffer the economy against some initial volatility until the credibility of the reforms have been fully consolidated.

157. The response of the Tunisian private sector to a liberalization of restrictions on foreign borrowing need not result in an equivalent strengthening of the capital account. To the extent that increased recourse by the private sector to foreign capital is offset by a reduction in its use of domestic saving at unchanged investment levels, overall foreign borrowing could remain unchanged, if the government were simultaneously to shift from foreign to domestic financing of the deficit. Similarly, allowing nonresidents to acquire government debt instruments in the Tunisian market would allow the government to reduce its recourse to international capital markets.

158. The impact of capital liberalization on the balance of payments is uncertain. An increase in private capital inflows could be offset in part by a reduction in official inflows, especially in view of the envisaged increase in the role of the private sector in the economy and its share in investment. An important factor in the increase in private sector inflows would be the positive impact of the implementation of the AAEU on direct foreign investment.51 Also, in some instances increased inflows could be accompanied by increases in domestic expenditure resulting in higher imports, offsetting in part their impact on the balance of payments. Overall, the experience in other countries would indicate that the phased liberalization of restrictions on outflows and the effects of the AAEU are likely to have a positive effect on the balance of payments.

Improving the functioning of the interbank foreign exchange market

159. The growing integration of goods and financial markets with world markets needs to be supported by a deepening of the foreign exchange market. Within the context of the current managed float there is scope for improving the functioning of the interbank foreign exchange market so as to allow more room for market forces and strengthen the role of participating intermediaries, while strengthening incentives to assume management of exchange risk by the private sector. Important steps in this regard are already under preparation or consideration:

  • Increase in limits on open positions in individual currencies to 10 percent of the banks’ capital.
  • Allowing arbitrage operations between foreign currencies to better link the Tunisian interbank market to foreign exchange markets abroad.
  • Elimination of the prescribed margin of 0.25 percent between selling and buying rates of banks.
  • Establishment of a forward interbank foreign exchange market in which the rate is determined by participating intermediaries.
  • Broadening of the spot foreign exchange market to nonbank foreign exchange dealers who would be made subject to the same regulatory requirements as the banking institutions.
  • Transfer of the exchange guarantee scheme of the central bank for long-term borrowing by commercial and development banks to the private sector.

Exchange rate policy

160. Exchange rate policy needs to be kept under close review, in particular in light of international reserve movements, developments in export performance, and possible pressures in the interbank foreign exchange market. While the exchange rate at present may be close to a level that is sustainable and consistent with Tunisia’s export-led growth strategy, future developments could result in changes in the equilibrium real exchange rate level, which could require a change in the real effective exchange rate target. Such factors include further trade liberalization, with a possible negative impact on the balance of payments; but also a further deepening of structural reform in other areas, and opening of the capital account, with likely positive effects.

VIII. Economic Growth: Recent performance and Medium-Term Perspective

Economic growth in Tunisia: 1970-96

161. The Tunisian economy grew rapidly during 1970-80, registering an averate rate of about 7 percent per year. Economic growth was broadly based, and reflected high levels of investment (mainly by the public sector), which rose from 21 percent of GDP in 1970 to 29 percent in 1980. A large share of public investment was directed toward the development of human resources and infrastructure. National saving as a share of GDP rose in line with investment, as petroleum revenue increased rapidly due to favorable world prices while financial policies remained generally prudent. The external current account deficit averaged about 3.5 percent of GDP during the 1970s, except for a brief period in 1976-78, when current account deficits rose to 9-11 percent of GDP, following declines in world prices of phosphates and oil.

162. Tunisia’s economic and financial situation deteriorated markedly under the VIth Development Plan (1982-86) as a result of declining petroleum production, a deceleration in mining and manufacturing output, and the effects of recurrent droughts on the agricultural and agro-industrial sectors. Economic growth averaged only about 3 percent a year during 1982-86. Domestic and external imbalances increased significantly owing to expansionary financial policies and the decline in Tunisia’s terms of trade, reflecting mainly the fall in world petroleum prices. Gross capital formation rose further to about 36 percent by 1984, with national saving hovering around 25 percent. Thus, current account deficits widened to 11 percent of GDP. In 1985, investment controls and import restrictions were tightened in an effort to reduce the unsustainable external imbalance, resulting in a sharp drop in imports as well as a significant cut back in investment outlays.

163. Tunisia adopted a comprehensive adjustment program in 1986 which called for the adoption of tight demand management policies (including a rationalization of investment expenditure) combined with a significant improvement in external competitiveness. Comprehensive structural adjustment measures were designed to reorient the economy away from heavy reliance on administrative controls and increase the role of market signals and the scope of private sector activity. Despite adverse exogenous developments, including severe droughts in 1988 and in 1994-95, the Middle East crisis, and weak economic growth in key European export markets, Tunisia achieved an average growth of about 4.5 percent per year during 1987-96. With investment as a percent of GDP rising in line with national savings, current account deficits declined to 3 percent of GDP by 1996.52

164. Although the share of agriculture and fishing in total output has declined from about 18 percent in 1985 to 14.5 percent in 1996 (Table 18), agriculture remains an important source of employment (about one fourth of total employment). Its performance has been volatile, reflecting the heavy dependence on weather conditions, especially in the rainfed agriculture. Moreover, this volatility affects the nonagricultural sector via supply links (mostly with agro-processing) and demand effects on local industry and many services.

Table 18.Tunisia: Sectoral Structure of GDP, 1983-2001
VIth PlanVIIth PlanVIIIth PlanIXth Plan
1983-86 1/1987-911992-961997-01
(In percent of GDP at constant prices)
Agriculture and fishing15.315.214.513.9
Mining1.01.10.80.7
Hydrocarbons, electricity, and water10.18.67.16.1
Manufacturing14.916.617.518.0
Food processing4.53.93.33.3
Construction materials and glass1.61.91.91.8
Mechanical and electrical industries2.32.52.52.4
Chemical and rubber industries0.61.41.81.9
Textiles, clothing, and leather4.04.85.76.1
Woodwork, paper, and other1.92.22.32.5
Construction and public works4.84.04.54.8
Services42.243.643.744.4
Transport and telecommunications6.66.87.38.2
Commerce and other services17.718.317.918.2
Tourism5.65.25.05.0
Government wages and salaries12.213.313.313.0
Indirect taxes minus susbsidies11.811.011.912.1
Total100.0100.0100.0100.0
Source: Ministry of Economic Development.

Detailed national account on a consistent basis covers the 1983-96 period.

Source: Ministry of Economic Development.

Detailed national account on a consistent basis covers the 1983-96 period.

165. However, as the economy became more diversified, it also became more resilient to external shocks. For example, the 1988 drought led to a decline in agricultural output of about 30 percent, which brought economic growth down to 1.5 percent. By contrast, during the 1994-95 drought, agricultural output declined by a cumulative 19 percent, but the economy still achieved an average growth of 2.8 percent per year, led by expansion in manufacturing and services; their share in GDP rose to 18 and 44 percent of GDP in 1995, respectively. Manufacturing is dominated by textile and leather goods and includes important public enterprise activity, mainly in the chemical sector. The growth in services reflects an increase in value added in commerce, telecommunications, transportation, and tourism.

Linkages between growth, saving and investment, and cross-country comparisons

166. There is substantial empirical evidence pointing to a close correlation between changes in saving, investment, and growth rates in developing countries. For example, a recent study (World Economic Outlook (1988)) examined the relationship between investment and economic growth among 125 capital importing developing countries and found this relationship to be positive and statistically significant. A 10 percent increase in the ratio of investment to GDP was associated with a 1.5 percent increase in the rate of growth, on average. Other studies indicate that high-saving countries tend to grow faster than those with low saving. For example, (World Economic Outlook (1995)), 14 of the world’s 20 fastest growing economies had an average saving rate of over 25 percent during 1973-93, and none had a saving rate of less than 18 percent53 Meanwhile, 14 of the world’s 20 slowest growing economies saved less than 15 percent of GDP.

167. These correlations reflect positive impacts running in both directions. The favorable impact of saving on growth is the more straightforward one, as higher saving allows an increase in capital accumulation which in turn raises the growth of output. The traditional policy recommendation flowing from this view is that in order to increase the pace of economic growth, countries Med to boost their saving in order to spur capital formation. At the same time, an important implication of the life-cycle model of saving and its variants is that the rate of output growth has a positive impact on saving.54

168. Viewed in this light, Tunisia’s saving performance in recent years ranked among the stronger performers. Despite large fluctuations in growth—stemming from the vulnerability of the agricultural sector to drought—the rational saving rate remained relatively stable at about 21 percent of GDP during 1989-96, while the share of investment in GDP averaged about 26 percent of GDP. The resource gap averaged 6 percent of GDP, with the annual fluctuations reflecting mainly the changes in foreign-financed investment in the energy sector. Nonetheless, during the same period, the Asian countries55 were growing at 8 percent on average, about twice the rate of Tunisia; their saving ratio exceeded that of Tunisia by about 11 percent, allowing investment that was about 10 percent of GDP higher. Apart from higher saving and investment levels, it appears that these countries also achieved higher efficiency of capital as reflected in a relatively stable and lower ICOR (Table 19). This difference may stem from the fact that, in contrast to Tunisia, gross capital formation in these countries was dominated by the private sector.

Table 19.Tunisia: Comparative Growth Performance, 1982-96
1982-881989-96
(Period averages)
Growth rate of real GDP
Asia7.57.8
Western Hemisphere1.52.6
MENA2.63.8
Oil0.94.1
Nonoil4.93.4
Tunisia3.14.1
National saving (in percent of GDP)
Asia26.931.8
Western Hemisphere19.018.7
MENA20.321.2
Oil23.122.9
Nonoil15.918.9
Tunisia23.620.9
Gross investment (in percent of GDP)
Asia27.832.5
Western Hemisphere19.822.6
MENA24.423.5
Oil24.425.1
Nonoil24.521.4
Tunisia28.426.1
ICOR 1/
Asia3.74.2
Western Hemisphere13.08.7
MENA9.46.2
Oil27.16.1
Nonoil5.06.3
Tunisia9.26.4
Sources: World Economic Outlook, May 1996, and Ministry of Economic Development.

