Tunisia - Second Forestry Development Project

D _ocM=t of The World Bank FOR OFFICIAL USE ONLY Rept No. P-6006TUN ME IORAJU AND OMENDATION OF THE PRESIDENT OF THE INTElNATIONAL BANK FOR RECONSTRCTION AID DEVELOPME TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN THE AmuNT EQUIVALENT TO US$69 MILLION TO THE REPUBLIC OF TUNISIA FOR A SECONID FORESTRY DEVELOPMENT PROJECT APRIL 16, 1993 7 *1~~~~~ - I- ~~~~~ i;~~~~- 1 g4.I-F T Trs document bas a res'cted distribution ad may be used b repie only in the performnce of| tWr ofricial dutiesL Its contents may not otherwise be discosed without World Bank auhrzto.  CURRENCY EOUMEIVAI (Janary 1993) Currency Unit = Tunisian Dinar (D) US$1.00 = D 0.9 D 1.00 = US$1.11 WflGHT AND NKMEAUP 'he metric system is used throughout this report GLOSSARY OF ABBREVIATIONS AFIC - Forestry Association of Collective Interest (Association Forestiere d'Jnthrt Collectif) CFPR - Professional Training Center of Remel (Centre de Formation Professionnelle de Remel) CRDA - Regional Agricultural Development Commission (Commissariat Regional de D6veloppement Agricole) CTS - Technical Monitoring Committee (Comite Technique de Suivi) DGF - Directorate General of Forests (Direction Generale des Forets) DREF - Directorate of Forest Exploitation (R6gie d'Exploitation Forestiere) FC - Forestry Code (Code Forestier) FCC - Forestry Coordination Committee (Comite de Coordination Forestiere) FSP - Sylvo-Pastoral Fund (Ponds Sylvo-Pastoral) INRF - National Institute of Forestry Research (Institut National de Recherche Forestiere) NFE - National lorest Estate (Domaine .-.orestier de I'Etat) NGO - Non-Governmental Agency (Organiation Ncn-Gouvenementale) PMU - Project Management Unit (Bureau de Gestion du Projet) SCAL YEAR January 1 - December 31  FOR OMCIL USE ONLY REPBX-O F nam SECOND? FOY=MMM PROJEC LOAN AND PRQ,1C liJMR l*orr,ow,er: Republic of Tunisia AmQnt- US$69 million equivalent 17 years, including 5 years of grace, based or. level repayment of principle Financin:Ljj World Bank 69.0 African Development Bank 0.7 Beneficiaries 4.2 Government _74.2 Total Project Costs 148.1 Bcopoic Rate of Rehtu 13 percent StaffAppraisal Report No. 11618-TUN MMsNo. EIBRD 24535 IBRD 24536 This document has a restricted distribution and way be used by redpients only in tb' 1,.'ormance of their official duties. Its contents may not otherwise be disclosed without World B ;nak aut orization.  I 1RIPUUC OFTUWM& SECOND FORESTRY DEVELOPMENT PROJECT Table of Contnts ba No. I. COUNTRY POUCIES AND BANK GROUP ASSISTANCE STRATEGY ............ 1 A. Intmduction .............................................. I B. Pas *Perfra ........................................... 2 Preudoto Adjustment ..................................... 2 TheAdjusnenPfogram .................................... 2 mpact of theProgram ..................................... 3 WoidBankGroupOperadons ................... ..... 5 C. Extena Envnnmet ................................. 6 D. Govermnent Deveopment Policies and Bank Assistance S .... ......... 7 Bank Assist Strateg ................................... 8 Instrunients to Support e Strategy ............................. 9 Pra Sector Development .. ................................ 11 PublicAdml onand PublicSectorResources .................... 12 SocialSetorsndt*e Allelon ofPoverty ....................... 12 Natural Resources and the Environment .......................... 14 ExternaEconomic hntgration .................. 15 IBRDLendingLevel ...................................... 15 DownsideRl PkandContigency Plans .......................... 16 E. Summary ...................................... 17 H. THE PROPOSED PROJECr ........................................ 17 ATTACEHMElS  MEMOANUM AND RECOMMENATION OF TIE P OF THE INTERNATIONAL BANK FOR RECONSMUCTON AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO US$69 MILLION TO THE REPUBLIC OF TUNIIA FOP. A SECOND FORESIRY DEMELOPMENT PROJECT 1. I submit for your approval the following memorandum and recommendation on a proposed loan to the Republic of Tunisia for the equivalent of US$69 million to help finance a project for forestry development. The loan would be at the Bank's standard variable interest rate, with a maturity of 17 years, including 5 years of grace. I. COUNTRY POLICIES AND BANK GROUP ASSISTANCE STRATEGY A. Inrnduction 2. During the past decade, Tunisia has witnessed remarkable economic transformation, and done so while continuing its traditional emphasis on the social development of its inhabitants. Most of the macroeconomic distortions that threatened the economy in the mid-1980s have been reduced to manageable levels (see para. 11). From being a highly regulated economy, it is being gradually transformed into an outward-oriented, private sector-led economy. Its first attempt at reentry into the international financial markets in 1992 was successful. This experience and the growing importance of direct foreign investment, helped by the country's decision earlier this year to adopt current account convertibility, are indications of the market's positive assessment of Tunisia's medium-term creditworthiness. Finally the country has invested heavily and successfully in human resource developmen. and it shows in terms of its social indicators, relatively low and declining population growth, actve participation of women in development, and the skills of its labor force. 