Tunisia - Review of development plan 1965-1968 (Vol. 1 of 7) : Main report

RESTRICTED FILE COPY Report No. AF-39a This report was prepared for use within the Bank and its affiliated organizations. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION REVIEW OF 1965 - 1968 DEVELOPMENT PLAN TUNISIA VOLUME I The Main Report November 22, 1965 Africa Department CURRENCY EQUIVALENTS Prior to September 1964 U. S. $ = .420 Dinars Since September 1965 U.S. $a . 525 Dinars TABLE OF CONTENTS Page Basic Data Summary and Conclusions i I. INTRODUCTION II. RECENT ECONO1IC PERFORMANCE 2 Output Growth 2 Employment 4 Investment overall Trends in Savings 6 Internal Financial Developments 7 Public Finance 7 Overall Monetary and Price Developments 9 External Trade and Payments 10 III. THE GENERAL OBJECTIVES OF THE FOUR-YEAR PLAN 12 IV. THE FOUR-YEAR INVESTMENT PROGRAi 1 Agriculture 16 Industry 18 Power 21 Transportation and Telecommunications 22 Education 24 Summary 25 V. PROSPECTS FOR OUTPUT, EMPLOYMENT AND FOREIGN TRADE 27 Agriculture 27 Manufacturing and Hining 29 Other Sectors and Overall Output 30 Implications for Employment 30 Implications for Exports 31 Imports 32 Factor Services 33 The Resource Gap 33 Page VI. NATIONAL EXPENDITURE AND REFINANCING OF INVESTMENT 35 Government Savings 36 Public Enterprise Savings 38 Private Savings 39 Summary of Domestic Savings and Consumption 40 Prospects The Relationship of Savings to Consumption 41 and Investment Longer Run Prospects 42 Foreign Financing Requirements and Prospects 42 The Need for Local Currency Financing 45 The Need for the "Economic Budget" Approach 46 Conclusion 47 TUNISIA Basic Data Area: 48,000 square miles; 12.5 million hectares Population: Total: 4.54 million (mid. 64 estimate) Tunisians: 4.39 million Non-Tunisians: .15 million Rate of growth: 2.5% (1956-1964) - excluding non-Tunisians Political status: Independent since 1956 Gross Domestic Product-. 439 million Dinars (1964) Rate of growth: 3.5% 1950-1960 at 1957 prices 5.9% 1960-1964 at 1960 prices Per capita (1964) U.S. $200 Gross Domestic Product at factor cost: 1960 1964 Total at 1960 prices 287mln.Din. 352 m1n.Din. of which: Agriculture 25% 23% Mining and Industry 14% 14% - Construction 5% 8% All Other 56% 55% 1960-61 1963-64 Percent of GDP at market prices: Average Average Gross fixed investment 18.4 23.0 Inventory change - 0.4 - 1.3 Gross savings 9.6 11.5 Balance of payments current account deficit 8.3 11.8 Investment income payments 0.2 0.5 Central Government current revenues 20.9 20.0 Savings of public enterprises 1.3 3.2 Change December 31, 1964 1960-64 (in million Din.) (in 7o -p.a.) Total money supply 133.3 10 Time and savings deposits 21.7 21 Bank credit to Central Government 81.1 46 (1961-64) Other Bank credit 133.5 17 Rate of change in prices (Cost of living-Tunis) 7%* 2 & From last quarter 1963 to last quarter 1964. 3overnment current receipts 90 5 zovernment current expenditures 74 6 Surplus 16 ,overnment capital expenditures 43 9 Public investment expenditures 41 9 rotal external assistance to public sector 16 11 bernal debt: Cotal debt: $ 260 million as of December 31, 196h Potal annual service on capital: t 20 million Debt service ratio: 10% of goods and non-factor service exports 15% of goods exports 1964 Change ( in Yo p, Lance of payments: (in million Din.) old Potal exports 57. 2 Cotal imports 101 7 qet invisibles - 9 qet current account balance - 52 1964 1960-( ,ommodity concentration of exports (olive oil, wine, phosphates) 51 49 End 1964 End 1S (old parity) xross foreign exchange reserves D. 13 mln. D. 11 r Jet foreign exchange reserves - D. 6 mln. D. 39 r 1962-64 (in million U.S, $) ernal financial assistance: Commitments Disburser .otal 590 270 lajor donors: U.S. 280 All other (mainly France and other EEC countries) 310 SUMIARY AND CONCLUSIONS 1. Under the stimulus of a major increase in the public development effort, real output growth in Tunisia accelerated to nearly 6% annually in 1960-64, as compared with a growth rate of 3.5% in the previous decade. A decline in private investment associated with the large scale departure of Europeans after independence was more than offset after 1959 by large in- creases in public investment which brought the overall rate up from a low of 11% of GDP in the late 1950's to 23% by 1964. 2. This sharp increase of investment was carried out mainly in the framework of Tunisia's first operational development plan which covered the period 1962-64. That plan proved too ambitious, particularly with respect to the domestic savings which grew at a marginal rate of 20% in the period, as compared with a target of around 40%. Although gross for- eign long-term capital inflow increased sharply in the period to around 12% of GDP by 1964, it also fell short of the targets for 1962-64. Thus, even though investment was lower than the targets, there was an overall short- fall in financing which led to balance of payment difficulties in 1963 and 1964, as the result of excessive resort to inflationary finance. The latter led to a virtual exhaustion of exchange reserves by the end of 1964 and created some pressure on the domestic price level. This situation was largely corrected by a 25% devaluation at the end of 1964 and the intro- duction of a stabilization program supported by an IMF drawing. 3. The new Development Plan for 1965-68 calls for total investment of around D 500 million measured at post devaluation prices, which would represent an average rate of 23% of GDP over the period, assuming that real output growth will continue at around 6%, as seem feasible. The Plan envisages a substantial increase in the share of investment going to the directly productive sectors, especially agriculture, as compared with the results achieved in the previous three years. In general, the project content of the Plan seems appropriate to the needs of the economy, although there are some programs which may have to be delayed because of implementa- tion difficulties, and others which could be delayed without much impact on the medium term growth rate. On the other hand, there appears to be a general under-estimate of net investment costs in the Plan, and almost certainly there is insufficient allowance for replacement. On balance, it seems likely that a program of the magnitude indicated could be usefully implemented in the period providing resources can be mobilized to finance it. 4. The Plan implies a significant increase in the marginal savings rate, 35o between 1965 and 1968, when projected at current prices. This effort seems implausible. A more realistic expectation would be a moderate increase over the 20% rate observed in the past - up to, perhaps, 23%, even assuming progress in establishing an improved climate for savings in the private sector and improvements in the financial performance of public enterprises. This would leave a gap to be taken care of by foreign financing of some D 200 million (new parity), representing 40% of total - ii - investment, which compares favorably with the effort during the Pre-Plan period of about 50%. However, when considering also the prospective deficit in factor income payments, the rising amortization charges on existing and new debt to be contracted and the need for somereplenishment of TunisiaIs foreign exchange reserves, the total foreign financing requirement of the Four-Year Plan would amount to some D 330 million ($630 million equivalent). This would represent an average annual gross inflow of over D 80 million ($150 million equivalent), as compared with a peak level actually reached in 1964 of about D 62 million ($120 million equivalent). Assuming that around D 15 million annually might be financed by private foreign equity capital, public capital inflow (including publicly guaranteed private loans) would have to contribute some D 270 million ($515 million equivalent) for the financing of the Four-Year Plan. 5. As the result of a sizable increase in external debt in the recent years, including a large component of supplierst credits, and the need to finance the new investment program, service on debt will rise from the quite modest amounts in the recent past. If, as seems possible, Tunisia's export earnings start to rise rapidly in the next several years and keep rising into the 1970's, the country could afford to take some further conventional borrowing, although it will have to be very cautious about additional suppliers' credit financing. However, if the gross inflow requirements are not to grow to excessive proportions, a substantial part of the capital inflow will have to be on comparatively soft terms at least in the next several years. 