Journal Issue

Stabilization Problems and Policies in Tunisia

International Monetary Fund. External Relations Dept.
Published Date:
September 1970
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Evangelos A. Calamitsis

TUNISIA attained independence in 1956 as a beylik or monarchy, and was proclaimed a republic the following year. Lying at the crossroads of the eastern and western Mediterranean, between Algeria and Libya, it is the smallest of the North African countries in land area. In 1969, its rapidly growing population reached an estimated 4.9 million, and the gross domestic product (GDP) per capita amounted to about $240, well above the average of Africa as a whole, Though endowed with relatively modest resources, Tunisia has made considerable progress in mining, manufacturing, and in the development of tourism into a thriving industry. Gross receipts from the tourist industry are at present the most important single source of foreign exchange earnings, followed by receipts from petroleum and phosphate exports. Yet farming is still the mainstay of the economy, and fluctuations in agricultural output continue to have a major impact on the country’s economic performance.

Following independence, the Tunisian Government devoted much of its attention to the tasks of defining and consolidating the country’s economic and political relations with the rest of the world. It also set out to bring local institutions in line with modern, essentially western-oriented practices. During the period 1956-61, various judicial and social reforms were undertaken, and a number of new national institutions were set up. Among the first to be established was the Central Bank of Tunisia, which began its activities on November 3, 1958, replacing as bank of issue the Bank of Algeria and Tunisia. On November 1, 1958, the Tunisian dinar was introduced in lieu of the old Tunisian franc at the rate of 1 dinar per 1,000 francs. The introduction of this new monetary unit left unchanged the existing parity with the French franc. However, when the latter was devalued in December 1958, the Tunisian authorities decided to maintain the value of the dinar in terms of other currencies; the dinar was thus defined as the equivalent of US$2.38095 or old F 1,175.

This decision was guided in part by social considerations, but it was also inspired by the prevailing financial situation, which was characterized by a much improved trade balance, rising foreign exchange reserves, and a comfortable budgetary position. Besides, the authorities were anxious to avoid a devaluation of the dinar that would tend to exert an upward pressure on domestic wages and prices. For similar reasons, they refrained from following the devaluation of the Spanish peseta in July 1959, and of the Moroccan franc in October 1959.

In this period after independence, some steps were taken to increase public investments and promote the expansion of the economy; yet these did not yield the desired results. Owing largely to difficulties of a structural nature as well as the lack of a coordinated development effort, the rate of growth of the economy remained rather modest, living standards improved only slightly, and unemployment persisted on a large scale throughout the country. In view of this situation the authorities resolved to accelerate the pace of economic development within a framework of economic planning and centralized policy formulation. In 1961, a far-reaching study of the nation’s development problems and prospects was prepared,1 and soon thereafter the Government launched its first operational plan, the Three-Year Plan, covering the period 1962 through 1964.

Performance Under Planning

Tunisia’s performance under the Three-Year Plan was marked by a number of significant achievements. During the Plan period, the GDP at market prices increased at an annual rate of 4.6 per cent in real terms; although this was well below the planned target of about 7 per cent, it represented a considerable improvement over the record of 1956-61. Important gains in output were registered by the mining sector, power, transportation, and telecommunications, and particularly by the tourist industry. At the same time, there was a notable improvement in living standards, and in the level of employment.

Moreover, substantial progress was made toward the qualitative objectives of the Plan. By late 1964, the “Tunisification” of the economy had been largely completed, and various structural reforms had been carried out in agriculture, commerce, mining, and the handicraft industry. The agricultural reforms included the formation and promotion of production, service, and marketing cooperatives aimed at integrating the traditional farms with those taken over from foreign settlers. With the implementation of a progressive educational policy, there was also a rapid extension of education at all levels.

Growing Financial Difficulties

These achievements were due mainly to the intensive efforts of the authorities to expand public investments, but the drive with which these efforts were made soon gave rise to growing financial difficulties. As the Government attempted to implement with speed a whole range of ambitious projects, it overtaxed available resources and incurred sizable over-all treasury deficits. At the outset, these deficits were covered essentially by increased savings generated through ordinary budget surpluses, and by foreign loans and grants. However, as the flow of such financial resources fell short of the rising requirements of the capital budget, there was substantial recourse to borrowing from the banking system.