3. By most accounts, therefore, Tunisia is one of the superior performers among the Bank's member countries. In a gradual but persistent manner, it has traversed the difficult stabilization period and is now poised for the post-adjustment phase. 4. And yet, an important unfinished agenda, particularly of post-adjustment issues, remains in the economic and social arenas. Indeed the next stage of reforms is likely to be no less challenging than the last one as it wfll involve more difficult structural and behavioral changes in the public and private sector entities. The lingering vestiges of close regulation-dating back to the presidency of Bourgutba-need to be eliminated. The banking system, though in the midst of important reform, remains somewhat fragile, and the financial system overall is still relatively underdeveloped. Ihe privatization program needs to be accelerated. The civil administration must undergo profound changes to respond to the ongoing liberalization and decentralization. In the social sectors, the commendable achievements so far need to be tempered by the existence of pockets of poverty, the rising budgetary burden of the social benefits and the need for greater private sector pardcipation in the provision of public services. While the Government has demonstrated strong initiative in dealing with issues relating to the  -2- management of naua resources and the environment, a great deal remains to be done: the serious scarcity of fresh water resources, the protection of aquifers from depletion and pollution, deforestation and pollution could threaten sustainable economic growth F Finally, Tunisia is in the midst of integrating its economy more fully with the rest of the world, particularly the European Community. B. Pad Erelude to AdJustment 5. Given Tunisia's policy during the 1960s and 1970s of heavy goverent regulation and absence of domestic and external competition, the pertinent question is not why an economic crisis occurred but M it was forestalled until the mid-1980s. The answer lies in three factors. First, a policy of granting tax exemptions and simplified customs procedures helped create enterprises that exported all their output, and the so-called "off-shore' sector grew rapidly. Second, oil export revenues increased significantly owing to volume and price increases; by 1980 petroleum products accounted for close to 60% of merchandise export earnings (compared to about 15% today). Third, tourism grew rapidly, in part due to a generous investment code for the sector and in part due to deft exploitation of Tunisia's climatic and locational advantages. 6. The collapse of world oil and phosphate prices in 1986 that led to larg6 budgetary and balance of payments deficits (see Table 1) also exposed the structural weaknesses of an economy that was inward-oriented, protected and heavily dependent on depleting resources. The situation was complicated further by the presence of large and untargeted food subsidies that amounted to over 4% of GDP by the mid-1980s. The Adjustment Program 7. Starting in 1986, the Government initiated a comprehensive stabilization and structural adjustment program aimed at reducing the distortions in the economy, improving efficiency and resuming economic growth. The key elements of the stabilization program were demand management through tight fiscal and monetary policies, exchange rate adjustment, price liberalization, and financial sector reforms. Public investment was brought down from the unsustainable level of around 30% of GDP of the previous years. Consumption was restrained by keeping wage increases in the public sector below inflation, which elicited a similar behavior in the private sector. Food subsidies were reduced by elininating them on the items that were consumed less by the poor. Finally, interest rates were gradually freed and the only significant constaint remaining (a cap on each bank's average spread of its lending rates over the money market rate) will be removed before the end of this year. 8. These stabilization measures were accompanied by a series of structural adjustment measures. The tax system went through a complete overhaul and is now exceptionally fair, simple and efficient. A highly distortionary and complicated set of indirect taxes was replaced by a value added tax (VAT) on non-agricultural production in 1988 and was extended to wholesale, excluding foodstuffs, in 1989. A number of direct taxes, extremely uneven in their incidence and correspondingly unfair, were replaced by a simple direct tax with a maximum marginal rate of 35% and no double taxation. The maximum import tariff was reduced to 43%, and quantitative import restrictions, which in 1986 applied to most imports and protected virtually all of manufacturing and agriculture, were gradually reduced.  -3- Similarly domesic producer prices and distribon margins werc liberalized. By lae 1994, quatative restrictions would cover only about 5% of produedon in macting and agricultu (a few articles of basic consumption such as brown bmd and vegtable oil). The same will apply to the lieralization of producer prices and distrbuion magins. In the financial sector, new and rigorous prudential regulations have been dopted, and the Cal Bank has stengened Its own spevisory functions. Tne stock maret, which had atophied becau of the reliance on bans and budgetary funds for financing was refomed In 1988-89. The two principal obtcles to the deveopment of bond markets wer removed: the Treary ceased to reure bans to buy its 10-year low intere bonds (8 118%) and now Issues bis and bond at rat negoded with the bans (10% - 11 1(2%); and fiscal incentives that encouraged the retention of prmy Issues and certain bank deposits were eliminated to allow secondary markets to deveip. Tbis fiscal reform would also benefit the equity market and the creation of mutual funds. 9. Prdvatzation, which began early In Tunisia (in 1987), is one area where progress has been slow. Up to now, progrm management responsibility had been diffused by dense and complex institutional arrangements which were Inended to ensure transparency and public acceptance of each transaction. So far 39 cases of prvatizaon bave occurred, mosdly of small, loss-making firms. There still remain about 190 fims with State majority holdings and many more with the Stae as a minority shareholder. In December 1992, the Govenament strngthened the management responsibility in order to reactivate its privatzaton program. In February 1993, a large profitable enterprise was sold through the Tunis Stock Exchange to a group of local investors. Some thirty large and profitable enteprises have been slated for early divestitre in this new phase. 10. The above stabilization and structural adjustment reforms have been supported by the Bank and the IM. Bank support has been in the form of six adjusment loans, of which five have been closed or had all trnches released. The second and third tranche releases of the sixth and most recent, the Economic and Fhiacial Reforms Support Loan (EFRSL) are expected in June 1993 and January 1994, respectively. After succeflly completig a Stand-by Arrangement with the IW in May 1988, Tunisia entered into an Extended Arn_gemnt in July 1988. he programunder this facility, which was extended to a fourth year in July 1991, was successfully completed in July 1992. Coordination between the Bank and the IMF has been excellent. LEmpac of the Prgrm 11. Tunisias economic performance since 1986 has combined sustained macroeconomic adjusmen wit significat growth. The current account deficit of the balance of payments was brought down from 8% of GDP in 1986 to 4.7% in I992. The budget deficit was reduced from 5.5% of GDP to 2.6% over the same period (see Table 1). Infladon has averaged around 7% during the period and was down to 5.4% in I992. Man d exports have grown rapidly over the last few years prior to the recent slow-down of the world economy. GDP growth has averaged over 4% in real terms, with an exceptional growth of 8% in I992 facilitated by good weather and a rebound in tourism. The lower current account deficits, coupled with steady exportled growth and a prudent external debt strategy have allowed debt indicaors to improve sysematically: the ratios of debt to GDP and of debt service to exports declined from about 70% and 28% in 1987 to 53% and 23%, respectively, in 1992. Unlike many other counries in similar circumstances, Tunisia was able to avoid debt rescheduling.  -4 - 12. The abity to weather the nitial talization and the lae exogenous shocs (the drught of 1988-89 led to relatvely large cereal imports, and the Gulf crisis resuted In a drop of 30% in tourism) attests to the growing resilience and diversification of tho economy. In earlier years, such shocks had caused larger drops in GDP. Admittedly the peormace was helped by eain circumstances, such as the continued boom in Europe and a jump in the number of worLef from within the region in 1988; but the capciy to respond to favorable ci was in great measure the fist fruit of the economic reformn. Iab* C?OrWC TRPJ4D On |_ 1 8045 [ 11986 1197 1989 1989 19 1991 19 ODP wlRate8 4.2 -1.4 6.7 0.1 3.7 7.6 3.9 8.0 E3xsO Gowd Rates 0.6 S.2 13.4 21.4 S.0 1.8 -3.8 13.1 of Which Maavtdi 6.4 13.1 14.0 14.0 19.6 10.7 3.7 3.7 bJAIIW k Rmat} 0.5 -2.1 -3.S 16.1 14.6 8.9 8.3 12.6 CoaaxmpU.Per capI 2.5 -.4 -1.2 -2.6 1.5 4.7 1.8 4.1 nlationRat 9.6 5.8 7.2 63 7.4 6.8 8.2 5.4 To1 DODAPD? 483 66.9 70.2 66.9 68.2 61.6 62.9 53.3 Total Det Sveuni 18.6 28.2 28A 21.9 21.9 23.9 24.0 22.9 Total DODIXOS 117.4 190.1 174.4 139.9 137.6 130.0 144.8 1243 Ovwnan lDDlet/DP -5.6 -5.5 -3.1 -3.6 -3.8 -3.8 -4.0 -2.6 Oaen Aoont/DP -7.9 4.0 -1.0 1.0 -3.3 -5.3 -4.4 -4.7 Rasout. BelenceIPD?8.4 -7.3 -1.0 0.4 -3.9 -7.2 4.8 -5.8 Own Find Capal Fo*j utiODP 30.3 23.5 20.6 19A 22.6 26.4 23.3 25.9 Dfr.o FOI JuSWAtaa (US$ mSoN) 262.5 155.0 92.3 110.2 144.2 185.2 -164.0 167.0 ~~~~~~~~~~~ . _, , 1, II -1 . _ _XW 13. A strikg feature of the Tutdsian adjusent story is that, even in the most stringent times, the major social objectives were maiaied. For example, when the budgetary difficulties forced the country to cut food subsidies in half, the authorities improved the targeting of subsidies to the very poor, limiting the negative impact on thea. It is this emphasis on social development and equity that has allowed Tunisia to bave social indicators comparable to those of many much wealthier economies. Life expectancy is now almost 70 years, Infant mortality 44/thousands live births, and the total fertility rate is down to 3.5 births per woman. Population growth has dropped to 1.7%. Tunisia has one of the most impressive participation of women in all aspects of ecowmic and social life among the Arab and Muslim countries. Adult litercy is 65%, and 92% of children of primary school age attend school. The proportion of the populadon living below the poverty line Is estimated at 6.7%, and the distribution of income is quite visibly less skewed tha in many comparable countries. Moreover, an extensive, if somewhat cumbersome, system of socia protection provides almost all Tunisians health care and some protection from extreme poverty. 14. Following three years of abundant harvests, it will be difficult to maintain the same growth rate in agriculture during 1993. This lower growth in agriculture, combined with the relatively  -5- unfavorable market condtions in Europe is expected to translate Into a lower real growth rate of GDP of about 3% durIng 1993, compared to an average of about 6.5% during 1990-92, though prospect remain good for a sustaed grwth rate of about 5% after 1994. 15. Whie the ongoing eonomic reform pogram Is on the schedule indicated in the countrys' Five Year Plan, there are some emerg problem hat need to be addressed to avoid the achievements so far from being jeopardized. First, the growth of man trig production, ewports and investment (excluding agro-industry) dowed down during 1991-92. Second, workers' remittances also declined during the same period. The external fctors responsible for these developments are mentioned later (paras. 22-24). However, there were also other factors. The Tunisian Industry, especially the pat that produces for the domestic market, is undergoing adjustment to cope with the reduction of quantitative import restrictions under the Bank's ongoing EFRSL. At the same time, the real effective exchange rate, after falling through 1990, started to rise, regiteing a cumulative increase of about 5% through June . 1992. 16. To avoid program slippages, the Government acted quickly in late 1992, by devaluing the Dinar by over 10% and declaring the currency convertible for current account transactions and certain capital transactions, such as repatriation of investments. Tnese measures should provide impetus to export actvities and workers' remk:tances. ft also stresses the need for continuous vigilance of the macroeconomic sit'ation (particularly in the absence of an IMF progrm) and for deepening the structural reforms beyond the horizon of the EFRSL. Only with assured macroeconomic stability can the country focus fully on the medium-term issues discussed in section D. World Bank Gru 17. Since 1962, IDA has committed 10 credits to Tunisia, amounting to US$75.2 million, and the Bank has committed 91 loans, totalling US$2.82 billion, both net of cancellations. As of February 28, 1993, the sector share of the Baks commitments was as follows: agriculture 11.7%; industry and energy 16.5%; transport and urban infrastructure 28.6%; social sectors 10.4%; and non- sector (i.e. adjustment) 32.8%. The Bank began adjustment lending to Tunisia in FY87 and, with the progress toward sustainable macroeconomic balances, it has been phasing it out. Of the six adjustment operations, four were sectoral and two structural. In agreement with the Government, the ongoing EFRSL, which was approved in December 1991 and whose third and final tranche is expected to be released in early 1994, is expected to be the last adjustment operation in Tunisia, barring very exceptional circumstances (see paras. 