11oreover, if the total investment program is to be carried out, a significant part of the foreign assistance would have to be made available through program grants and loans or project loans which could be used to meet local currency costs, since the import content of the pro- gram is significantly less than the total foreign exchange gap foreseen. 6. Tunisia's long-run prospects are good, assuming that political stability and pragmatic and sensible government policies continue to prevail. The country should be able to benefit increasingly from her favorable geographic position, her ties both with the North African coun- tries and with Europe, her relatively well-developed infrastructure and tho qualities of her people. Tunisia already has a civil service of very high standards at the top level. As the great emphasis of recent years on good education and training begins to bear fruit, standards elsewhere will improve as well. Despite the Government's active interest in population control, the employment problem will remain quite difficult for some time. However, as the Tunisian economy in the future becomes more closely co- ordinated with the economy of the region as a whole through closer ties with European Common Market (which are now under negotiation) and perhaps also within the framework of some future North African economic integration, it should be possible for it to maintain a growth rate adequate to cope with this problem as well as providing for sustained growth in per capita incomes and substantially reduced dependence on foreign aid. I. INTRODUCTION 1. Tunisia is the smallest of the North African countries, both in population - about 4.5 million, and in land area - 125,000 square kilometers. Its natural resource base is comparatively modest, consisting mainly of some inerals, and a climate and soil capable of supporting agriculture of varying degrees of intensity on about half the land area. Of equal or greater importance to Tunisia's longer run development potential is its location, near to the European markets, and the education and pragmitism of its leadership. 2. The nation achieved independence in 1956 and its performance since then has been impressive. Domestic political stability has been well maintained under the leadership of President Bourguiba whose Neo- Destour Party is well organized and effective in securing widespread popular support for government policies. The first major aim of the Government was to strengthen government administration and to expand education. In both respects great strides have been made. A concerted effort to speed up economic growth began in the early 1960's, and has succeeded in accelerating the growth rate from an average of 3.5% in the decade of the 1950's to about 6% annually in recent years. Average income per head now stands at roughly $200, although there are still wide disparities between those participating in the modern sectors of the economy and the larger group still dependent on traditional agricultural and handicraft activities. 3. With "decolonization" a major goal of government policy, the number of European residents in the country dropped from about 250,000 in 1956 to around 5D,000 at present. This exodus was accompanied by large scale repatriation of private capital and contributed to a sharp fall in private investment. Moreover, it left a severe shortage of skilled manpower, particularly in the middle levels of administration and in virtually all technical fields. However, the upper levels of the Tunisian administration are exceptionally able, and the results of the early emphasis on education are now beginning to help reduce the shortages in other areas. Moreover, expanded technical assistance from abroad is being sought and obtained. Efforts are also now being made to attract new foreign private capital and management. 4. Economic planning plays an important part in Tunisian government policy. In 1962, a long run set of targets was prepared - "The Ten Year Perspective of Development - 1962-19711, and shortly after, a "Three Year Plan 1962-1964" was issued. The latter is actually characterized by the Tunisians as the "Pre-Plan" reflecting the fact that this period was regarded as one in which policies would be tested and experience acquired in order to provide a more solid foundation for subsequent planning and development policy. Now, a new plan has been prepared for 1965-68, and it does indeed reflect an ability to learn from experience that is typical of the generally pragmatic approach of the Tunisian Government officials. A further improvement has been added this year in the decision to prepare annual economic budgets, which will introduce a highly desirable element of flexibility into economic development policy. The first of these has just been issued, covering the year 1966. (1965 is in effect a transition year between the two Plans). - 2 - II. RECENT ECONOMIC PERFORMANCE 5. As measured by the targets of the Three Year Plan, recent per- formance registers shortfalls in almost all respects - output, investment and savings. However, all the Plan targets were very ambitious, and actual performance on most points must be regarded as quite impressive when com- pared with the previous period and with what was feasible under the circum- stances. Overall real output between 1960 and 1964 rose by 6% annually, against the implied target of 7.5%. Gross fixed investment rose from 18% of GDP in 1960 to an average of 22% of GDP in 1962-64, as against a target rate of about 30%. Domestic savings rose from an average of 9.5% in 1960- 61 to about 11.5% in 1963-64, against a Plan target of 16%. Foreign capital inflow also rose substantially, although it did not reach Plan targets. 6. There were also some weaknesses in Tunisia's performance in the period: the allocation of investment was more heavily weighted to housing, social services and administration than might have been desirable; while some of the Government's policies tended to discourage private initiative and investment. Moreover, there was excessive resort to inflationary finance in the period in an effort to offset the shortfall in domestic savings and capital inflow. This led to financial difficulties in 1963 and 1964. How- ever, in the past year, significant progress has been made in overcoming these weaknesses. Output Growth 7. The most dynamic elements in total output growth during 1960-64 proved to be those most directly affected by the expansion of investment activity - the construction trades (which expanded by 16% annually) and transportation activity (nearly 12% annually). These sectors had been stagnant during most of the 1950's as a result of the decline in the in- vestment rate which occurred for most of that decade. Government services, mainly in support of economic development, also made a significant contri- bution to the acceleration of the total growth rate, rising by over 7% annually in 1960-64. 