Tunisia - Country economic memorandum on a midterm review of the Sixth Development Plan (1982-86) (Vol. 1 of 2) : Growth targets and policy objectives

Report No. 5328-TUN Tunisia Country Economic Memorandum: Midterm Review of the Sixth Development Plan (1982-86) (In Two Volumes) Volume 1: Growth Targets and Policy Objectives October 1985 Country Programs Department l! Europe, Middle East and North Africa FOR OFFICIAL USE ONLY , . , , . ' . .. . . ..~~~~~~~~1 ~ q. . .. -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~ - . : -7 Document of the World Bank This report has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise beE distdosed without World Bank authorization. -.;.  CURRENCY EQUIVALENTS SDR 1.00 = dinars (TD) .8486 (as of March 1985) Official exchange Rate: Dinar (TD) Per US Dollar Period End of Period Period Average 1973 0.4451 0.4200 1974 0.4065 0.4365 1975 0.4253 0.4023 1976 0.4309 0.4288 1977 0.4121 0.4290 1978 0.4034 0.4162 1979 0.3959 0.4065 1980 0.4187 0.4050 1981 0.5157 0.4938 1982 0.6158 0.5907 1983 0.7302 0.6785 1984 0.8666 0.7768 1985 0.8561 (March) 0.9107 (March) Source; L1IF, International Financial Statistics, May 1985 FISCAL YEAR January 1 to December 31 ABBREVATIONS API Agence de Promotion des Investissements CNP Comite National des Prix DGC Direction Generale du Commerce DPC Direction des Prix et du Contr6le Economique DRC Domestic resource cost EMIs Electrical and mechanical industries IEQ Institut d'Economie Quantitative ali bach Mamba MEN Ministere de l'Economie Nationale OC Office des Cereales ONAS Office National de l'Assainissement SMIG Salaire minimum interprofessionel garanti SONEDE Societe Nationale d'Exploitation des Eaux STEG Societe Tunisienne d'Electricite et du Gas TD Tunisian Dinar UTICA Union Tunisienne des Industriels, Commergants et Artisans.  FOR OFFMCIAL USE ONLY ABSTRACT 1. Tunisia started its Five Year Plan (1982-1986) in difficult conditions marked by a prolonged drought, technical problems in the industrial sector and stagnated tourism earnings due to the recession in Europe. Notwithstanding the sluggish output growth, domestic demand grew rapidly, fueled by wage increases and expansionary credit policy. The resulting large increase in the resource gap resulted in a rapid increase of the exteraal debt. The consolidated Central Government's overall deficit also deteriorated quickly while the unemployment rate has worsened. 2. Half-way through its execution, most of the macroeconomics targets of the VIe Plan have not been achieved, and only some limited adjustment and structural measures have been implemented.The main priority policy reforms set out by the Plan concerned demand restraint, export promotion, employment creation and regional development. In all these areas, the Government has made some progress. However, most of the new measures were introduced with substantial delays and focused on improvements in the administrative machinery rather than on fundamental macroeconomic adjustments. This has narrowed the margin of maneuver and the range of choices, increased the economic costs of policy changes and raised the urgency to implement these measures. 3. In the area of demand management, four groups of policies need to be adjusted. Wage policy needs to be corrected from the bias in favor of labor costs which discourages employment creation. Price policy, which is adressed more fully in volume 2 of the Report, needs to be thoroughly revised to improve productivity, equity and budgetary subsidies. Interest rate policy has to be made a more effective instrument for domestic demand management. Finally, in public savings mobilization, the tax reform must be implemented in full vigor, wages and salaries of civil servants must be contained, and specific measures to improve the financial situation of public enterprises must be implemented. In the area of export promotion, the exchange rate should be used more actively as a policy instrument for promoting exports and for restraining imports without quantitative controls. 