Average annual investment to GDP ratio, divided by the average real growth rate of GDP. Country group composites as defined by the WEO.

Sources: World Economic Outlook, May 1996, and Ministry of Economic Development.

Average annual investment to GDP ratio, divided by the average real growth rate of GDP. Country group composites as defined by the WEO.

Growth accounting

169. Research on growth in developing countries suggests that while investment has made a significant contribution to growth, other factors such as the accumulation of human capital as well as improvements in the quality of resources and the efficiency with which they are used, also have been very important. Growth accounting exercises have been used to analyze the determinants of economic growth by imposing a common production function on a group of countries and analyze the contribution to growth of factor accumulation and total factor productivity (TFP).

170. A recent study (Page and Underwood (1996)) using a simple production function (including capital, labor and human capital) analyzed the difference in growth performance among the Maghreb, East Asian and several European countries during 1960-94. It concluded that, in both Morocco and Tunisia, accumulation of physical capital had been the most important source of growth during this period. In Tunisia, the growth of capital averaged about 2.3 percent per year in real terms and contributed more than 40 percent of the growth achieved during 1960-94. By contrast, in East Asia, the growth of physical capital averaged about 3 percent per year, explaining more than 50 percent of growth. With the labor force growing at about the same rate in Tunisia as in East Asian countries, the remaining difference in growth performance was almost fully explained by lower growth in TFP in Tunisia (about 0.5 percent on average).

171. A recent OECD study (Morrisson and Talbi (1996)), also estimated a simple production function (including capital and labor), and analyzed the contribution of factors of production and TFP to growth in Tunisia during recent decades. Investment was again found to have been the foremost factor of growth in Tunisia. The contribution of capital accumulation (other than in housing) accounted for at least half of Tunisia’s growth in the 1956-93 period, with the other half due, in equal measure, to increases in the labor force and to TFP growth. Furthermore, the analysis of TFP revealed that the large budgetary outlays on education had contributed to an important rise in the average educational level of the labor force;56 in turn, the increase in the quality of labor was found to have contributed significantly to the growth in total factor productivity.

172. A distinction between various phases of economic policy in Tunisia points to striking contrasts in the behavior of total factor productivity. TFP growth was negative during 1962-6957 and 1982-88,58 a clear indication of economic inefficiencies. All gains in TFP occurred during the 1970s mid the 1988-92 period, marked by major economic reforms. Moreover, as the growth rates were virtually identical in the first (1962-69) and the last (1988-92) periods, the negative TFP growth in the former implies that considerably more resources had been used in order to achieve the same rates of growth.

173. To analyze Tunisia’s long-term growth performance in an international setting, TFP is estimated for Tunisia and a sample of “potential” competitor countries over the 1960-90 period (Tables 20 and 21).59 The sample included a group of developing countries (mainly Asian) defined by the WEO as major exporters of manufactures as well as two members of the European Union (Portugal and Spain), and Morocco.

Table 20:Factor Inputs and Productivity Growth Based on the Solow Residuals 1/(Average annual percent changes in real terms, period average)
1960-691970-791980-861987-901960-90
China
Growth3.77.69.47.76.8
Capital2.07.58.810.16.3
Labor1.92.52.92.22.4
TFP1.73.14.22.32.8
Korea
Growth7.89.97.39.78.6
Capital11.415.010.512.012.5
Labor2.43.15.92.03.4
TFP1.82.1−0.43.61.6
Thailand
Growth8.57.25.411.47.7
Capital12.710.47.58.910.3
Labor2.73.73.32.63.2
TFP1.80.80.46.31.7
Morocco
Growth8.15.24.83.05.8
Capital4.09.05.54.46.0
Labor1.93.13.23.12.8
TFP5.3−0.30.7−0.61.7
Portugal
Growth6.35.31.94.74.8
Capital7.96.23.64.25.9
Labor0.01.00.91.00.7
TFP3.12.2−0.12.52.0
Spain
Growth8.23.81.64.84.8
Capital8.96.92.84.46.6
Labor0.71.01.20.91.0
TFP4.20.4−0.22.51.8
Turkey
Growth5.05.74.55.45.2
Capital5.78.24.64.76.1
Labor2.42.73.32.72.7
TFP1.40.80.71.91.1
Tunisia
Growth5.37.23.94.45.5
Capital6.36.86.32.45.9
Labor1.43.03.22.82.5
TFP1.92.7−0.61.81.6
Sources: Nehru and Dhareshwar (1993); and staff estimates.

For comparability all data are based on the Nehru-Dhareshwar data base (1993).

Contributions are derived by applying the respective shares of factors estimated by Solow, (0.4 for capital and 0.6 for labor) to the average growth rate of each factor. Labor is population between ages 15 and 64.

Sources: Nehru and Dhareshwar (1993); and staff estimates.

For comparability all data are based on the Nehru-Dhareshwar data base (1993).

Contributions are derived by applying the respective shares of factors estimated by Solow, (0.4 for capital and 0.6 for labor) to the average growth rate of each factor. Labor is population between ages 15 and 64.

Table 21:Factor Inputs and Productivity Growth Based on the MRW Residuals 1/(Average annual percent changes in real terms, period average)
1960-691970-791980-861987-901960-90
China
Growth3.77.69.47.76.8
Capital2.07.58.810.16.3
Labor1.92.52.92.22.4
Human Capital5.34.62.93.04.2
TFP0.62.84.62.62.5
Korea
Growth7.89.97.39.78.6
Capital4.715.010.512.012.5
Labor0.53.15.92.03.4
Human Capital5.63.53.03.04.0
TFP4.22.70.94.02.0
Thailand
Growth8.57.25.411.47.7
Capital12.710.47.58.910.3
Labor2.73.73.32.63.2
Human Capital2.11.61.71.71.8
TFP2.62.01.37.02.7
Morocco
Growth8.15.24.83.05.8
Capital4.09.05.54.46.0
Labor1.93.13.23.12.8
Human Capital9.86.93.94.26.7
TFP2.9−1.20.6−0.80.6
Portugal
Growth6.35.31.94.74.8
Capital7.96.23.64.25.9
Labor0.01.00.91.00.7
Human Capital2.91.32.12.52.2
TFP2.72.4−0.32.21.9
Spain
Growth8.23.81.64.84.8
Capital8.96.92.84.46.3
Labor0.71.01.20.91.0
Human Capital0.61.01.61.81.1
TFP4.80.8−0.32.42.1
Turkey
Growth5.05.74.55.45.2
Capital5.78.24.64.76.1
Labor2.42.73.32.72.7
Human Capital2.11.61.71.71.8
TFP1.71.61.32.31.6
Tunisia
Growth5.37.23.94.45.5
Capital6.36.86.32.45.9
Labor1.43.03.22.82.5
Human Capital5.05.63.02.44.6
TFP1.02.1−0.31.91.1
Sources: Nehru and Dhareshwar (1993), and staff estimates.

Contributions are derived by applying the respective shares of factors estimated by Mankiw, Romer, and Weil (1992) to the average growth rate of each factor. Labor is population between ages 15 and 64. Human capital is the average increase in total means years of education.

Sources: Nehru and Dhareshwar (1993), and staff estimates.

Contributions are derived by applying the respective shares of factors estimated by Mankiw, Romer, and Weil (1992) to the average growth rate of each factor. Labor is population between ages 15 and 64. Human capital is the average increase in total means years of education.

174. Using the Solow residual method,60 the findings support those of Morrison and Talbi (1996) and Page et al. (1996) and showed that capital accumulation contributed significantly to growth in Tunisia (contributing about 45 percent of the increase in real GDP in the 1960-90 period) with the rest explained equally by labor and TFP growth. Except for the 1980-86 (the pre-reform period), TFP growth was positive and contributed to growth. During 1987-90, the better performance of most competitor countries came about principally on account of faster capital accumulation and higher TFP growth.

175. An alternative approach that explicitly identifies human capital as a factor of production,61 confirmed that accumulation of human capital was an important element in the process of economic development in Tunisia, and had contributed about 30 percent to economic growth in the 1960-90 period. The contribution of capital accumulation was about 40 percent. Capital accumulation and TFP remained the main factors behind growth in Asia and competing European countries. This may be explained by the fact that these countries improved less from already high levels of bade education.

176. These analyses, although limited by stringent assumptions underlying the production functions, support the argument that in order to achieve higher growth targets required to narrow the income gap vis-à-vis the most successful performers, Tunisia needs to raise its rate of capital accumulation, and that there is also considerable scope for improving TFP growth.

Structural reforms, macroeconomic policies, and growth

177. Several researchers have analyzed links between economic policies and TFP growth, on the basis of large country samples in an attempt to explain long-run growth. Borro (1991), Borro and Sala-I-Martin (1995), and Easterly (1993) all conclude that economic growth is maximized when the incentives to invest in physical capital and human capital as well as in technological innovation are determined by market forces. Governments can assist this process by providing an environment of macroeconomic and political stability and the appropriate infrastructure.

178. A study by the World Bank (1995b) combines estimates provided in the above studies to examine the contribution of various policy variables to the growth performance in Tunisia during 1987-94. The study concluded that advancement in the level of human capital, financial deepening, reduction of price distortions, decrease of nonproductive public expenditures, and higher openness to international competition and trade, all contributed to the increase in the per capita growth rate in the 1987-94 period compared to 1981-86. Changes in these variables could explain more than 92 percent of the increase in the average growth rate. The model underpredicted the growth that actually occurred probably because the fall in investment during the more recent period was mainly on account of lower investment by public enterprises, which may have had lower productivity.