In this respect, Tunisia’s experience was characteristic of the problems confronting many developing countries. Faced with a shortfall in both domestic and foreign financial resources, the Tunisian authorities resorted increasingly to deficit financing rather than correspondingly reducing their planned investments. At the same time, some investments of public and private enterprises were financed by bank borrowing, further aggravating the internal financial situation. Consequently, the economy experienced a large monetary expansion. Total domestic credit nearly doubled during the Plan period 1962-64, and despite a sharp decline in foreign exchange reserves, money supply increased by 33 per cent, compared with an increase of 14 per cent in real GDP.

In order to check the resulting pressures on the domestic price level, the Government intensified the existing comprehensive system of price controls. However, the methods used to suppress inflation had some distinct disadvantages. By the end of the Plan period, a parallel market had developed for several controlled commodities and for foreign exchange. Furthermore, the structure of prices and costs had become distorted, thus probably impairing incentives for a rational allocation of economic resources.

With mounting pressures on the domestic economy, Tunisia’s external payments position also suffered over the years of the Plan. This was due largely to a lag in exports, an increase in imports associated with the development program, and the emergence of a considerable deficit on account of various services and transfer payments. The “export lag” was attributable mainly to a weakening of the competitive position of several Tunisian products in foreign markets. While exports such as olive oil remained competitive in world markets, other commodities including phosphates, wine, and citrus fruits lost substantial ground. Moreover, the prospects for some of these export products were unsatisfactory, in view of the loss of preferential treatment in the French market subsequent to the termination in September 1964 of the financial and trade agreement with France.

These factors contributed to growing current account deficits that were only partly offset by the net inflow of foreign capital, both official and private. As a result, the balance of payments showed persistent deficits, leading to a considerable loss in official reserves and to an accumulation of a large volume of short-term foreign liabilities. By the end of July 1964, the gross foreign exchange reserves of the Central Bank of Tunisia had fallen to a point equivalent to less than two months’ imports, and amounted to $31.2 million, against $74.3 million at the end of 1961. In addition, Tunisia’s heavy reliance on foreign borrowing had resulted in a marked increase in its medium-term and long-term external indebtedness, which was to place a heavy debt-servicing burden on the economy in future years.

The Stabilization Program

Tunisia’s critical financial situation in mid-1964 posed a grave threat, not only to the gains already achieved under the Three-Year Plan but also to the prospects of further efforts to promote the growth of the economy. Faced with this situation, therefore, the Tunisian authorities undertook in October 1964 a comprehensive stabilization program for the gradual restoration of internal and external balance. In support of this program, the Fund approved a one-year stand-by arrangement for Tunisia in the amount of $14.25 million, which was fully utilized.

The stabilization program consisted of three main lines of action: the containment of the over-all treasury deficit within limits compatible with the restoration of economic stability; the application of prudent monetary policies; and the adjustment of the rate of the dinar. These lines of action were to provide the necessary financial controls and incentives at a time when the authorities were about to embark on their second development program, the Four-Year Plan, covering the years 1965-68.

The containment of the over-all treasury deficit aimed at controlling the expansion of aggregate demand, thereby reducing the existing pressures on the domestic price level and the balance of payments. Since the rapid growth of expenditures under the capital budget had been the major cause of the tight treasury position, the stabilization program called for limiting such expenditures to a level that would not entail excessive borrowing from the banking system. In particular, it emphasized that the Government would not start new investment projects for which foreign assistance had not been secured, unless additional domestic means of financing could be found. The program also called for measures to restrain the growth of ordinary budget expenditures, including the freezing of government wages and salaries for at least a year.

Consistent with the measures envisaged in the fiscal field, the program placed separate ceilings on net central bank credit to the Government and on direct government borrowing from the commercial banks. It also placed a global ceiling on central bank credit to the commercial banks, with a view to curbing the expansion of credit to the private sector. This ceiling was supported by other appropriate provisions affecting commercial bank lending, such as the imposition of marginal reserve requirements varying from 10 per cent to 30 per cent depending on the rate of increase in deposits.