4. Employment creation depends crucially on two main policies dealing with relative factor costs and the investment program. Thus far wage policy has been used not to promote employment but to improve the standard of living for those who hold jobs in the modern sector. Changes in wage and interest rate policies thus are needed to bring about an improvement in relative factor costs. The investment program has to be reduced substantially, mostly, but not exclusively, through a marked reduction in public enterprises investments. New investments will have to be more labor intensive, while controls for new investments and on imports of inputs have to be alleviated and procedures simplified. Finally, the Report recormmended a careful monitoring of the external indebtedness and the current account deficit. 0591S/90-91 'This document has a restricted distribution and may be used by recipients only in the performance of their oflicial duties. Its contents may not otherwise be disclosed without World Bank authorization.  TABLE OF CONTENTS Pages FOREWORD MAP COUNTRY DATA SUMMARY AND CONCLUSIONS i-xi I. GENERAL BACKGROUND 1 A. INTRODUCTION 1 B. THE SOCIO-ECONOMIC FRAMEWORK 2 II. RECENT ECONOMIC DEVELOPMENTS 4 A. ACHIEVEMENTS OF MACROECONOMIC TARGETS 4 B. ACHIEVEMENTS OF POLICY OBJECTIVES 9 1. Pricing Policy Issues 9 2. Employment Promotion Difficulties 12 3. Controlling External Deficit 15 4. Domestic Resource Mobilization 17 5. Regional development 23 III. PROSPECTS FOR 1985-86 24 A. REVISED GROWTH TARGETS 24 1. The Need for Controlling Foreign Resources 25 2. Targets for a Viable Growth Scenario 34 B. INVESTMENT STRATEGY 43 1. Need for Reducing the Investment Program 43 2. Impact on Productivity and Employment Creation 44 3. Intended Sectoral Investment 50 C. PRIORITY POLICY OBJECTIVES 57 1. Liberalizing the Pricing Policy 57 2. Controlling Demand and Mobilizing Domestic Resources 62 3. Improving Policy Implementation 64 Annex: Issues in Public Finance 69 Statistical Annex 114  List of Tables Pages Table 2.1 Investment Structure by Agents, 1972-83 6 Table 2.2 Minimum Guaranteed Wages, 1977-83 15 Table 2.3 Investment and Savings Structure, 1977-83 18 Table 2.4 Financial Savings, 1980-83 19 Table 2.5 Central Government's Trends in Revenue and Expenditures, 1976-91 21 Table 3.1 Export Performance, 1981-86 26 Table 3.2 Resource Gap Structure, 1980-91 31 Table 3.3 External Debt Structure, 1981-91 33 Table 3.4 Domestic Production; Sectoral Growth 1977-86 35 Table 3.5 Hydrocarbon Sector 1981-91 37 Table 3.6 National accounts Structure, 1977-91 39 Table 3.7 Investment Financing Structure, 1977-86 42 Table 3.8 VIth Plan Investment Prospects 45 Table 3.9 Capital Stock, 1981-86 46 Table 3.10 Investments, Employment and Overall Productivity 1976-1986 48 Table 3.11 Investment Allocation by sector 53 Table 3.12 Economic Policies: Monitoring Indicators 66 Table 3.13 Priority Economic Policy Actions in 1985-86 67  FOREWORD This report was prepared by members of an economic mission that visited Tunisia in April 1984. The mission was composed of; Rene Vaurs Mission Chief Hinh T. Dinh -Deputy Chief, General Economist Hans Reichelt Investment Program M'hamed Cherif Modelling Oli Havrylyshyn (Consultant) Pricing Policy Marto Ballesteros Agricultural Prices Margaret O'Donnell Research Assistant The report consists of two volumes. The first analyzes recent economic developments and assesses the achievements of the Five-Year Plan (1981-1986) macroeconomic targets, as well as the implementation of structural policy reforms that the Plan recommended. The second volume focuses exclusively on pricing policy issues, the main recommendations on which were incorporated in the first volume. The preliminary version of the report was completed in September 1984 and was sent to the Government at its request for consideration in the preparation of the Budget 1985. Since then, data have been revised extensively, but the conclusions of the report stand, and the recent data will be reflected in forthcoming economic reports.  PAGE 1 TUIESIA - SOCI I#OtCATORS DATA SHEET TUNISIA REFERENCE GROUPS (UwRGnEo AVER =) I mmIOST RECENT= ESTIMTE) /b RE.CENT HNOLE INCOKE NIOOL itm I9jg/b 197n/b ESTDITFI-b N. AFRAIC A MID eASr LAT. ANERICA & CAR A (THOsmm SQ. I) TOTAL 163.6 163.6 163.6 ACAICILTURAL 68.8 70.3 61.4 CuP PER CITA US) .. .. 1290.0 1134.9 1875.9 NgRGUT tONSUITIOI PER CAPITA (KILOGRAMS OF OIL EQUIVALENT) 1iS.q 230.0 496.0 623.9 993.6 POPMATIOU AM rrnL STATISTICS POPULATION,MI-TEAR (THOUCSUS) 4221.0 5127.0 686.0 URJAS POPrLATIOS (Z OF TOTAL) ;6.0 43.5 53.6