1/ 8. Value added by agriculture (at constant prices) showed a growth of about 3.5% annually between 1960 and 1964. However, this cannot be re- garded as representative of the longer run trend, because 1960 was an 1/ Output growth by sector for 1960 is summarized in the estimates of gross domestic product at 1960 prices shown in Tables 6 and 11. This is new series and is not directly comparable with the previous one giving estimates for 1950-1960 in 1957 prices (Table 5). While the latter series appear to be less reliable than the new one, it con- stitutes the only comprehensive set of estimates of growth available for the period prior to 1960, and is thought to reflect reasonably well the main trends in that period. - 3 - exceptionally depressed year for olive oil production. It is difficult to establish what the underlying growth trends have been in agriculture because of the large year-to-year variations in both olive and cereal production, and because of uncertainties about statistical reporting. However, as a rough approximation it may be estimated that the growth rate for agricultvin as a whole fell from around 4% in the decade of the 1950's to about 2% in the past five years. The main element in this slowdown was a levelling off in wine production, which had expanded rapidly in the 1950's. 9. Grain production, which now accounts for about one-quarter of the value of agricultural output, apparently has remained approximately stable on the average over the past 15 years.l/ Olive oil production (accounting for another 15% of total value) has shown an average growth rate of around 2% annually over the past 15 years, although there have been some signs of a modest acceleration in the growth rate. As noted, wine output (10% of total value) levelled off in recent years, after more than doubling between the first and second half of the decade of the 1960's. The growth of citrus output also slowed down somewhat in the past several years as the result of reduced plantings in the mid-1950's, but is now starting to increase again. There has been a rapid increase in vegetable production recently and this now accounts for over 10% of total production. On the other hand, production of livestock products, which is carried on almost entirely in the traditional sector (but which accounts for over 20% of total value in agriculture) has apparently risen quite slowly throughout the past 15 years. 10. Even if the estimated 2% "long term" growth rate for total agri- cultural output for the decade 1955-64 were substituted for the higher rate actually recorded in the national accounts between 1960 and 1964, the total growth for the economy in that period would have still been over 5.5%. 11. In the case of mining, growth was only 2.7% annually as against 12.5% in the Plan, mainly because unexpected declines in iron ore and lead production, which partly offset the healthy expansion of phosphate producticn, Even so, this recent increase represented a reversal of the steady decline in this sector which took place between 1955 and 1960, Growth in manufactar- ing at 6.5% annually was also substantially below the target of 15%. Aga,n, the shortfall was in large part the result of delays in project execution. But here too, growth in the period was considerably above the rate character- istic of the previous decade - somewhere between 3% and 4%../ The most rapid increases within the manufacturing sector during the recent period took place within the metal products, wood and furniture and paper production, all of which expanded at rates between 8% and 10% annually, mainly reflecting new 1/ Published data indicate a 15% decline in output between the averages of 1955-59 and 1960-64. However, qualified observers believe that this was partly due to exceptionally poor weather in the latter period, and partly to an increase in the under-reporting of output. 2/ Large year-to-year variations in the value added of food processing, reflecting variations in the crops, make it difficult to be more pre- cise about the trend in this period. investments for purposes of import substitution. Output of building materials rose by 6% as most construction equipment still had to be imported in the period. Textiles and food processing expanded at around 5% annually. 12. Structural shifts in the economy resulting from these changes were fairly significant in the period, with agriculture dropping from 27% of GDP to 25% and construction activity rising from 5% to 7%. Manufacturing and mining remained constant at about 14%, while the contribution of wholesale and retail trade dropped slightly (Table 9). Employment 13. The slow expansion of economic activity in the 1950's contributed to a growing unemployment problem by the end of that decade. The accelera- tion of growth in the recent period has eased the problem somewhat, but certainly has not solved it. The growth rate of civilian employment between 1960 and 1964 is estimated at 2.2% reaching 1.2 million in 1964. This probably slightly exceeded the growth in the labor force in the period. (Although no direct estimates of past changes in the labor force are avail- able, the Plan for 1965-68 makes a projection of labor force growth of 1.5% annually for that period. While this may be on the low side, it appears un- likely that it will exceed 2.0% in that period, while the past rate was probably slightly less.) Of the total increase of 100,000 jobs in the period, it is estimated that only 33,000 were in agriculture, so that estimated agricultural employment declined from 58% of the total to 56%. The major increase was in the textile and clothing industry, consisting largely of handicraft activities. Here estimated employment rose from 34,000 or 3% of the total to 76,000 or 6%. Whether this shift represents much progress is not clear, as the handicraft sector is almost as subject to underemployment as agriculture. Other industrial employment rose by 10,000 or about 1.8% annually, whereas employment in construction went up by 25,000 or over 40%. Nevertheless, at the end of 1964, when a labor force survey was taken, unemployment was still estimated at over 140,000 or 10% of the labor force (Tables 12 and 13). In addition there was substantial under- employment in agriculture (where the average number of days worked per year is estimated at 130) and in handicrafts. 