In devising the stabilization program, the authorities considered, inter alia, whether action on the exchange rate was needed to correct the disparities between domestic and foreign prices. The same political and social considerations that had operated earlier to prevent devaluation still applied. Nonetheless, following a thorough assessment of this matter, it was concluded that the dinar was overvalued, and that an exchange rate adjustment was indeed necessary. Since the country was faced with an inflationary situation, it was difficult to determine the extent of the necessary adjustment; but after careful evaluation of some key indicators, the authorities decided upon a devaluation of the dinar by 20 per cent and sought Fund concurrence on an initial par value. The par value of D 1 = US$1.90476 was agreed with the Fund and became effective on September 28, 1964.

The new rate of the dinar was expected to stimulate the growth of exports, and to promote the expansion of foreign exchange earnings from tourism and other services. In addition, it was expected to help limit the demand for imports and service payments, and also lead to a saving in foreign exchange on outward private transfers.

The exchange rate adjustment was accompanied by certain changes in export and import duties. For a few export products, such as phosphates and olive oil, additional export duties were levied to absorb part of the windfall profits brought about by the rate adjustment. On the import side, the change in the exchange rate was expected to yield additional revenues to the Government. However, in order to minimize the impact of the devaluation on the cost of living, import duties on some essential commodities, like sugar and textiles, were reduced.

Short-Rim Effects of the Program

With the implementation of the stabilization program, the Tunisian authorities were able to initiate the difficult process of correcting the existing disequilibria in the economy. The exchange rate adjustment and the changes in export and import duties soon yielded substantial fiscal revenues to the Government, resulting in a considerable reduction in its indebtedness toward the banking system in the last quarter of 1964. Subsequently, in 1965, there was a further increase in government revenues and in the ordinary budget surplus; but as capital expenditures were still at a high level, the Government had recourse to bank credit to cover its over-all treasury deficit. However, such credit remained within the established ceilings, and money supply rose only slightly.

At the same time, owing mainly to an excellent harvest, the growth of total output continued unabated. This helped improve the supply situation in domestic markets, thus offsetting some of the effects of increased import prices on the cost of living. The increases in prices and costs in the economy were also moderated by the fact that the wage line was held in the public sector. Accordingly, the advantage gained by the devaluation was largely preserved, notwithstanding the rapid expansion of consumption and investment expenditures.

The short-run effects of the program on the balance of payments were on the whole rather favorable. As a result of the devaluation, Tunisia was able to maintain the competitive position of most of its agricultural exports in the French market, though they were made subject to full tariff rates following the termination of the trade agreement between the two countries. Moreover, the devaluation encouraged the growth of mineral exports, and fostered the development of the tourist industry. On the import side, it also appears to have had a restraining influence. Nevertheless, due to a sharp decline in wine exports to France and larger payments for certain services and transfers, the balance of payments remained under pressure.

In the first year of stabilization, Tunisia benefited from a large inflow of foreign private and official capital, which helped finance a greater part of the investment program. It also contributed to a modest improvement in official reserves, hence permitting the authorities to take measures to relax restrictions and reduce discrimination. These measures included some liberalization of current invisible transactions, the abolition of advance import deposits, and a reduction in reliance on bilateral payments agreements.

Temporary Setback

In tracing their course of action for the years 1966-67, the Tunisian authorities were guided essentially by the experience gained in formulating and administering the first stabilization program. On balance, this did not suggest any fundamental changes in monetary and fiscal policy. But it did stress the importance of greater flexibility in economic and financial planning, and the need for caution in contracting additional foreign loans, particularly of short-term and medium-term maturities. In the light of these considerations, in 1966 the Government introduced for the first time an annual economic budget incorporating the country’s investment targets and their financing into a framework of national income accounts. The Government also stipulated that all enterprises should obtain prior approval for the use of suppliers’ credits, and subsequently placed quantitative limitations on such credits in order to improve the foreign debt structure.