56-57). 18. The Bank's portfolio in Tunisia is generally in good condition. Accumulated disbursements for the 30 projects currendy under supervision amounts to some 90% of appraisal estimates. The overall rating of the portfolio is one of the highest among Bank borrowers, particularly in the agriculture sector. Some implementation problems were encountered during FY90 and FY91, mainly as a result of the impact of the Gulf crisis on the economy, which translated into shortages of counterpart funds and delays in saopting appropriate tariff policies. However, these problems have been largely resolved. Despite the generally good performance, it is possible to improve the status of the portfolio even fiuther and actions are planned (see para. 34). 19. To date IFC has completed 18 projects in Tunisia in a variety of sectors, Including manufacturing, mining, tourism, textiles and financial services. During fiscal 1993, IFC expects to make  -6- investmeots in two projects, consistng of the Cercina oil and gas development project, with a total project cost of US$215 million, and Mddal Sanitaire, a project to manufacture ceamic bathroom and kdtchen fixtures, wkh a total cost of US$S1 ilion. the recent past, IC's role as an investor in Tunsla was limited due mainly to adimaere local lending rates, Govement control over key sectors of the economy, and genealy low levels of forign and local private sector investment. However, as the Dinar becomes fully convertible and the privatzatlon program es ffect, the climate for private sector investment shodd imprve sWficay. IFC expect to have an increingly important role to play in encouraging privat Investment, particulady by foreign investors. IFC also expect that it will play a maor role in asistng in the development of capital markets through the creation of specialized financia institutions. 20. MIGA is cuntly preparing an insurance project to cover a major foreign investment In the hydrocarbon sector in Tunisia. This project, the first MIGA projeLt in Tunisia, is planmed for presentation to the MIGA Board in late FY93. 21. Finally, FIAS prepared a report on Tunisia entided: "Foreign Investment Promotion' in October 1991. The report was witten at the request of, and in cooperation with, the Tunisian Industry Promotion Agency. It covers: () the present business dimate for foreign investors, and (ii) recommendatons on the dcsign of a new investment promotion policy to diversity foreign investmnet and eliminate the existing sepatation between totally export-oriented activities and those directed to the local market. C. Ena 22. Tunisia is relatively well insulated against certain types of external shocks. Oil price movements have little net effect on the balance of payments because exports and imports of oil and oil products roughly balance. Debt servicing is not sensitive to interest rate movements because over 70% of its debt is at fixed intrest rates, something that will change ondy gadually given that the average maturity of the debt is over 16 years. However, the country is susceptible to other exogenous shocks, notably regional tensions, dmughts and downturns In the world economy, especially the EEC. 23. 'Me effects of regional tensions and droughts have been experienced repeatedly, most recently with the Gulf crisis. In the case of regional tensions, toursm is hurt most; tourism receipts declined by about US$260 million in 1991 (a 30% decline in real tenrs) during the Gulf crisis. A single year of drought has an effect on the value added, balance of payments, and the budget. Thus in the drought years of 1986 and 1988, the value added in agriculture dropped by an average of about 18% (agricultural value added accounts for roughly 12% of GDP), and resulted in average additional imports of cereals of around US$40 million. However, a series of droughts, say for three or more years, could have much more serious longterm consequences by having cumulative effects on the balance of payments, on income and employment in rur areas, and on resevoirs and aquifers. Such a calamity camot be altogether discounted, but its probability is small. 