14. In addition to fostering the development of new full time jobs, as a major aim of its development efforts, the Government has had since 1960 a direct works relief program of considerable scope and effectiveness. This program will employ any person who comes to ask for a job, and has provided part-time employment in land reclamation, reforestation, and sane perhaps less useful activities, during the slack periods in agriculture and construction of each year since 1960, to about 200,000 persons in the form of 110,000 full-time equivalent jobs (20,000 in the "regional" works pro- grams and 90,000 in the "national"works program). The participants are drawn both from the under-employed group in agriculture and other sectors, and from those listed as unemployed. Payment is partly in cash and partly in kind (including foodstuffs provided under the United States aid program). In the future, it is hoped that more rapid increases in regular employment will result in a reduction in the demand for jobs from the works program, and hence in its costs, which amounted to about D 11 million in 1964. -5- Investment 15. After achieving a peak of 22% of GDP in the early 1950's gross fixed investment fell to a low of around 11% in 1956-58, but had recovered to about 18% by 1960.1/ Since then, under the impetus of the Three Year Plan it rose to a new high of around 23% by 1964. (Tables 3 and 4.) 16. The fall of investment in the late 1950's reflected a sharp drop in private investment. This was due to a number of factors, the most im- portant of which were the general state of uncertainty created by the Algerian War and the moves taken by the Government to speed decolonization, including nationalization of foreign properties, sometimes on a negotiated basis, sometimes not. Since 1960, when private investment rose temporarily to about 8% of GNP, it has drifted downward in absolute terms, and hao declined sharply as a proportion of total investment, from 42% in 1960 to about 21% in 1964 (see Table 17). Thus the entire increase of investment in recent years has come from the public sector, whose investments rose in current prices from D 34 million in 1960 to D 81 million in 1964, bringing total fixed invest- ment up from D 60 million in the former year to D 103 million in the latter. Recently, however, the Government has taken a number of steps to encourage greater private participation in some sectors, which should result in an increase in the share of private investment in the future. 17. The 1962-64 Plan had set a target figure for investment in those years of D 330 million at 1957 prices, which would have been roughly equiva- lent to D 3b0 million at 1960 prices. Actual investment in the three years was D 258 million, (at 1960 prices) or roughly 25% less than the target. However, in retrospect, it is evident that the Pre-Plan targets were far too ambitious, both with respect to the ability of the country to implement the projects, and to mobilize the financial resources to pay for them. 18. Comparison of the sector breakdown of planned investments with actual investments is rendered somewhat inexact by the fact that the Pre- Plan projections refer to net fixed capital formation and the actual figures to gross fixed capital formation (see Table 15). Nevertheless, it is clear that the major shortfall was in agriculture. Actual gross capital forma- tion in agriculture in current dinars was less than half the net figure in 1957 dinars projected for the Pre-Plan period. Consequently, agriculture's share of total actual capital formation came to 21/ instead of the h2%o pro- jected for the Pre-Plan period. However, this still represents a modest increase as compared with the 1960-61 period, when share of agriculture in gross investment was only 18%. The principle elements of investment in the recent agricultural program have consisted of irrigation works, soil con- servation and reforestation, the purchase of mechanical equipment for the wheat farms, and planting of tree crops - olive and citrus. Much of the program has also involved effort to reorganize the institutional framework simultaneously, and these have posed major administrative and technical bottlenecks. 1/ The investment rates for the 1950's may be somewhat overstated relative to those derived from the new national accounts series which start in 1960. - 6 - 19. Capital formation in mining and manufacturing on the other hand increased rapidly each year from 1960 on, and by 1964 showed a six-fold increase over 1960 (Table 16). For 1962-64, industry's actual share in total investment was about the same as originally projected in the Plan - around 22%, if allowance is made for the probable depreciation element in the Three Year Plan. The main industrial projects in the period consisted of a petroleum refinery at Bizerta (D 8 million), crude oil exploration and production (D 6 million), a 70,000 ton steel mill (D 11 million), a phosphat3 fertilizer plant (D 5 million), a paper mill (D 4 million), and textile ex- pansion (D 5 million). All of these projects, except for some oil explora- tion, were carried out by government enterprises, although in two of the most important - production of refined and crude petroleum, and phosphates - foreign shareholders participate on a 50-50 basis and provide the manage- ment. In the case of the steel mill and several of the textile plants, foreign technical management has been obtained. Although production had started in most of these projects by the end of 1964, none of them were yet up to full capacity. 20. Investment in the main infrastructure sectors - electricity, water and transport - fell short of the Plan targets by about one-third, mainly reflecting lags in project preparation. On the other hand, investment in housing and general governmental facilities including education, was sub- stantially above Plan targets, both in absolute and relative terms. Housing accounted for nearly 15% of total investment in 1962-64, as against a Plan target of 7%, while general administration and education together came to 21% as against a target of 14%. Thus, in all,social and administrative in- vestment came to 35% of the total in the 1962-6. period. While undoubtedly useful in the long term, it seems clear in retrospect that this was an ex- cessive level, given Tunisia's financial position during this period. 21. During the five years 1960-64, there was a significant net draw down of stocks, which was primarily a reflection of the fact that, on the average, this period was in a low point of the olive oil cycle. This crop which normally has averaged two good years out of five for the past 15 years, only enjoyed one good year (1960/61) during this period, as measured by oil production. (The production years 1958/59 and 1964/65 were also good ones, in which stocks increased.) Thus, gross investment including inventory accumulation, was lower in the period than it would have been under more average oil production conditions. For purposes of measuring changes in gross investment (and domestic savings) within the period, however, the years 1960-61 and 1963-64 are probably reasonably comparable, since the net draw down of stocks was only D 1.5 million in the former period and about D 2.5 million in the latter. (Table 4.) Overall Trends in Savings 22. In the late 1950's the domestic savings rate in Tunisia was apparently quite high - as much as 20% of GDP-/ but, at the same time, private capital transfers abroad were also high. By 1960-61, private / Although the investment rate was low in 1957-59, the balance of payments show surpluses on current account in all three years. capital outflow fell substantially, but so did the domestic savings rate. The average for these two years is about 9.6%. By 1963-64, the rate had increased to about 11.3% when measured in current prices, and slightly more at constant (1960) prices. This indicates a marginal savings rate in the period of about 20%, which can be considered as reasonably satis- factory, even though it fell well below the very ambitious target of the Three Year Plan. (Table 22.) 