179. Similarly, Fischer (1993) used regression analysis on panel data to examine the relations between various proxies for macroeconomic policies and structural conditions, output growth, factor accumulation, and TFP growth. The results suggest that macroeconomic instability (as proxied by the inflation rate and adverse changes in the terms of trade, and policy indicators such as the budget deficit and the parallel foreign exchange market premium) is associated with lower growth, and that the links operate through a dampening of both investment and total productivity.

180. More specifically, the results point to the following channels through which policies affected growth. Inflation impairs economic growth by reducing capital accumulation and productivity. Improvements in budget balances were strongly associated with more rapid growth, mainly through greater productivity. Deteriorations in the terms of trade were associated with a decline in growth, with the link operating mainly through their impact on productivity. Distortions in the foreign exchange market (as measured by the extent of parallel market premia as a proxy for foreign exchange controls and expectations of devaluation) adversely affect economic growth through their impact on capital accumulation. A recent study (Goldsbrough (1996)) covering 92 countries over the 1970-92 period confirmed these findings.

181. As noted by the authors of these studies, causality between inflation and growth is likely to run in both directions. For example, an adverse supply shock (including a deterioration in the terms of trade) is likely to raise inflation and put upward pressure on the fiscal deficits, with the remits of the regression merely reflecting that association.

182. With the above limitations in mind, the results of the Fischer study were used to examine the extent to which an improvement in growth during 1987-93 over the pre-reform period (1980-86) in Tunisia could be linked to an increase in macroeconomic stability (Table 22). The evidence supports the hypothesis of a link between macroeconomic stability and growth, with improvements in stability indicators explaining 70 percent of the improvement in growth performance during 1987-93.

Table 22.Impact of Macroeconomic Policies on Growth(Percent changes)
Policy IndicatorsCoefficientsChange in Policy
and Proxiesfrom1980-861987-93IndicatorsContributions to
for External ShocksFischer’(Actual Period Average)Between the TwoImprovements
StudyTime Periods 1/in Growth 2/
Rate of Inflation−0.0398.856.80−2.050.08
(−4.65)
Fiscal balance0.228−4.74−4.210.530.12
(in percent of GDP)(4.49)
Average change in the
terms of trade0.043−1.890.312.200.09
(2.71)
Exchange rate
Premium−0.01710.601.80−8.800.15
(−2.76)
Growth3.854.500.650.44
Sources: Fischer (1993) and staff estimates.

Change in mean policy indicators.

Contributions were calculated by multiplying the change in mean policy indicators by the corresponding estimated coefficient.

Sources: Fischer (1993) and staff estimates.

Change in mean policy indicators.

Contributions were calculated by multiplying the change in mean policy indicators by the corresponding estimated coefficient.

TFP growth and the IXth Development Plan (1997-2001)

183. Improvement in TFP was first introduced as an explicit policy objective in Tunisia under the VIIIth Development Plan (1992-96) (Table 23). However, growth in TFP was below targets in 1992-96, even when account is taken of the impact of the drought by deriving TFP on the basis of trend GDP. This outcome may be explained, inter alia, by the fact that private sector investment did not pick up as envisaged and that the pace of structural reform was more gradual than planned.

Table 23.Tunisia: Total Factor Produtivity (Solow Residual) During Various Development Plan Periods(annual averages)
1973-761977-811982-861987-911992-961997-2001
IVth PlanVth PlanVIth PlanVIIth PlanVIIIth PlanIXth Plan
ActualActualActualActualTargetsActualTargets 1/
Growth5.65.92.84.36.04.56.0
Capital7.37.77.32.54.33.55.2
Labor3.03.02.62.52.92.92.5
Contributions to
Growth: 1/
Capital 2/2.93.12.91.01.71.42.1
Labor 3/1.81.81.61.51.71.71.5
TFP (Solow residuals) 4/0.91.1−1.71.82.51.42.4
Memoradum items:
TFP (based on trend income) 5/1.90.5−0.51.62.51.62.4
Population growth2.22.62.62.21.81.81.7
Labor force growth2.63.32.42.62.4
Labor force participation rate2930303132
Unemployment (end-period) 6/16.315.815.313.9
Sources: Historical data based on Nehru, V. E. Swanson, and A. Dubey (1993) and Nehru and V. and Dhareshwar (1994); VIII Development Plan (July 1992); note d’orientation of the IXth Development Plan (June 1996), National Census (1989 & 1994) and staff estimates.

Contributions are derived by applying the respective shares of factors estimated by Solow (0.4 for capital and 0.6 for labor) to the average growth rate of each factor.

For 1997-2001, data extended using projected investment at constant prices and assuming a 4 percent rate of depreciation of the capital stock.

Labor is total employment (ages 15 and above) based on interpolation of data provided in the 1989 census and 1994 employment data, and official estimates under the IXth Plan.

Solow residual derived on the basis of observed growth and plan projections.

Solow residual derived on the basis of trend growth using Hodrick-Prescott filter method.

Estimates based on interpolated official data.

Sources: Historical data based on Nehru, V. E. Swanson, and A. Dubey (1993) and Nehru and V. and Dhareshwar (1994); VIII Development Plan (July 1992); note d’orientation of the IXth Development Plan (June 1996), National Census (1989 & 1994) and staff estimates.

Contributions are derived by applying the respective shares of factors estimated by Solow (0.4 for capital and 0.6 for labor) to the average growth rate of each factor.

For 1997-2001, data extended using projected investment at constant prices and assuming a 4 percent rate of depreciation of the capital stock.

Labor is total employment (ages 15 and above) based on interpolation of data provided in the 1989 census and 1994 employment data, and official estimates under the IXth Plan.

Solow residual derived on the basis of observed growth and plan projections.

Solow residual derived on the basis of trend growth using Hodrick-Prescott filter method.

Estimates based on interpolated official data.

184. The IXth Development Plan aims at a average annual growth rate of 6 percent and a lowering of the rate of inflation to 3.5 percent by 2001. Economic growth is to be led by an expansion in value added in manufacturing (mainly textile, clothing and leather industries) driven partly by higher demand in partner countries; transportation and telecommunications (with the start of various infrastructural projects involving the private sector); and commerce and tourism, with services expected to contribute half of total growth. The external current account deficit is to decline steadily to about 2.2 percent of GDP by the end of the plan period, mainly on the strength of higher exports of manufactures and tourism proceeds, while permitting substantially higher import growth. External financing would come mainly through foreign direct investment, allowing external debt to fall to 41 percent of GDP.

185. In terms of growth accounting, the objective of the plan is to be achieved through higher capital accumulation and total factor productivity growth, more than offsetting a slower growth of labor input.

186. Employment would grow by 2.5 percent annually, thus about 320,000 new jobs would be created during the period. The labor force is expected to increase by 2.4 percent annually, in line with recent trends, and unemployment would decline to about 13 percent.

187. Investment is expected to rise from 25 percent of GDP in 1996 to 28 percent by 2001, with a larger participation by the private sector, especially in infrastructure, transportation, and services, translating into an increase in the real capital stock of about 5.2 percent per year.

188. Total factor productivity growth is targeted to double to more than 2 percent on average per year, based on rapid implementation of the structural reform agenda:

  • Trade liberalization (see Chapter II for more detail). The degree of trade protection remains high and rapid and comprehensive trade liberalization is needed to avoid the risk of delaying the process of preparing protected industries to face greater international competition by 2001.
  • Accelerated privatization and stronger deregulation of public monopolies. The share of public enterprises (defined as to include enterprises in which the state holds more than 50 percent of equity) in total value added was about 14 percent in 1994, as compared with 11 percent for developing countries.62 Moreover, the state still dominates several critical sectors such as transportation, banking, telecommunications, cement production, chemicals and fertilizers, and energy. The private sector has been encouraged to participate in the development of infrastructure, particularly in transport and telecommunication, via build-operate-transfer contracts. Similar arrangements are under consideration for port services and electricity production.
  • The strengthening of the capacity of the financial system (see Chapter VI for more detail), to mobilize savings and intermediate resources efficiently. This would include a deepening of the treasury bill market through creation of effective settlement systems for treasury bills and the removal of remaining restrictions on deposit rates, while strengthening the banking system’s financial soundness.
  • Better targeted educational programs. Strong efforts are needed to develop further human capital resources. The World Bank and the authorities are in the process of strengthening training and retraining programs within the mise à niveau framework (Chapter II).
  • Reduction of restrictions on foreign investment. Higher foreign direct investment is a significant element underlying the medium-term growth and balance of payment targets under the IXth Plan, as it tends to contribute to growth via positive externalities such as increased access to foreign markets, increased scope for human capital development, and introduction of more advanced technology.

189. To ensure continued macroeconomic stability and to support higher investment rates, the plan targets an improvement in the national saving rate of more than 4 percent of GDP by 2001, mainly on account of a gradual increase in consolidated central government saving of more than 3 percent of GDP. Improvement in nongovernment saving would result from the impact of rising per capita income, public enterprise reform, and reforms in the financial sector.

190. Higher public saving is to be brought about primarily through a reduction of current expenditure by 3.7 percent of GDP during the period, mainly on account of the civil service and food subsidy reforms (Chapter V).