24. Tunisias economic perfomce is closely linked to developments in Europe, particularly now that Tunisia has reduced its protection and made the Dinar parlly convertible. About three-quarters of the exports are destined there. Workers' remittances, tourism receipts and foreign direct investment emanate largely from Europe, especially France. Therefore, developments in the European economy  - 7 - specifically ad world economy generally ae now increasingly transmitted to ihe Tunisian economy directly and rapidly. The recent slowdown in mufacued expors gowth (about 6% in real tm during 1991-93, compared to about 14% durin 1986-90) Is explained to a large ent by the weakness of the European economy. The Tunisian private sector Is also concerned thtu the frmer communist countries of Europe will be give market preence by Westem Europe, Jeopardizing the special stas of Tunisia with the EEC. 25. Tne Tunisian private sector and the Governmt re responding to the political and economic developmens in two ways. Pist, the Government has initiated preliminary discussions with the Europen Community for a free-tde agemen aimed at fller economic inegraion with Eupe. Concaurey, efforts are underway to diverfy markets, especily to North America and Japan (see para. 52). 26. While, as mentioned, Tunisia i relatiey Immune from developments in international petroleum market it is affected by chag in the phosphates markets, its other major commodity export. Tunisia exports roughly US$500 million (about 12% of merchandise exports) of rock phosphate and phosphatic fertilizers. The depressed prices for these products (international prices of DAP and TSP in 1993 are some 35% below the 1980 level in nominal US$ terms) are causing a severe economic and flnmcial problem for the mining and chemical industries in the country. Since the phosphate-related activities are located In an economically depressed part of the country, it has also created a severe social problem. To deal with these and eironmental problems, the Govenmen has requested Bank support for technical and possibly financial assistance (see para. 43). D. tioxermmenft Dvlomt Poliedes and -Bank Agft Sb ate 27. Beyond 1993, the Goverment's objectives can be stated simply as those of sustining GDP growth rates averaging at least 5% a year (see Table 2), while spreading the benefits to all the population and husbanding the country's fraie naturl resources. The growth objective is attainable with a reasonable degree of confldence, but it is also the minimum for reducing unemployment from its estimated rate of 15% with a labor force growing annually at 2.9%. It presupposes an improvement in economic efficiency manifested in a fall in the ICOR to 4.0 - 4.5, as compared to 6.7 in the early 1980s. A higher growth rate, in the 7-10% per annum range, would be necessary to absorb the unemployed in a more forceful way. This higher growth rae is not inconcehiable given favorable external economic and political environment but it would be impmdent to assume it. 28. With the projected improvement in efficiency, the Tunisian economy will be able to achieve its growth targets with a non-interest current account close to balancing and a gradual improvement in its external debt indicators. Intenational financial markets and foreign direct investment will contribute a large and growing part to exten inflows as financing from official sources becomes lower than in recent years. In 1992, Tunisia introduced itself to the finacial markets, after a long absence, with a syndicated loan, and the relatively favorable terms - LBOR + 1 1/8% for five years - - augur well. The Government is exploring the possibility of obtaining a rating and is expected to approach recognized rating agencies as soon as it has removed the one remaining major weakness in its extermal debt management, the dispersion of debt data over several parts of the Government.  -8- I Zblg: ECONOMIC TRENDS On %) ________________________ 1993 1994 _ 9 1996 97-2001 GDP Gowt Rales 3.0 4.1 5.3 5.4 5.8 BXode Grwth Rates 6.9 7.1 -2.1' 5.3 7.2 Of Which ManuMudnI 9.9 8.5 8.9 9.0 10.0 Import.rowb Rat 4.2 6.6 -1.9t 6.7 8.0 Consumption per Capits 0.6 1.1 2.7 3.9 3.9 Inliation Rate 5.7 5.5 5.5 5.5 5.5 Totl 1DDI/GDP S3.5 53.S 52.0 50.2 42.6 Total Det SenvieXGS 20.0 17.6 16.4 15.8 1S.8 Total DOD/XGS 119.4 1153 113.4 108.0 86.6 Goveomnent Defot/ODP -3.2 -2.3 .0.9 -1.5 -1.4 Cuaiet AoooutGDP -3.8 -3.4 -2.1 -2.1 -2.1 ResouoeBahnoeIODP -4.6 -4.3 -2.9 -3.0 -2.9 Gross Fied CapitalonitiolGDP 24.8 25.2 2S.6 25.6 25.6 Dire Foreit P lvment (US$ mnioi) .) 242.0 263.8 292.8 32S.0 444.5 at The deoline Ipor mand mports in 1995 refect any indo prducdon of a now onl rfiey, esulng in a decline in the export of crude ofl and Impots of refined prodcts. 29. 