23. By far the most important contribution to the recent increase in savings came from the public sector (Table 21). Savings of the Central Government rose only modestly in the period - from an average of D 11 million in 1960-61 to one of D 14 million in 1963-64. However, public enterprise savings rose from around D 5 million in 1960-61 to an estimated D 15 million in 1964. All other savings stagnated at around D 19 million throughout the 1960-64 period. The latter, consisting mainly of private enterprise and househo d savings, represents a fall as a percentage of private disposable incomel,. - from about 6.3% in 1960-61 to 6.0% in 1963-64, a trend which is not surprising in view of the departure of Europeans, and of the increasing role played by government enterprises, often at the expense of private enter- prise. 24. In the aggregate, domestic savings financed just under half of total investment in 1962-64 (Table 19). This is just about the same as the percentage projected in the Three Year Plan, and is only slightly less than the percentage reached in 1960-61. Foreign grants and long-term capital inflow rose substantially over the period - from D 22 million in 1960 to D 48 million in 1964, but these nevertheless fell short of Plan targ6ts. The actual total for 1962-64 was D 114 million as against a target of D 155 million. The result was that total domestic savings and long-term capital together fell short of the actual investment in the period by D 30 million. This residual was provided by a draw down in net foreign exchange assets from a reasonably comfortable position at the end of 1960 (when reserves were equal to nearly four months imports of goods and non-factor services in that year) to a negative position by the end of 1964. Internal Financial Developments 25. The internal financial picture between 1960 and the end of 1964 was dominated by large-scale expansion of Bank credit to the public sector which contributed to pressure on the internal price level as well as the draw down in exchange reserves. These developments forced the country to devalue the currency by 25% in September 1964. Since then, a stabilization program supported by a drawing from the IM4F has largely contained the fi- nancial situation. Public Finance 26. As indicated above, the current surplus (savings) of the Central Government expanded moderately over the period 1960-64, as a whole. However, they fell significantly in the first two years, as revenues remained stagnant 1/ Defined as GDP at factor cost less direct taxes and savings of public enterprises. - 8 - in absolute terms at around D 72 million. Tax revenue fell relative to GDP at factor cost from 24% in 1960 to 19% in 1962 (Table 28). Efforts to restrict the growth of current expenditures were largely successful in this period, except in the case of the works relief program which increased from D 3 million in 1960 to a peak of D 6 million in 1962 (Tables 23 and 25). 27. At the end of December 1962, however, important fiscal reforms wero introduced with the object of stimulating the economy and mobilizing addi- tional domestic resources for the Three Year Plan. A single agricultural tax was substituted for a series of old land taxes tied to specific products, which were not well adapted to the fluctuations of rural production. With a view to stimulating savings, amounts invested by enterprises or individuals, under certain conditions, were exempted from the income tax. The progressive rates of the income taxes were raised in the medium and higher brackets, as was the rate on benefits from non-commercial enterprises. At the same time a single income tax declaration for all revenues subject to direct taxation was introduced. The tax applying directly to wages and salaries was reduced. Some sales taxes were increased, although fuels to be used in agriculture were excluded from taxation. These measures had a marked impact on revenues, and total collection rose by an average of 11% a year in 1963 and 1964. A further 11% increase in 1965 is also likely, so that the ratio of taxes to GDP has probably now recovered to a rate of 22%. Non-tax current revenues have risen faster than GDP since 1960, so that total revenues in 1965 are probably back up to the 1960 ratio to GDP. 28. Total expenditures were permitted to increase to D 73 million in 1964 (after being held stable at D 65 million in 1963) particularly in connection with the expansion of general administration, education, health and cultural activities. A more modest increase is projected for 1965. For the period as a whole, the net result in terms of the current surplus (before debt service) was a drop from D 14 million in 1960 to a low of D 7 million in 1962 and a recovery to a level of 16 million in 1964 and an esti.- mated 19 million in 1965. 29. As noted, total public capital expenditures rose sharply in the period (Table 24). Central Government capital outlays remained fairly con. stant from 1960 through 1962 at around D 33 million, but then jumped to D 49 million in 1963. An important part of the increase is attributable to capital grants to state enterprises, which reached a peak of D 10 million in that year. In 1964, this item was reduced moderately and other ex- penditures held roughly constant, so that total capital outlays declined to around D 43 million. Debt service excluded from the current savings given above rose steadily in the period - from D 4 million in 1960 to 8 million in 1964. As a result, the overall deficit of the Central Govern- ment rose from D 22 million in 1960 to a peak of D 45 million in 1963 and fell to D 35 million in 1964. External long-term sources financed approxi- mately 40% of this deficit throughout the period. Non-inflationary borrow- ings financed an average of about D 6 million annually, while net borrowings from the banking system financed the rest. The latter rose from an annual total of D 6 million in 1961 to a peak of D 23 million in 1963, falling to D 9 million in 1964. Taking the three-year period 1962-64 as a whole, bank credit to the Central Government, as measured by the monetary statistics, rose by about D 60 million, which was equivalent to 65% of the 1961 money supply. - 9 - 30. In addition, substantial bank credit to public enterprises was necessary in the period to help finance their rapid expansion of investment. Fixed investment of these enterprises rose from only D 5 million in 1960 to D 41 million in 1964. Working capital requirements, on which comprehensive data are not available, also undoubtedly rose sharply. As noted, enterprisn savings grew in the period - but only from D 5 million to D 15 million. Grants from the Central Government financed another significant share, and so did foreign loans: total foreign lending to public enterprises in the period rose from nil in 1960 to D 6 million in 1963 and probably over D 10 million in 1964 (Table 31). Identifiable bank lending to public enterprises amounted to around D 15 million in 1961-64 (Table 31) but it seems likely the actual increase was greater. The only important identifiable increase in credit to the private sector consisted of a D 10 million rise in credit for purchases of real estate and housing (Table 4l). In total, bank credit to the non- Central Government sector rose by D 63 million between the end of 1960 and the end of 1964 (Table 39). Overall Monetary and Price Developments 31. Some financial offsets to this expansion of Bank credit were pro- vided by the growth of time and savings deposits, the capital accounts of the banks and the unspent counterpart of foreign aid. In the aggregate, these rose from D 27 million at the end of 1961 to D 52 million at the end of 1964. (Table 38.) However, this left net domestic credit expansion at around D 88 million in the three years - or about 100% of the end 1961 money supply. In the event, net exchange reserves were allowed to decline by D 39 million, so that the net impact on the money supply was an expansion of D 49 million, or around 12% annually, in the three-year period. 