With these adaptations of policy, it was hoped that further progress would be made toward economic stability. However, in contrast to 1965, the economy suffered a setback in 1966 and 1967. This was due in large measure to a prolonged drought which adversely affected agricultural production and, in turn, fiscal revenues and the balance of payments. In addition, the performance of the economy fell short of expectations owing to the fact that the stabilization program was not carried out with sufficient flexibility. Faced at the same time with a sharp decline in foreign aid, the authorities were unable to make all the necessary cutbacks in investment expenditures; some development projects were already at an advanced stage, while others could not be held back for social and other reasons. Also the execution of certain development projects was carried out at an accelerated pace, and entailed substantially higher costs than originally envisaged.

Consequently, the investment expenditures planned in the economic budgets for 1966/67 were largely exceeded, bringing renewed pressures on the internal and external financial situation. During 1966, in particular, the authorities experienced serious difficulties in adhering to the established credit ceilings, and as a result there was a marked increase in total domestic credit and money supply. In that year, the balance of payments deficit almost doubled to $14.2 million; it would have been even larger but for an import policy made more restrictive through delays in the issue of import licenses.

Progress Toward Stability

Throughout the latter half of the 1960’s, Tunisia obtained much valuable assistance from a number of friendly countries and international organizations. The technical and financial assistance provided by members of the Consultative Group for Tunisia, headed by the World Bank, was particularly helpful. The Fund also provided much needed and important support through five additional stand-by arrangements, totaling $38.3 million, in the expectation that progress toward economic stability would help establish a sounder basis for future economic development.

With this support, the authorities were able to make further and more determined efforts to stabilize the economy in 1968/69. Toward this end they resolved to adhere to a flexible approach in the implementation of the annual economic budgets and, in particular, to curtail investment expenditures if financial resources should fall short of expectations. Moreover, they took steps aimed at improving government finances, including higher taxes, stricter controls on recurrent expenditures, and a better selection and surveillance of investments. As a result of the new fiscal measures and a strengthening of the tax administration, the ratio of tax revenue to GDP at market prices was expected to reach 22 per cent in 1969, against 19 per cent in 1965. Steps were also taken to improve the financial operations of public and semipublic enterprises, with a view to mobilizing additional domestic savings for development purposes. Finally, new measures were devised to enhance the effectiveness of monetary policy, to improve the allocation of foreign exchange resources, and to alleviate the foreign debt-servicing burden.

After two years of relative stagnation there was considerable progress in 1968 and in 1969 toward a combination of economic growth with stability. Spurred on by a marked recovery in agricultural production and further growth in other sectors of the economy, GDP rose by about 9 per cent per annum in real terms. Concurrently, the authorities were able to limit the investment program to a level consistent with available financial resources, thus contributing to price stability and a marked improvement in the external payments position. This improvement was also the result of higher exports of agricultural commodities and petroleum and of increased earnings from tourism. Hence, for the first time since 1959, the balance of payments showed a surplus in 1968; a further surplus was achieved in 1969. Though reserves remained low during these years, the authorities were able to eliminate the backlog of import licenses awaiting payment authorization and to follow a more liberal policy regarding certain current international transactions.


Tunisia’s experience has been typical of the problems confronting many developing countries. Clearly, the major lesson to be learned from this experience is that there are distinct limits within which a country can accelerate its economic development. Though the propensity to invest may be high, the implementation of development projects has to be kept under close surveillance; it should be flexible, and above all it should be in tune with available means of domestic and foreign financing.

In recent years Tunisia has made considerable progress toward growth with stability. However, it still faces many difficulties, including a low level of official reserves and a high foreign debt-servicing burden. Moreover, in the autumn of 1969, the country suffered from severe floods, which inflicted heavy damage on roads, railways, irrigation dikes, and rural housing. Concerted efforts are still required to ensure continued economic progress in a climate of internal and external equilibrium.

1See République Tunisienne, Secrétariat d’Etat au Plan et aux Finances, Perspectives Décannales de Développement, 1962-71 (Tunis, 1961).

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