'De Govet's development objectives, as emnciated In the Eighth Five Year Plan (1992-1996), esentally ewision completion of the change in the economic management paradigm stated in the mid-1980s. Tne prmary focus of economic nagment is epected to move from stabilization and adjustment to post-adjuent issues of restoring sustainable growth, Increasing competiton, Wating private invesmet and better intgring the economy into the world markets, especially the EEC. In this scenario, 1992-3 ae esLentaly viewed transition years. Ban Assidc & 30. The Bans strategy reflects this shift in focus, and is built on five main pillars. The first priority i to help the I e nreaingly play the leading role in an outward-oriented economy. Second, to help ensure that the PjiIkj *-public administration as well as public sector institutions at large-adapts to the new environment and plays a more supportive, instead of controlling role, toward the private sector. ThWid, to suppor T s long standing emphasis on the Wial sectors and poverty alleon but with greater emphasis on the financial viability of the social prov. ion system. Fourth, to support the prtcdon ad better management of the county's fragile na- dl resources and the gnilrgnu, especially its scarce water resources. Finaly more atention will be given, at the request of the Governmee, to the extemal economic in n of Tunisia into the world markets. An over- arching aspect of these five pillars of the Bank's strategy is that, unlike in the past when the primary beneficiaries of Bank support were the Government and the public entities, in the future increasingly the main beneficiary will be the private sector, particularly in industrial, agricultural and financial sectr actives. Support In the social and ifstrucue seors will, however, condtiue to be channelled through public entities, ldthough even here an increasingly larger role is foreseen for the private sector.  9 - 31. In terms of lWn isuments, there will be a major shift away from adjustment lending. During the last sv years, adjustmet lending accounted for about onehird of the Bank's lending. No new adjustet leng is foresen, cept under vey speck 4rcunces (see paras. 56-57), with the burden of Bank ateWing caied by sector investment and project loans. 32. To support the proposed lending straeg, a progrm of focussed E is planned, which is directly linked to the now operadons. The four 'flagships' of the planned ESW, which support four of the five pillars of the Bak's strategy, are the Private Secoor Assessment, the Poverty Assessment, the Public Sector Magement Study, and the Water Resoum Management Study. 33. Aside from substaial technical assistance and insfitution-building components in several projects, the Bank's strategy iolves fre-standing financed to the extent possible by grat funds-to address key issues such as privadzation, facilitating a free-tr2de agreement with the European Community, speeding up Tunisia's access to international capital markets, etc. 34. To continue the recent progress in aguliomanaentacountry portfolio performance review (CPPR) Is scheduled for ery FY94. In addition to tackling issues specific to a few projects with modest problems, the CPPR will focus on two county-wide areas selected to improve the quality of the entire portfolio and to improve quality at entry of fitumre projects. The first involves putting in place mechanisms to solve the remaning generic problems. For example, in response to the problem of inadequate budgeting of counterpart funds, the CPPR would aim to set up a systematic annual review of Finance Law provisions during the preparation cycle to ensure that counterpart funds are fully focusing on 'problem' projects, with a view to restructuring or cancelling thiem if impediments cannot be removed punctually. Second, systematc effort would be made, joindy by the Government and the Bank, to draw lessons from the experience of previous projects in designing new ones. A good example of this is the workshop held in Tunisia in July 1992 to reflect on regional development and poverty alleviation issues of the Northwest Region, the least developed in Tunisia. The workshop was atended by representaives of the Govemment (cental and local), communities and associations, NMOs and several donors. The workshop, in which the Bank played an important role, resulted in the Identification of key constraints and measures to deal with them In particular, the workshop fully endorsed the participatory approach to the design and implementation of strategies and proj=s, the first of which will be the proposed Nczthwest Mountainous Region Development Project (see para 48). Whenever appropriate, other new projecu will also be subjected to the same discipline. 35. The proposed assistace strategy in each of the five areas of primary focus is elaborated on in the following parapbs and illustraed schematically in the matrix on the following page.  OBJECTIVES AND INSTRUMENTS OF COUNTRY ASSISTANCE STRATEGY, FY93-FY97 O BJLz ExGOS TO mut PUTOR QIIS A. Development of an efficient The mcroconom