32. With real output growth averaging about 6%, the excess liquidity led to pressure on prices. The official cost of living index rose by around 6% between 1960 and 1964, as did the price index implied in the difference between national income at current and constant prices (Table 44). Howevei, this relatively slow growth in prices reflected the application of price controls on a number of items (75% of those covered by the cost of living index), and pressures were clearly being felt in an increasing premium on imported goods and on foreign exchange. Thus, although money velocity apparently declined significantly in the period - from a ratio to GDP of 4:1 in 1960 to 3.3:1 in 1964, this almost certainly overstates the under- lying trend of monetization in the period. This is evident from the price increases which have occurred since the devaluation of September 1964. 33. The devaluation was worked out in cooperation with the IMF and was accompanied by a stabilization program which included the following limitations: Central Bank credit to the Government was not to exceed D 45 million, the amount reached in July 1964, net new additional borrowing of the Government from the commercial banks was to be limited to D 2.0 million and Central Bank credit to the commercial banks which reached D 22 million in July/August 1964 was not to exceed D 25 million during the period of the stand-by, i.e., until October 1, 1965. The Tunisian Authorities have kept within these limits, mainly by limiting public expenditures and con- tinuing to increase revenues. The result has been that gross credit ex- pansion was only D 5 million or 20 between September 1964 and May of 1965 - 10 - (latest data available). In the same period net exchange liabilities went up slightly to D 11 million reflecting use of the IIF drawing, and the money supply remained completely stable. However, between the third quarter of 1964 and June 1965 prices rose by an average of 12% at the wholesale level and 10% at the retail level, reflecting in many cases the removal of price controls (Table 43). 34. Wage rates of unskilled labor have remained quite constant through- out the period, although average earnings have apparently increased moder- ately. Rates for skilled labor have apparently gone up fairly steadily re- flecting the scarcity of this group in a period of rising economic activity. Civil servants' wages have remained constant since 1961, but pressures for an upward adjustment in 1966 are likely to become strong. External Trade and Payments 35. Tunisia had a surplus on current account during the earlier years after independence owing to large French civil and military expenditures, but in 1960, a deficit emerged, and this has become increasingly larger with the execution of the 1962-64 development plan. It exceeded D 4O million in both 1962 and 1963 and reached D 52 million in 1964 or nearly 12% of GDP. This trend is almost entirely due to increased imports. 36. Rxports of goods and services failed to rise at all between 1960 and 1964, when measured at the old parity (Table 46), and indeed are still below the peaks achieved in 1958 and 1959. As a percentage of GDP, mer- chandise exports have dropped from 16% in 1960 to 13% in 1964. The most important single export item is olive oil, which varies substantially from year to year, but has averaged about 20% of the total since 1960. Wine exports have been second in importance, averaging about 18% of the total in the past five years, after rising from quite low levels in the mid-1950's. Until late 1964, wine was sold almost entirely to France, at prices around twice the world market level. However, at the end of that year, the French abruptly stopped wine purchases from Tunisia in retaliation for the Tunisian Governments' nationalization of all remaining French farmland. The other main exports consist of wheat, citrus, phosphates and fertilizer, iron ore and lead. Wheat, iron ore and lead have tended to decline while citrus, and phosphates have been expanding (Table 49). Export prices for most items have been comparatively stable in the period, except in the case of wheat which has dropped sharply as the result of the elimination of preferential arrangements with France (Table 51). 37. After remaining stagnant through the entire decade of the 1950's at around D 65 million, merchandise imports jumped in 1960 to a level of D 80 million or 23% of GDP and have since gone up steadily reaching a peak of around D 104 million (old parity) in 1964. Virtually the entire in- crease in imports since 1958-59 has been in capital goods and industrial raw materials (Table 50). Foodstuffs and other consumer goods have gone up only 5% in the five-year period, whereas capital goods imports more than tripled between 1959 and 1964, and raw materials imports have more than doubled. - 11 - 38. France continues to be Tunisia's principal trading partner, although its relative importance has diminished sharply in recent years, especially with regard to imports. Tunisian imports supplied by France amounted to 69% of the total in 1956, and 60% in 1960 but only 46% in 1964. (Table 52.) The United States and the other European countries are becoming increasing'y important as suppliers of equipment to Tunisia. Exports to France were mor. stable both in an absolute and a relative sense. In 1956 55% of Tunisian exports found an outlet in the French market against 59% in 1960 and 56% in 1964. It is, however, likely that the diversification of Tunisia's trading pattern, which was one object of the 1962-64 plan, will proceed more rapidly in the years to come if the preferential trade agreements with France that terminated on September 30, 1964 is not renewed. 39. A deficit on invisibles transactions has emerged in 1960, mainly because of a continuing decline in sales of service to other governments, and because of a rise in net factor income payments to abroad. The largest component of the latter outflow has been purchases of consultants' services in connection with project planning. In total, the shift in the invisible balance has been from a surplus of D 3 million in 1960 to a deficit of D 9 million in 1964 (Table 48). 40. As mentioned, gross foreign capital inflow increased substantially in this period - from D 26 million in 1960 to D 50 million in 1964.1/ (Tables 46 and 47.) Nevertheless, for 1962-64 it fell below the Pre-Plan targets, the actual inflow amounting to D 120 million in that period, as compared with a target of D 155 million. The shortfall was due in part to difficulties in project preparation, but also to the fact that the bulk of the aid was tied to projects and to imports from particular countries. The composition of long-term capital inflow changed significantly during the period. Grant aid declined from about D 19 million annually in 1960 and 1961 to D 8 million by 1964, whereas loans to the public sector rose sharply from virtually nothing in 1960-61 to D 30 .million by 1964. Foreign private capital, mainly for oil exploration, also went up - from an average of D 5 million in 1960-61 to one of D 13 million in 1963-64. Use of ex- change reserves and short-term credit averaged D 10 million in the period 1962-64, as compared with an average of D 4 million in 1960-61. 