Table A1.Tunisia: Sectoral Distribution of GDP, 1992-96
19921993199419951996
Prel.
(In millions of dinars at current prices)
Agriculture and fishing2,2102,1571,9861,9382,630
Mining88677991111
Hydrocarbons, electricity, and water937803830841927
Manufacturing2,2662,5222,9103,2023,453
Food processing453488548551590
Construction materials and glass264290320348370
Mechanical and electrical industries321352391428449
Chemical and rubber industries188225301351399
Textiles, clothing, and leather7338289841.1121,201
Woodwork, paper, and other306339366411445
Construction and public works609726790803874
Services5,7676,4347,1537,9528,636
Transport and telecommunications9791,1001,1971,2781,424
Commerce and other services2,2792,5242,8183,2113,458
Tourism7128169441,0501,130
Government wages and salaries1,7971,9942,1942,4142,624
Indirect taxes minus subsidies1,8291,9532,0612,1852,340
GDP (at market prices)13,70614,66315,80717,01218,971
(As a percentage change)13.97.07.87.611.5
(In percent of GDP)
Agriculture aid fishing16.114.712.611.413.9
Mining0.60.50.50.50.6
Hydrocarbons, electricity, and water6.85.55.34.94.9
Manufacturing16.517.218.418.818.2
Construction and public works4.45.05.04.74.6
Services42.143.945.246.745.5
Transport and telecommunications7.17.57.67.57.5
Commerce and other services16.617.217.818.918.2
Tourism (Hotel, restaurants and)5.25.66.06.26.0
Government wages and salaries13.113.613.914.213.8
Source: Ministry of Economic Development.
Source: Ministry of Economic Development.
Table A2.Sectoral Distribution of GDP, 1992-96
19921993199419951996
Prel.
(In millions of dinars at constant 1990 prices)
Agriculture and fishing2,0431,9391,7461,5732,035
Mining1028491114124
Hydrocarbons, electricity, and water942901881881927
Manufacturing2,0202,1202,2922,3862,451
Food processing400402439421429
Construction materials and glass226240247259261
Mechanical and electrical industries290306317331333
Chemical and rubber industries203218239254268
Textiles, clothing, and leather632670748801828
Woodwork, paper, and other268284302321332
Construction and public works501562622607625
Services51305332561859126141
Transport and telecommunications83788594010021074
Commerce end other services21402188229324362499
Tourism581611669680703
Government wages and salaries1,5711,6491,7171,7941,86S
Indirect taxes minus susbsidies1,3771,4441,5381,6181,686
GDP (at market prices)12,11512,38112,78913,09013,990
(Percentage change, at constant prices)
Agriculture and fishing5.5−5.1−10.0−9.929.4
Mining−1.1−18.19.324.59.3
Hydrocarbons, electricity, and water5.9−4.4−2.2−0.15.2
Manufacturing6.54.98.14.12.7
Food processing3.80.39.2−4.01.9
Construction materials and glass3.76.22.75.00.7
Mechanical and electrical industries3.55.43.74.20.8
Chemical and rubber industries17.67.49.96.15.6
Textiles, clothing, and leather7.35.911.77.03.4
Woodwork, paper, and other6.85.86.36.33.5
Construction and public works14.812.110.7−2.53.0
Services8.83.95.45.23.9
Transport and telecommunications13.85.76.36.67.2
Commerce and other services6.22.24.86.22.6
Tourism24.15.19.51.73.4
Government wages and salaries5.04.94.14.54.0
Indirect taxes minus susbsidies9.54.86.55.24.2
GDP (at market prices)7.82.23.32.46.9
Source: Ministry of Economic Development.
Source: Ministry of Economic Development.
Table A3.Tunisia: Supply and Use of Resources, 1992-96
19921993199419951996
Prel.
(In millions of dinars at current prices)
Consumption10,65411,47812,41413,52614,726
Central Government 1/1,6241,7871,9562,1332,355
Private sector 2/9,0309,69210,45811,39412,371
Gross capital formation4,0024,2893,8694,1804,670
Gross fixed capital formation3,7294,1224,2684,1144,634
Central Government 1/600681663746837
Private sector 2/3,1293,4413,6053,3683,797
Changes in stocks273165(399)6737
Domestic Demand14,65615,76616,28217,70719,396
Net exports of goods and nonfactor services(950)(1,103)(475)(695)(425)
Export of goods and nonfactor services5,4195,9317,0917,5967,976
Imports of goods and nonfactor services6,3687,0337,5678,2918,401
GDP (at current prices)13,70614,66315,80717,01218,971
Net factor payments abroad (-) 3/(628)(874)(918)(838)(868)
GNP13,07813,78914,88916,17418,103
Net current transfers abroad (-) 3/499594703735733
Gross national disposable income13,57714,38315,59216,90918,836
(In percent of GDP)
Saving-Investment Balance:
Gross investment29.229.224.524.624.6
of which: Gazoduc and Miskar2.22.92.10.70.0
Changes in stocks2.01.1−2.50.40.2
Gross domestic saving22.321.721.520.522.4
Gross national saving21.319.820.119.921.7
Savings-Investment gap−7.9−9.4−4.4−4.7−3.0
Consolidated central government 1/2/−0.4−0.80.9−1.3−1.8
Rest of the economy−7.5−8.6−5.3−3.4−1.2
Source: Ministry of Economic Development.

Includes the social security system.

Includes all economic agents except the central government.

National account concept.

Source: Ministry of Economic Development.

Includes the social security system.

Includes all economic agents except the central government.

National account concept.

Table A4.Tunisia: Supply and Use of Resources, 1992-96
19921993199419951996
Prel.
(In millions of Dinars at constant 1990 prices)
Consumption9,3599,69210,01810,31610,759
Consolidated Central Government 1/1,4171,4991,5641,6391,693
Private sector7,9428,1938,4548,6779,067
Gross Capital Formation3,4843,4053,0143,1463,498
Gross Fixed capital formation3,1843,0883,3323,0873,327
Changes in stocks300317−31859171
Domestic Demand12,84313,09713,03213,46214,257
Export of goods and nonfactor services5,0445,2145,8945,9665,956
Imports of goods and nonfactor services5,7725,9306,1376,3386,223
GDP12,11512,38112,78913,09013,990
(Annual percentage change)
Consumption6.13.63.43.04.3
Consolidated Central Government 1/6.45.84.34.83.3
The rest of the economy6.03.23.22.64.5
Gross capital formation19.8−2.3−11.54.411.2
of which: Gross Fixed capital formation18.5−3.07.9−7.47.8
Domestic Demand9.52.0−0.53.35.9
Export of goods and nonfactor services8.03.413.01.2−0.2
Imports of goods and nonfactor services11.82.73.53.3−1.8
GDP7.82.2332.46.9
Source: Ministry of Economic Development.
Source: Ministry of Economic Development.
Table A5.Gross Fixed Capital Formation by Economic Sector and Financing, 1992-96(In millions of dinars)
19921993199419951996
Prel.
Agriculture and fishing459489516602763
Industry1,2061,4961,4391,1141,281
Mining4361303137
Hydrocarbons 1/490636534318201
Electricity and water158258310179391
Manufacturing515541566586652
Food processing100110115130150
Construction materials and glass8894122104112
Mechanical and electrical goods8382767790
Chemical and rubber products4256636570
Textile and leather products135132126140150
Woodwork and other6667647q80
Construction and public infrastructure9521,0411,0851,1671,295
Housing562627643680710
Construction and public works6072466465
Public infrastructure331342396423520
Services1,1111,0971,2281,2301,295
Transport and communications637543687650700
Lodging, food, and beverages222274279295295
Commerce and other252280263285300
Total3,7294,1224,2684,1144,634
Of which: central government600681663746837
Change in stocks273165−3996737
Financing requirement4,0024,2893,8694,1804,670
Gross national savings2,9232,9063,1783,3824,110
(in percent of GDP)21.319.820.119.921.7
Foreign resources 2/1,0791,383691798560
(in percent of GDP)7.99.44.44.73.0
Source: Ministry of Economic Development.

Includes Gazoduc (1992-94) and Miskar (1992-95) projects.

National Account concept.

Source: Ministry of Economic Development.

Includes Gazoduc (1992-94) and Miskar (1992-95) projects.

National Account concept.

Table A6.Tunisia: Production of Major Agricultural Crops, 1992-96(In thousands of metric tons)
19921993199419951996
Prel.
Cereals2,1951,9146546202,853
Hard wheat1,3231,1344364721,706
Soft wheat2612796659312
Barley 1/61150115289835
Fruits and vegetables
Citrus fruit185281210194221
Dates7586746974
Tomatoes550420480580700
Red peppers190180165150190
Potatoes2182002102,332270
Melons and watermelons380330375300350
Almonds45475235420
Table grapes5060606055
Olives1,3256751,050350300
Other
Meat141151153155152
Sugar beets291245232268306
Milk449486500565605
Fish8984878482
Source: Ministry of Agriculture.

Includes triticale.

Source: Ministry of Agriculture.

Includes triticale.

Table A7.Tunisia: Supply and Use of Cereals, 1992-96 1/(In thousands of metric tons)
19921993199419951996
Prel.
Hard wheat
Production1,3231,1344364721,706
Commercialization 2/772862786333875
Imports0.00.00.0681260
Producer price (D/t) 3/260260260275285
Soft wheat
Production2612796659312
Commercialization 2/22822420151200
Imports623550752860660
Producer price (D/t) 3/225225225240250
Barky 5/
Production61150115289835
Commercialization 2/2921888770255
Imports0.00.0402605200
Producer price (D/t) 3/150150150150170
Source: Ministry of Agriculture.

By crop year (July/June).

Commercialization of the previous year’s crop.

Covered by official marketing.

Source: Ministry of Agriculture.

By crop year (July/June).

Commercialization of the previous year’s crop.

Covered by official marketing.

Table A8.Tunisia: Energy Production and Consumption, 1992-96
19921993199419951996 4/
Prel.
Production6,1475,5895,3214,9875,313
Crude petroleum5,1994,6474,3774,2503,832
Gas 1/9489429447371,481
Production237362350219651
Royalties 2/711580594518830
Consumption4,4734,7154,9263,3274,684
Liquefied petroleum gas272282290201292
Gas1,1461,2081,2388291,223
Fuel oil1,2521,351999548769
Lighting oil153164154107149
Gasoline286298307209201
Jet fuel186217251159234
Natural gas 1/1,1781,1951,6871,2741,816
Surplus1,6748743951,660629
Electricity production 3/5,4795,7056,0316,6256,254
Sources: Ministry of Industry; and Direction Générale des Mines.

In thousands of tons of oil equivalent.