41. By the end of 1964, Tunisia's external debt had risen to about $260 million (D 108 million at the old parity), equivalent to over nearly 25% of 1964 GDP and about 120% of 1964 export earnings of goods and services (Table 1). Service on existing debt, which was fairly modest in the 1960-63 (around D 3 million in 1963), jumped to D 7 million in 1964, and is estimated at an average of D 10 million (old parity) in 1965-1968 (Table 1). This corresponds to 18% of 1964 merchandise exports and 12% of total exports of goods and non-factor service. This large increase reflects the fact that a significant amount of the loan inflow in 1960-64 (about D 40 million) was in the form of suppliers' credits with short repayment periods. As these will be largely repaid by 1969, service on existing debt will fall to around D 7 million in that year, and decline gradually thereafter to about D 4 million by the end of the 1970's. 1/ These figures differ slightly from those referred to in paragraph 24, mainly because of timing factors. Compare Tables 19 and 46. - 12 - II * THE OENRAT OBJECTTyES OF THE FOUR-EAR PLAN 42. The basic objectives of the new four-year plan for 1965-68 remain much the same as those outlined in the Ten-Year Perspectives. The latter were a) decolonization, b) promotion of man, c) structural reform, and d) independence of net foreign assistance. The first goal has been largely achieved, but the others remain. While independence from foreign assistance is not an explicit target for the 1965-68 period, the Plan does call for an important reduction in net capital inflow. However, it also emphasizes the need for greater cooperation with other less developed countries, particularly its neighbors in North Africa, and with the more developed countries. 43. From a social and economic standpoint the fundamental goals of the 1965-68 Plan are the promotion of man, which means raising levels of education and per capita incomes, and the achievement of structural reforms. The main elements of the latter target consist of a progressive integration of the traditional and modern agricultural production units, and a substan- tial increase in the role of industry. h4. In general, the main quantitative targets reflect a considerably greater degree of realism than the very ambitious Three-Year Plan for 1962- 1964. The target for real output growth is just over.6.0%. Moderate re- ductions in unemployment and under-employment are also projected. Total fixed investment is projected at D 420 million (1960 prices) over the four- year period which would represent a reduction in the ratio of investment to GDP from the 23% rate realized in 1964 (at 1960 prices) to an average of about 22% for 1965-68. Current government expenditures are projected implicitly to grow by 11% annually and current receipts at 12% with a consequent growth in central government savings. The growth rate of private consumption on the other hand, is projected at 4.6% (over the 1963 base). Domestic savings outside the Central Government are projected as rising from 8% of GDP in 1963-64 to 10% of GDP by 1968. Capital inflow net of factor income Davments is projected as declining by over 50%. Merchandise exports are targeted in 1968 at about 50% above the 196L level, while imports of goods are to be held at virtually the 1964 level, reflecting the assumption of substantial import substitution in the period. 45. The mission's detailed evaluation of the Plan targets and assump- tions are contained in the following three chapters of this Volume and Volume II, containing the sector chapters. It may, however, be useful to indicate here the main lines of the mission's views. First, the target growth rate seems feasible, although it will be more difficult to maintain a 6% rate in the future than it was to achieve it in the recent past, mainly because of the reduced stimulus expected from the construction trades and because the shortage of managerial and technical skills will make it difficult to implement a number of the programs in the commodity producing sectors at the pace envisaged. Secondly, it may well prove difficult to reduce unemployment and under-employment as much as projected, partly because it seems probable that the labor force will grow faster than projected in the Plan and partly because the number of jobs likely to be created by the projects in the Plan seems overestimated, especially in the industrial sector. The former consideration reflects the mission's impression that thr - 13 - past (and rresent) growth rates of the population are underestimated. This also has implications for the education aspects of the Plan. 46. Thirdly, while it may be possible to implement an investment program of the financial magnitude projected, the actual contribution to real net investment may be less than envisaged because costs appear under- estinated for a number of projects (especially when full account is taken of the recent devaluation), and because replacement requirements are almct certainly understated. However, it is felt that there are a number of projects which could be deferred or reduced without significantly affecting the target growth rates for output. In general, the composition of the investment program seems appropriate, although again, the success of much of the program, particularly in industry and agriculture, will depend on the rate at which Tunisia can increase the supply of managerial and technical skills. 147. Finally, the mission feels that the estimates of domestic savings are probably too optimistic. It follows that, if a gross investment program of the size projected is to be carried out, the contribution from external sources will have to be somewhat greater than called for in the Plan. This impression fits with the mission's view that the projection of exports may well be too opt:Lmistic, and that imports will have to rise by more than projected. 8. It should be noted that the Government is already aware of most of these possibilities, and that the first economic budget projections for 1966 reflect a number of modifications relative to the trends indicated in the Four-Year Plan. The Mission did not, however, have time to take full account of all these changes in its analysis of the Plan which is containe5 in the following chapters. - 14 IV. THE FOUR-YEAR INVESTMENT PROGRAM 49. The Four-Year Plan calls for total investments in current (1965) prices of D 505 million of which about D 50 million for replacement. On an average annual basis this is equivalent to 23% of GDP projected at current prices, or the same as the percentage actually achieved during 196L. Expressed in terms of 1960 prices - as in the Plan documents - total invest- ments between 1965 and 1968 would amount to D 420 million of which about D 40 million for replacement. This is equivalent to only 22% of GDP since it does not reflect the influence of the devaluation on investment costs in relation to other prices. 50. The nea Plan projects a significant shift in the sector composition. Comparison with actual gross investment during the Pre-Plan period 1962-1964 - which gives a more realistic view of the intended changes in the direction of investment than comparison with the Pre-Plan as such - shows, for example, a sharp increase in the share of agriculture in total investment (from 21% level in actual expenditures during 1962-1964 to 33% in 1965-1968), and an important decrease in the shares of housing (from 1L% to 4%) and of administration (from 21% to 14%). Industry, which increased its share of actual investment during the Pre-Plan period, is supposed to increase it still somewhat during the Four-Year Plan. There will also be room for increased shares of electricity and transport over actual investments in 1962-196b. The overall objective of the planning authorities has been to concentrate the efforts in the Four-Year Plan in the more directly productive investments. 