In kind royalties from the trans-Tunisia pipeline carrying gas from Algeria to Italy.

Production by the state company STEG (excluding production by private plants).

Estimate for January - November.

Sources: Ministry of Industry; and Direction Générale des Mines.

In thousands of tons of oil equivalent.

In kind royalties from the trans-Tunisia pipeline carrying gas from Algeria to Italy.

Production by the state company STEG (excluding production by private plants).

Estimate for January - November.

Table A9.Tunisia: Indicators of Tourist Activity, 1992-96
19921993199419951996 1/
Annual fixed investment in tourism sector
(in millions of dinars)219222279295295
Accommodation available
(in thousands of beds)136144153161169
Number of foreign visitors
(in thousands)3,5403,6563,8564,1203,885
Visitor bed-nights
(in thousands)21,71823,69326,44025,34624,712
Of which: foreigners20,20622,11924,68123,51422,906
Average length of stay
(in days)66666
Average occupancy rate
(in percent)5252534949
Tourism receipts
(in millions of dinars)9451,1141,3171,3231,369 2/
Average daily expenditure per tourist
(in dinars)4750535657
Sources: National Tourism Office; Central Bank of Tunisia.

Estimates for the first eleven months, except for investment, number of visitors, and bed-nights.

As of December 20, 1996.

Sources: National Tourism Office; Central Bank of Tunisia.

Estimates for the first eleven months, except for investment, number of visitors, and bed-nights.

As of December 20, 1996.

Table A10.Tunisia: Consumer Price Index, 1992-96
Weight
(In percent)19921993199419951996
Food41.2114.0116.9121.9132.0137.0
Housing18.7111.8116.1120.6125.4129.1
Clothing10.4116.9123.4129.0138.6147.3
Health9.1112.8119.6128.3135.2137.3
Transport8.8118.7127.1131.9134.1136.8
Services and other11.8116.9121.2128.6136.3143.4
General index100.0114.5119.1124.6132.4137.3
General index (excluding food)114.9120.6126.6132.7137.6
Food4.92.54.38.33.8
Housing6.23.83.84.02.9
Clothing8.25.64.67.46.3
Health5.86.07.35.41.5
Transport8.07.13.81.62.0
. Services and other5.03.76.16.05.2
General index5.84.04.76.33.7
General index (excluding food)6.55.05.04.93.7
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
Table A11.Tunisia: Consumer Price Index by Price Regime, 1992-96
Price regime19921993199419951996
(Change, December-December)
Fixed prices 1/
Homologation5.86.45.04.2
Auto-homologation4.83.35.75.5
Controlled freedom 1/
Free prices4.83.05.57.54.1
Total5.04.05.36.33.7
Sources: Central Bank of Tunisia; and National Statistics Institute.

Regimes of fixed prices and controlled freedom were abolished at the beginning of

Average change during the first nine months in 1995 compared to the same period

Sources: Central Bank of Tunisia; and National Statistics Institute.

Regimes of fixed prices and controlled freedom were abolished at the beginning of

Average change during the first nine months in 1995 compared to the same period

Table A12.Tunisia: Producer Price Index, 1992-96(Annual average; 1983 = 100)
Weight
(in percent)19921993199419951996
Manufacturing51.1181.4187.7192.4211.0215.6
Food processing10.7181.3194.4202.5215.7226.8
Construction materials and glass7.8166.0169.3174.2173.0172.6
Mechanical and electrical products9.6185.8188.7190.8206.4210.3
Chemicals and rubber3.8185.1197.8204.5216.8228.1
Textiles, clothing and leather12.3180.8185.3187.8193.9227.6
Other manufacturing6.9191.8195.2201.2227.3226.4
Mining4.4128.3127.3122.4118.0137.5
Hydrocarbons37.2189.8190.2191.2192.1192.2
Electricity and water7.3136.3140.2146.8154.0158.5
General index100.0178.9182.4185.5192.0199.3
Percent change1.82.01.73.53.8
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
Table A13.Tunisia: Producer Prices of Principal Agricultural Commodities, 1992-96 1/(In dinars per ton)
19921993199419951996
Prel.
Cereals
Hard wheat260260260275285
Soft wheat225225225240250
Barley150150150150170
Sugar beets4244474747
Olive oil
High grade1,7501,7501,3151,3151,315
Low grade1,3901,3901,0551,0551,055
Tomatoes7070858590
Source: Ministry of Agriculture.

By crop year (July/June).

Source: Ministry of Agriculture.

By crop year (July/June).

Table A14.Tunisia: Flow of Funds in 1992
TotalGovernmentNongovernmentBanking system
(In percent of GDP)
Investment29.24.424.80.0
Saving 1/21.44.017.40.0
Saving-investment gap 1/−7.8−0.4−7.40.0
Financing7.80.47.40.0
Foreign financing7.81.06.9−0.2
Capital grants0.50.00.50.0
Loans 2/3.61.02.7−0.2
Direct investment3.70.03.70.0
Domestic financing−0.60.50.2
Banking system 3/−1.21.10.2
Deposits0.0−3.23.2
Credit−1.26.6−5.4
Other0.0−2.42.4
Nonbanks 4/0.6−0.6
Capital transfers−2.22.2
Net lending−0.90.9
Arrears0.4−0.4
Treasury bills1.0−1.0
Negotiable treasury bonds0.00.0
Equipment bonds
(placed by banks)1.6−1.6
(placed directly by Treasury)−0.10.1
National treasury bonds0.4−0.4
Deposits with CENT (Savings Bank)0.4−0.4
Other 4/0.00.0
(In percent of GDP)
Investment29.24.624.60.0
Saving 1/20.53.916.60.0
Saving-investment gap 1/−8.8−0.8−8.00.0
Financing8.80.88.00.0
Foreign financing8.81.27.7−0.1
Capital grants0.70.00.7
Loans 2/4.31.23.3−0.1
Direct investment3.73.7
Domestic financing−0.40.30.1
Banking system 3/−0.30.20.1
Deposits−2.92.9
Credit−0.33.9−3.6
Other−0.70.7
Nonbanks 4/−0.10.1
Capital transfers−2.32.3
Net lending−0.80.8
Arrears0.6−0.6
Treasury bills2.5−2.5
Negotiable treasury bonds0.6−0.6
Equipment bonds
(placed by banks)−0.70.7
(placed directly by Treasury)−0.20.2
National treasury bonds−0.10.1
Deposits with CENT (Savings Bank)0.2−0.2
Other 4/0.00.0
(In percent of GDP)
Investment24.54.220.30.0
Saving 1/20.35.115.20.0
Saving-investment gap 1/−4.20.9−5.10.0
Financing4.2−0.95.10.0
Foreign financing4.21.44.8−2.0
Capital grants0.70.00.70.0
Loans 2/0.71.41.4−2.0
Direct investment2.80.02.80.0
Domestic financing−2.30.32.0
Banking system 3/−0.5−1.62.0
Deposits0.0−3.33.3
Credit−0.54.1−3.6
Other0.0−2.32.3
Nonbanks 4/−1.81.8
Capital transfers−2.02.0
Net lending−0.90.9
Arrears0.6−0.6
Treasury bills1.5−1.5
Negotiable treasury bonds0.9−0.9
Equipment bonds
(placed by banks)−0.60.6
(placed directly by Treasury)−0.10.1
National treasury bonds−0.10.1
Deposits with CENT (Savings Bank)0.3−0.3
Other 4/−1.51.5
(In percent of GDP)
Investment24.64.420.20.0
Saving 1/20.03.116.80.0
Saving-investment gap 1/−4.6−1.3−3.30.0
Financing4.61.33.30.0
Foreign financing4.62.91.40.3
Capital grants0.40.00.40.0
Loans 2/2.62.9−0.60.3
Direct investment1.60.01.60.0
Domestic financing−1.61.9−0.3
Banking system 3/−0.50.8−0.3
Deposits0.0−2.92.9
Credit−0.54.7−4.2
Other0.0−1.01.0
Nonbanks 4/−1.11.1
Capital transfers−2.12.1
Net lending−0.70.7
Arrears0.9−0.9
Treasury bills1.6−1.6
Negotiable treasury bonds0.4−0.4
Equipment bonds
(placed by banks)−0.20.2
(placed directly by Treasury)−0.20.2
National treasury bonds−0.10.1
Deposits with CENT (Savings Bank)0.2−0.2
Other 4/−0.90.9
Sources: Data provided by the Tunisian authorites; and staff estimates.

Based on external current account.

For banking system, consists of changes in net foreign assets.

For government, reflects changes in the net position of the central government excluding social security system with the banking system.

For all subcategories except “other”, and equipment bonds placed directly by Treasury, the social social security is included in nongovernment. “Other” includes the social security system’s financing.

Includes changes in the deposit position of public entities with the Treasury.

Sources: Data provided by the Tunisian authorites; and staff estimates.

Based on external current account.

For banking system, consists of changes in net foreign assets.

For government, reflects changes in the net position of the central government excluding social security system with the banking system.

For all subcategories except “other”, and equipment bonds placed directly by Treasury, the social social security is included in nongovernment. “Other” includes the social security system’s financing.

Includes changes in the deposit position of public entities with the Treasury.

Table A15.Tunisia: Revenue from the Petroleum Sector, 1992-96
19921993199419951996
Nontax revenue296300348302309
Surplus from petroleum exploitation, ETAP241218230222220
Dividends, SITEP - TRAPSA3326710
Transfer of excess funds of public2037613658
companies, ETAP-STIR
Surtax of petroleum companies3242323621
Direct taxation of petroleum companies74.768395847
Total371369388359356
Sources: Ministry of Finance.
Sources: Ministry of Finance.
Table A16.Tunisia: Monetary Survey, 1992-96
19921993199419951996
(In millions of dinars; end of period)
Foreign assets (net)5475618858431,138
Foreign assets1,3811,4982,0071,9712,486
Foreign liabilities−834−937−1,121−1,128−1,348
Domestic credit7,4788,0758,5689,28610,470
Credit to the government (net)687640562473371
Central Bank47−6−104−52−150
Deposit money banks537536544341291
Counterpart of CCP deposits104110122184230
Credit to the economy6,7917,4358,0078,81310,099
Central Bank84952015973
Deposit money banks6,7517,3407,9868,7989,126
Money plus quasi-money (M2)5,9036,3186,8117,2218,212
Money2,7812,9153,2143,5274,001
Currency1,1561,1791,1961,3151,472
Demand deposits1,6251,7362,0182,2132,529
Financial institutions1410141820
Nonfinancial enterprises and households1,6111,7262,0042,1952,510
Quasi-money3,1223,4033,5973,6944,211
Financial institutions9714512311659
Nonfinancial enterprises and households3,0243,2573,4743,5784,151
Long-term deposits388394435514552
Other items (net)1,7341,9242,2072,3932,843
Special resources849903983877907
Capital accounts9421,1131,3151,7511,999
Other−57−92−91−235−62
(Change in percent of initial stock of broad money)
Foreign assets (net)0.40.25.1−0.64.1
Domestic credit13.410.17.810.516.4
Credit to the government (net)−3.0−0.8−1.2−1.3−1.4
Credit to the economy16.410.99.111.817.8
Money plus quasi-money (M2)7.27.07.86.013.7
Money2.62.34.74.66.6
Currency0.90.40.31.72.2
Demand deposits1.61.94.52.94.4
Quasi-money4.64.83.11.47.2
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
Table A17.Tunisia: Selected Interest Rates, 1992-96
Dec.
19921993199419951996
(In percent; end of period)
Money market rate (TMM)11.318.818.818.817.81
Central Bank
Auction of refinance credit 1/10.387.887.887.886.88
Repurchase facility 2/11.388.888.888.887.88
Rediscount of preferential credits 3/
Export-related credit8.258.258.258.258.25
Crop credit7.757.757.757.757.75
Agricultural investment8.508.508.508.508.50
Small enterprise investments9.509.509.509.509.50
Commercial banks
Maximum lending/overdraft 4/16.5014.4413.81
Special savings deposit rate 5/9.637.386.886.886.12
Source: Central Bank of Tunisia.

Under the appel d’offres a fixed amount of seven-day liquidity is auctioned against assets held by the banks.

The prise en pension is an automatic repurchase window at the initiative of the banks.

Preferential rediscount abolished in November 1996.

Since 1992 the average lending rate for each bank had been limited to the TMM plus 3 points and all restrictions were lifted in early June 1994.

The interest rate for special savings deposit has been set at the money market rate of the previous month minus two points since 1987. Rates on deposits with terms of at least three months are free. The maximum rate on deposits of shorter maturities has been set at 2 percent since July 1990.

Source: Central Bank of Tunisia.

Under the appel d’offres a fixed amount of seven-day liquidity is auctioned against assets held by the banks.

The prise en pension is an automatic repurchase window at the initiative of the banks.

Preferential rediscount abolished in November 1996.

Since 1992 the average lending rate for each bank had been limited to the TMM plus 3 points and all restrictions were lifted in early June 1994.

The interest rate for special savings deposit has been set at the money market rate of the previous month minus two points since 1987. Rates on deposits with terms of at least three months are free. The maximum rate on deposits of shorter maturities has been set at 2 percent since July 1990.

Table A18.Tunisia: Assets and Liabilities of the Central Bank, 1992-96
19921993199419951996
(In millions of dinars; end of period)
Foreign assets8779441,4821,5561,938
Claims on Government 1/1171229385103
Claims on development banks849520154
Claims on deposit money banks9861,068799799154
Claims on private sector0000969
Assets = Liabilities2,0642,2292,3952,4553,168
Reserve money1,3551,4211,5231,6672,264
Currency outside banks1,1561,1791,1961,315.1,472
Currency with banks4051575684
Banks’deposits134157227250673
Claims of development banks

and other financial institutions
2432424634
Deposits of nonfinancial entities22211
Foreign liabilities301323334311272
Government deposits and

currency holdings
71128198137254
Counterpart funds6478493947
Allocation of SDRs4549504849
Capital accounts5459697984
Other items (net)174171172173198
Source: Central Bank of Tunisia.

Excluding subscription to IMF and AMF.

Source: Central Bank of Tunisia.

Excluding subscription to IMF and AMF.

Table A19.Tunisia: Assets and Liabilities of Deposit Money Banks, 1992-96
19921993199419951996
(In millions of dinars; end of period)
Reserves137181294275760
Currency4051575684
At Central Bank97130237219676
Foreign assets504556517414548
Claims on Government537536544341291
Equipment bonds3242201445817
Treasury bills159281368267262
Other5435321612
Claims on the economy6,7517,3407,9868,7989,126
Credit financed by ordinary resources5,7116,2096,7897,6367,914
Credit financed by special resources784845892827872
Equity portfolio256286305335339
Assets = Liabilities7,9298,6139,3419,82910,725
Demand deposits1,5161,6231,8932,0242,297
Development banks108131418
Nonfinancial enterprises
and households1,5061,6151,8802,0102,278
Quasi-money liabilities3,1013,3723,5563,6524,178
Development banks77115827427
Nonfinancial enterprises and households3,0243,2573,4743,5774,151
Term deposits664645624662983
Certificates of deposits54796556121
Special savings deposits2,0412,2752,3872,4082,650
Other savings deposits3032433951
Deposits in foreign exchange
or convertible dinars00661
Other236226349407345
Long-term monetary liabilities388405435514552
Foreign liabilities5336147808171,076
Special resources785824934839860
Credit from Central Bank9721,068796799186
Capital accounts8881,0531,2451,6721,915
Other items net−254−348−299−486−338
Source: Central Bank of Tunisia.
Source: Central Bank of Tunisia.
Table A20.Tunisia: Foreign Trade Indicators, 1992-96
19921993199419951996
(Changes in percent)
Exports 1/
Value (in dinars)3.55.924.910.13.8
Volume−1.64.018.33.0−2.4
Unit price (in dinars)5.21.85.66.96.4
Value (in SDRs)5.1−5.920.911.25.4
Unit price (in SDRs)6.9−9.52.28.08.0
Imports, c.i.f. 1/
Value (in dinars)18.88.57.712.31.1
Volume13.16.7−1.16.3−1.8
Unit price (in dinars)5.01.78.95.62.9
Value (in SDRs)20.6−3.64.213.32.6
Unit price (in SDRs)6.7−9.65.36.64.5
Terms of trade0.20.2−3.01.23.4
Source: Ministry of Economic Development.

Current price data are based on customs trade statistics.

Source: Ministry of Economic Development.

Current price data are based on customs trade statistics.

Table A21.Tunisia: Value of Foreign Trade by Commodity Class, 1992-96 1/
Prel.
19921993199419951996
(In millions of SDR)
Exports, f.o.b.2,8502,6833,2433,6053,801
Energy products432325305305398
Non-energy2,4182,3582,9383,3013,403
Phosphates and derivatives395336412470539
Agricultural (including agro-processi296312421359286
Textiles and leather1,2311,2621,5431,8001,944
Mechanical and electrical industry341315430496476
Other goods156132130175159
Imports, c.i.f.4,5674,4044,5905,2025,338
Energy products319326326356445
Non-energy4,2476,0784,2644,8464,892
Raw materials and semi-finished goo1,4771,3061,3111,5241,536
Equipment1,1201,0851,0021,0201,076
Food305298375574433
Nonfood consumer goods1,3451,3881,5771,7281,848
Memorandum item:
Net energy exports113−1−21−52−47
Source: Ministry of Economic Development.

Based on customs statistics.

Source: Ministry of Economic Development.

Based on customs statistics.

Table A22.Tunisia: Volume of Foreign Trade by Commodity Class, 1992-96 1/
Prel.
19921993199419951996
(Growth rates in percent)
Exports, f.o.b.−1.64.018.33.0−2.4
Energy products10.2−11.52.73.65.6
Non-energy−3.97.321.02.9−3.6
Phosphates and derivatives−16.619.017.64.65.3
Agriculture (including agro-processing)−24.418.428.4−30.8−28.6
Textiles and leather8.46.419.39.81.8
Mechanical and electrical industry−1.6−4.034.98.5−10.0
Other goods−6.4−9.4−5.527.0−14.4
Imports, c.i.f.13.16.7−1.16.3−1.8
Energy products15.016.59.87.11.5
Non-energy12.95.8−2.26.2−2.2
Raw materials and semi-finished goods15.3−7.2−1.09.44.4
Equipment9.120.7−23.7−4.2−1.0
Food21.92.321.135.2−30.1
Nonfood consumer goods11.78.311.63.10.3
Source: Ministry of Economic Development.

Based on customs statistics.

Source: Ministry of Economic Development.

Based on customs statistics.

Table A23.Tunisia: Trade Balance in Hydrocarbons, 1992-96
19921993199419951996
(In thousands of tons of oil equivalent)
Crude oil
Exports4,0053,0133,3753,4083,242
Imports341295660900781
Balance3,6642,7182.7152,5082,461
Refined products
Exports60445524621820
Imports2,2541,8722,6442,8732,133
Balance−1,812−2,077−2,120−2,252−1,313
Gas
Exports------700
Imports1,1181,1321,5461,4002,219
Balance−1,118−1,132−1,546−700−2,219
Total
Exports4,0653,0583,8994,7294,062
Imports3,3313,5484,8505,1735,133
Balance734−491−951−444−1,071
(In millions of dinars)
Total
Exports538455442437563
Imports397457472511629
Balance141−2−3074−66
Source: Ministry of Economic Development.
Source: Ministry of Economic Development.
Table A24.Tunisia: Exports of Phosphate Rock and Phosphate Derivatives, 1992-96
VolumeValueVolumeValueVolumeValueVolumeValueVolumeValue
19921993199419951996
(Volume in thousands of tons, value in millions of dinars)
Phosphate rock926281,122321,296331,308321,20636
Phosphoric acid1,0261448951211,1421701,1281911,198218
Superphosphate7573263575776103744110705120
Other phosphates derivati743107762105743131145163214
Sources: Direction générale des mines et BCT.

Estimates for the first nine months.

Includes: ammonium phosphate, bicalcium phosphate and hyperphosphate.

Sources: Direction générale des mines et BCT.

Estimates for the first nine months.

Includes: ammonium phosphate, bicalcium phosphate and hyperphosphate.

Table A25.Tunisia: Exports and Imports of Primary Products by Major Categories, 1992-96
VolumeValueVolumeValueVolumeValueVolumeValueVolumeValue
19921993199419951996
(Volume in thousands of tons, value in millions of dinars)
Exports
Olive oil971391231771933059021729117
Dates17441948215721581847
Almonds1214--1--------
Citrus20824102182511229
Wine 1/911913152210151014
Fish12691690148310741391
Imports
Soft wheat596726568680390911147664131
Hard wheat578295501266813820653
Barley513034543866975295
Maize3433829037254333114331558
Sugar2355921362284941876924287
Tea1419111713197111117
Milk28413842283119361221
Soybean oil136521416615492177111197113
Meat 2/14211526916612410
Sources: Central Bank of Tunisia; and National Statistics Institute.

Includes other alcoholic beverages.

Including live animals for slaughter.

Sources: Central Bank of Tunisia; and National Statistics Institute.

Includes other alcoholic beverages.

Including live animals for slaughter.

Table A26.Tunisia: Direction of Trade, 1992-96
19921993199419951996
(In percent of total)
Exports, f.o.b.
EC countries 1/78.478.380.178.779.7
Of which: France27.229.327.227.925.7
Italy17.218.519.619.020.7
Germany17.117.415.515.715.6
Netherlands2.63.13.12.83.1
Belgium/Luxembourg6.97.36.56.57.1
United Kingdom1.81.31.51.51.9
Greece2.10.11.30.60.7
Spain2.82.54.74.03.6
Arab Maghreb Union7.97.76.47.46.0
Of which: Libya4.45.03.43.53.6
Algeria2.41.82.33.41.7
Morocco1.10.90.60.50.7
Mauritania----------
Other countries13.714.013.513.914.3
Of which: United States0.80.71.01.30.8
Turkey0.91.30.30.60.9
FSU0.30.20.1----
Japan0.30.20.30.30.3
Switzerland0.30.50.50.90.5
Total100.0100.0100.0100.0100.0
Imports, c.i.f.
EC countries 1/71.172.369.570.269.5
Of which: France25.527.227.426.124.1
Italy18.218.415.415.618.6
Germany14.013.112.212.712.6
Netherlands2.22.22.12.72.3
Belgium/Luxembourg4.74.34.34.54.4
United Kingdom1.82.32.22.02.0
Greece0.60.80.70.90.8
Spain3.33.33.64.23.9
(In percent of total)
Arab Maghreb Union4.43.24.54.45.4
Of which: Libya0.80.81.92.33.0
Algeria2.41.61.91.41.6
Morocco1.20.80.70.80.7
Mauritania----------
Other countries24.524.526.025.325.1
Of which: United States5.05.86.65.04.4
Canada1.00.50.51.00.6
Brazil0.60.71.00.60.8
Argentina0.80.60.70.21.2
Austria0.50.40.60.4--
Turkey0.90.91.31.41.3
Sweden1.11.31.11.11.1
Switzerland1.21.31.51.51.3
FSU1.31.61.62.81.1
Former Yugoslavia0.50.10.10.10.1
Romania0.10.00.10.30.9
China, People’s Rep.0.80.80.80.70.8
Japan2.32.32.31.82.1
Saudi Arabia0.30.30.40.60.4
Total100.0100.0100.0100.0100.0
Sources: Central Bank of Tunisia; National Statistics Institute of Tunisia.

Outside Austria, Finland, and Sweden.

Sources: Central Bank of Tunisia; National Statistics Institute of Tunisia.

Outside Austria, Finland, and Sweden.

Table A27.Tunisia Composition of External Debt by Creditor, 1991-95
19911992199319941995
(In millions of Dinars; end-period)
Multilateral organizations2,0182,3363,0763,1103,341
Of which: World Bank1,2231,3091,5821,5401,536
African Development Ba5107281,0371,1671,327
OECD Countries3,4303,6593,9044,1184,194
Of which: France9631,0471,1221,2691,348
Germany673694686695750
Japan529530639689673
United States550605631650618
Italy304415468434432
Arab countries and organizations533568616728647
Of which: Saudi Fund139134124113105
Kuwaiti Fund151136127164154
Arab Fund for Economic
and Social Developmen136177234288225
Other countries2961023813929
Financial markets123161122368874
Total medium- and long-term debt6,4006,8267,7558,4629,085
Arab Monetary Fund141240
International Monetary Fund223276298300279
Total External Debt6,6237,1168,0658,7669,364
(as percent of GDP)55.151.955.055.555.0
Source: Central Bank of Tunisia; and Fund staff estimates.
Source: Central Bank of Tunisia; and Fund staff estimates.
Table A28.Tunisia: External Debt and Debt Service Payments, 1992-96
19921993199419951996
(In millions of SDRs)
Disbursement727849104110321026
Long term capital482558464442437
Medium term capital245291577590589
Debt Service
Med. & l.term92793198510541131
Interest298321348386429
Principal629610638669702
IMF3617132342
Charges1513131310
Repurchases21401032
Total debt service96394899810781173
Interest313334360399439
Principal650614638679734
Debt outstanding54445610605866256857
Medium and long term debt52225395584864286692
AMF118300
Fund Credit211207207197165
(In percent of current receipts)
Total debt service 1/20.220.418.618.418.9
Interest6.67.26.76.87.1
Principal13.713.211.911.611.8
Excluding IMF19.520.018.318.018.2
Interest6.36.96.56.66.9
Principal13.213.111.911.411.3
(In percent of GDP)
Debt outstanding51.955.055.555.052.0
Total debt service8.89.19.19.18.7
Source: Data provided by the Tunisian authorities; and Treasurer’s Department of the Fund.

Includes IMF charges and repurchases.

Source: Data provided by the Tunisian authorities; and Treasurer’s Department of the Fund.

Includes IMF charges and repurchases.

Table A29.Tunisia: Selected Exchange Rate Indices, 1992-96 1/
Effective exchange rate 2/
U.S.FrenchRealRelative
dollarfrancSDRNominal(CPI-based)Prices
(Period averages; 1990=100)
1992Q196.597.894.4100.7103.4102.7
Q297.397.395.0101.2104.4103.1
Q3105.596.298.6101.8104.7102.8
Q498.295.095.0102.4105.4102.9
Year99.496.695.7101.5104.5102.9
1993Q189.291.087.998.6101.1102.5
Q289.389.785.897.599.1101.6
Q385.991.883.198.2100.4102.3
Q485.591.783.399.0101.6102.6
Year87.591.085.098.3100.5102.2
1994Q183.489.981.698.1100.5102.5
Q285.589.582.099.4101.7102.3
Q389.087.682.898.9101.1102.2
Q489.487.282.799.0101.7102.6
Year86.888.582.398.9101.2102.4
1995Q190.686.182.498.9102.1103.3
Q294.185.181.598.9103.3104.4
Q393.585.183.799.7104.4104.7
Q493.084.384.699.2103.7104.5
Year92.885.283.099.2103.4104.2
1996Q190.884.184.199.0103.0104.0
Q289.584.984.099.8103.6103.8
Q390.785.084.8100.1104.2104.0
Q489.785.484.3100.5104.9104.3
Year90.284.884.399.9103.9104.0
Sources: IMF, International Financial Statistics, and Information Notice System.

Foreign currency units per Tunisian dinar.

Weighted by non-oil trade and tourism flows of 15 partner and competitor countries.

Sources: IMF, International Financial Statistics, and Information Notice System.

Foreign currency units per Tunisian dinar.

Weighted by non-oil trade and tourism flows of 15 partner and competitor countries.

Tunisia: Summary of the Tax System as of January 1, 1996

(All amounts in Tunisian dinars)

TaxNature of TaxExemptions and DeductionsRates
1.Taxes on net income and profits
1.1CorporationsNormal rate: 35 percent
Code de l’impôt sur le revenu des personnes physiques et de l’impôt sur les sociétés (CIRPPIS), December 30,1989.1/Levied on all resident corporations, cooperatives, and autonomous public entities engaged in industrial or commercial activity, as well on Tunisian-source profit of nonresident companies.



Losses can be carried forward as a deduction against profits of the following three years.
Exemptions: nonprofit professional associations with revenue from tax or quasi-tax sources; mutual funds; savings and assistance funds managed by nonpaid officials; nonprofit public entities; service cooperatives in agricultural and fishing activities; employee-owned production cooperatives.

Reduced rate: 10 percent. The latter is applicable to profits of the following companies: enterprises in handicraft, agricultural, and fishing activities; service and consumption cooperatives; profits from youth employment programs or promotion funds for handicrafts and small traders, Exemptions cannot reduce tax liability below 10 percent.
Provisional advance payments are required on current year’s profits, in three installments, each being equal to 30 percent of the pervious year’s income tax in the 6th, 9th, and 12th months of their taxable year. Adjustment is made upon submission of the tax return for the taxable year.Deductions: linear or degressive depreciations are allowed for business fund assets; provinious for bad debts up to 10 percent of taxable profits, with rates of 50 percent or 100 percent for banks; previous for depreciation of equity for banks and risk-capital mutual funds up to 30 percent of taxable profits, with a rate of 50 percent for fiscal years 1997-2001; deduction of up to 35 percent of not profits for purchase of newly issued equity instruments in enterprises Incentive Law (Law No. 93-120 of December 1993); deductions in various degrees of income from activities encouraged by the Investment Incentive Law; deduction allowed for charitable donations up to 2 per thousand of the turnover and for representation expenses up to 1 percent of the turnover with a maximum of D 20,000; 50 percent of the construction cost of housing built for employees is deductible the first year and the remainder over a period of ten years.Minimum tax: 0.5 percent of the turnover of the taxable year, with a ceiling of D 500 for companies subject to 10 percent rate and D 1,000 for companies subject to 35 percent rate. Tax withholding at source is applied to wages, salaries, interest, commissions, brokerage fees, royalties, and rents.
1.2Individuals

(CIRPPIS) 1/
Levied on individuals domiciled in Tunisia on their worldwide income. Types of income include wages and salaries; pensions, life annuities, professional income; business profits; profit shares; capital income; income from land; and royalty income. Nonresidents are also subject to this tax on their Tunisian-source income. Tax collected through withholding on wages and salaries, interest payments, dividends, director fees, payments to nonresidents. Advance payment is also required for business and professional income as in the case of corporations (see 1.1 above). Lump-sum tax liability (forfait) is established for enterprises with annual turnovers not exceeding the amounts specified m the tax code.Exemptions: remunerations of foreign diplomats (exempted on a reciprocal basis); life annuities paid to work-related accident victims, indemnities paid to victims of physical attacks by virtue of a court verdict; social security and welfare payments; special allowances to cover work-related expenses; dividends paid by entities subject to the corporate tax; interest income from savings deposits linked to financing for housing interest from bank deposits in foreign currency or convertible dinars; interest income from special savings accounts with banks and the National Savings Fund of Tunisia, and up to D 1,500, with a limit of D 1,000 for interest from special savings accounts. Deductions: same as in the case of corporate profits (see 1.1 above). In addition: premiums under insurance contracts up to D 200 increased by D 100 for spouse and D 50 for each dependent child.Rates
Brackets(In percent)
First 1,500zero
Next 3,50015
5,00020
10,00025
30,00030
Over 50,00035
Minimum tax: 0.5 percent of the turnover of the taxable year with a ceiling of D 500. Deductions and exemptions cannot lower tax liability below 30 percent of tax due in the absence of deductions and exemptions.
2.Social security contributionsAll private sector employers must join the National Social Security Fund (Caisse national de Sécurité sociale, CNSS). The CNSS pays pensions, family allowances, and other social security benefits.Exemptions: none.

Deductions: none.
Social security
Employers:13 percent.
Employees:6.5 percent.
Retirement
Employers:2.5 percent.
Employees:1.25 percent.
3.Taxes on payroll and work force
3.1Vocational training tax

(Taxe de formation

professionnelle)
Levied on wages and salaries.None.Normal rate: 2 percent

Reduced rate:1 percent

(for industrial manufacturing jobs).
3.2Contribution to the “Housing Promotion Fund for Wage Earners” (FoProlos)Levied on wages and salaries.None.1 percent.
4.Taxes on property
4.3Transfer duties on property transfers

(Droits d’enregistrement sur les mutations/sur les actes d’échanges)




Levied on transfer of property through sale, exchange, gift, or inheritance.




For inheritance, there is an allowance of D 2,000 for spouse, child, and other dependent descendants with a total ceiling of D 12,000 per estate.



Exemption for principal residence of deceased.




Gifts and inheritance: rates vary between 5 percent and 35 percent depending on relationship.



Sales are subject to a rate of 5 percent.



Exchanges are subject to a rate of 2.5 percent.
5.Taxes on goods and services
5.1Value-added tax (Code de la taxe sur la valeur ajoutée), June 2, 1988. 2/

Levied on services; imports, wholesale trade, and retail trade (with annual turnover of less than D 100,000); and industrial and handicraft production activities. Credit is given for the tax paid in previous stages for the same good. Lump-sum tax liability (forfait) is applied for enterprises with annual turnovers not exceeding the amounts specified in the tax code.


Exemptions: exports as well as selected domestic and import goods such as books, newspapers, periodicals, milk, vegetable oil, etc., and services, such as air transport, maritime transport, international transport, etc.


Normal rate: 17 percent

Reduced rate: 6 percent for medical services,

fertilizers, and handicrafts.

High rate: 29 percent on luxury goods.

Rate of 10 percent for TV sets, computers and dats processing hotel and restaurant services, equipment goods other than locally produced, non-commercial service, and small cars..
5.2Consumption duties (Droits de consommation, Law 88-62 of June 2, 1988 and revised by budget law for 1994).



Levied on selected goods.




None.




Ad valorem rates vary from 25 percent to 683 percent (some alcoholic beverages)



Specific rates (petroleum products, alcohol and wines).
5.3Tax on insurance contracts


Levied on premiums collected for insurance contracts.


Reinsurance.

Risk insurance for export goods and export credit insurance.

Risk insurance for agriculture and fishing contractted with the Tunisian Fund for mutual agricultural insurance (CTAMA). Life insurance and life annuities. Mandatory insurance for construction of housing. Risks located outside Tunisia.


Sea and air transport insurance: 5 percent

Other insurance premiums: 10 percent.
5.4Motor vehicle taxAnnual levy on motorcycles and cars.

Vehicles registered abroad during first three months.


Motorcycles: from D 30 to D 450 depending on the engine size;

Cars: from D 45 to D 1,500 depending on their fiscal horsepower.

Rates are doubled for legal persons.
6.Taxes on international trade
6.1Taxes on imports

A three-column tariff system based on the CCD nomenclature with minimum, preferential, and general rates. Preferential treatment is given to goods from 15 countries of North Africa and the Middle East, provided they satisfy origin criteria. General treatment is given to goods from
6.1.1Customs dutyExemptions or reductions in rates apply to certainRates: from 10 percent to 43 percent
(Droits de douane à l’importation)categories of importers or imports such as:

  • equipment for investment under the Investment Incentive Law;
  • goods used in manufacture under special customs regimes (e.g., temporary admission, industrial warehousing).
All duties are assessed ad valorem on c.i.f. value.
countries that do not have special commercial relationships with Tunisia, or do not apply the most-favored nation clause.
  • goods used by particular institutions and bodies; military forces, diplomatic personnel, and international organizations, airlines, etc.;
  • goods used for educational, cultural, social and health purposes;
  • household effects and travel goods within specified limits.


Exemptions or deductions may also be applied to certain categories of foodstuffs imported under special temporary tax relief (régimes fiscaux privilégiés conjoncturels).
6.1.3 Complementary duty on imports (Droit complémentaire à l’importation)Additional temporary import duty levied on limited range of finished and semifinished goods produced locally for which imports are liberalized.Rate: 10 percent Will be eliminated effective January 1,1998.
6.1.3Service fee on imports (Redevance sur prestations douanières à l’importation).Flat fiscal duty on imports, regardless of origin.Exemptions: numerous.2 percent of the total of import duties, including VAT, excises, and compensatory duty, with a minimum of D 5 per declared item.
6.2Export duties
6.2.1Service fee on exports (Redevances sur prestations douanières à l’exportation).Flat fiscal duty on selected exports.Exemptions: numerous.1.5 percent of the export value

(f.o.b.). Budget Law of 1998 provides a list of

taxable exports.
Other taxes
7.3.1.Registration duties

(Droites d’enregistrement)
Duties on registration of establishment, transformation, dissolution of corporations and changes in their capital.Exemption: Fully exporting enterprises

No registration is required for capital changes for enterprises with variable capital of cooperatives.
Rate: D 100 per registration
Duty on the amount of fine imposed by courtsRate: 5 percent of the amount with a minimum of D 5-20.
7.3.2Stamp duties

(Droits de timbre).
Specific duties on a wide of civil, administrative, and judicial procedures.Exemptions: numerous.Various rates between D 0.2 and D100.
Earmarked taxes for special Treasury funds
8.1 Levies for the fund for the development of competitiveness in the sector of agriculture and fishing
Fee on fishing products

Tax on fruits and vegetables

Tax on maize and soybean cake

Tax on meat
Levied on sales of fishing products.

Tax due on imports and production.

Tax due on imports.

Levied on volume of meat production and imports.
Exemption: exportsRate: 2 percent of sales

Rate: 2 percent

Rate: 2 percent

Rate: D 0.05 per kilogram
8.2 Levies for the fund for developing competitiveness in the industrial sector
Tax on food cans

Professional contribution of footwear

Tax on construction materials, ceramics, and glass materials

Contribution on the sale of fabrics

Tax on products of mechanical, electric, chemical, and packing goods industries.
Tax assessed on value of packing; for imports, on total value of food can.

Due on leather goods.

Assessed on turnover of enterprises producing construction materials.

Assessed on basis of factory gate prices and import value.

Levied on industrial products
Rate: 1 percent

Rate: 1.5 percent

Rate: 0.5 percent

Rate: 1 percent

Rate: 1 percent
8.3 Levy for the fund for strengthening competitiveness in the tourism sectorTax on hotels, tourist restaurants and class A travel agencies.Rate: 1 percent on turnover for hotels and restaurants; D 1.7 monthly for cash sent on vehicles used for tourist transport for travel agencies.
Sources: Code de l’impôt sur le revenu des personnes physiques et de l’impôt sur les sociétés; Code de la taxe sur la valeur ajoutée; Code de la douane; Law 88-62 of June 2, 1988 on Refonte de la réglementation relative aux droits de consommation; and Code des droits d’enregistrement et de timbre.

Applicable to 1990 income and profits.

Effective July 1, 1988.

Sources: Code de l’impôt sur le revenu des personnes physiques et de l’impôt sur les sociétés; Code de la taxe sur la valeur ajoutée; Code de la douane; Law 88-62 of June 2, 1988 on Refonte de la réglementation relative aux droits de consommation; and Code des droits d’enregistrement et de timbre.

Applicable to 1990 income and profits.

Effective July 1, 1988.

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