1 Values expressed in this section are in current dinars (early 1965), which were used in the Plan for the presentation of investments accroding to sectors. - 15 - Summary of Actual and Planned Domestic Capital Formation (in millions of Dinars) Pre-Plan Proj. Actual (Gross) Four-Year PL7n (net) 1962-196h 1962-1964 (net)Proj.1965-68 (millions of (millions of (millions of 1957 dinars) curr. dinars) curr. dinars)a/' Agriculture 114.7 56.6 150.5 Industry 49.1 61.51 112.0 Electricity, water 12.1 8.2 29.0 Construction - 4e8 - Transport, telecommunications 23.5 23.7 55.0 Housing, urbanism 19.7 38.7 16.8 Other services 9.8 8.3 19.1 Education 28.0 ) 663.6 Other government administration 10.0 )6 24.0 Handicrafts & unspecified 3.0 9$ 5.0 Subtotal: Net Fixed Capital Formation 270.0 xx 455.0 Depreciation 6o.0 xx (50.0) TOTAL: Gross Fixed Capital Formation 330.0 267.9 (505.0) a/ Implies an average 1965 price level for investment goods approximately 15% higher than the actual average for 1962-64. Source: See Appendix Table 18. 51. The Plan projects a further decrease in the share of investment by government administration - from around 43% in 1962-64 to 37% for 1965-68. It makes no attempt at separate projections of enterprise inves'- ment as between public and private. However, the government has taken a number of steps recently designed to encourage private participation. It was the first country to sign the convention on the Settlement of Investment Dispute; it has accepted a conciliation procedure proposed by the IBRD for settling a specific dispute between the government and the former owners of the nationalized electricity companies; it has given substantial encourage-- ment to both foreign and domestic private investors in the tourist industry, and in one or two of the new industrial projects, it has started to make efforts to find foreign partners. Thus, it seems likely that some increase in private participation in the investment plan is likely as compared with the 1962-64 period. - 16 - Agriculture 52. The total investments of D 150 million planned in the agricultural sector from 1965 through 1968 are divided among several development projects which fall broadly between two categories: first, the integrated develop- ment projects of Northern and Central Tunisia, which together contain the largest part of investment contemplated for arable farming, livestock improvement, fruit tree plantation, soil conservation and a small share of irrigation investments; second, a group of projects or programs dealing mainly with irrigation, forestry, fisheries and the expenditures on education, research and studies. 53. The development of production cooperatives in Northern Tunisia aim.9 at remodeling the agricultural structure on 800,000 hectares of the richest rural area of the country which contain the bulk of farms previously operated by the colons. During the plan period approximately D 37 million will be needed to finance the program (excluding rural housing). Obviously, the main difficulties in carrying out such a hugh program -which, in general, seems technically possible and economically sound - will consist of handling the organizational and supervisory problems; greatly expanded foreign technical assistance will be essential to help cope with these. In addition, there is a need to accelerate the initial operations leading to the creation of the cooperatives, in plarticular land tenure surveys and the preparation of land use maps. Already some 200,000 hectares of land has been organized in production cooperatives in recent years. It is essential that the work relative to the further development of these lands he given first priority. The success of the program as a whole would be in great danger if this were to be neglected because of a desire to move forward too rapidly in new areas. For this reason and because of the size and complexity of the program for the Plan period as such, some of the investments contemplated between 1965 to 1968 will probably have to be delayed for some years. 54. The establishment of polycultural cooperatives, aimed at re- grouping the farmers and livestock owners interested in the exploitation of one large area (5,000 to 10,000 hectares) is the basis for developing the steppes of Central Tunisia. As water resources are very scarce, irri- gation of small perimeters is intended mainly to supply the population with fresh food and to produce forage crops for feeding animals grassing on range land during periods of food shortage; fruit trees will be the main cash crops. The project is based on limited technical experience, but its value has been confirmed during the last two or three years by an FAO/UNSF experimental program carried out in two research farms. The program is estimated to cost D 25 million for the development of more than 1.2 million hectares. This includes D 4.5 million for deep well drilling and irrigation equipment, the rest is for tree planting and maintenance, range equipment, water conservation work and livestock development. The overall investment estimates are still very rough and will be studied for each pilot Z ne and its corresponding cooperatives. Well drilling may be extended beyond the limits presently foreseen in the Plan. Substantial technical assistance will be required for carrying out this project as well. 55. For the oases of Southern Tunisia, the Plan contemplates the financing of farm development programs and the improvement of some of the - 17 - existing irrigation systems and protection works. Meetings have recently been held with responsible representatives of the farmers working in the oases and their response to the administration proposals for improving their methods of production is encouraging. It may well be that the present provision of D 3 million for investment in this sector will not be quite sufficient for all the works now contemplated. 56. The expanded private well development programs in the North, Cape Bon and other coastal zones are among the most attractive of the Plan projec.> because they permit a very rapid increase in labor and soil productivity. The Plan provides for D 5-. million for two programs, which consist mainly of financing well drilling and irrigation equipment by medium-term loans and subsidies. These programs can be started immediately wherever underground water resources are sufficiently well known. In other areas more precise information of the underground water resources will be required first through the hydrological survey which would cost less than D 0.5 million. The feeling of the mission is that more study on well type and equipment should be under- taken with a view to reduce investment cost per hectare; also care should be taken that enough funds are made available so as to satisfy all farmers' requests for loans, as far as they can be properly supervised. 57. The surface irrigation program includes several separate projects totalling some D LO million, of which half would be for the continuation of projects already initiated. The investment estimates are probably on the low side. Among the new dams and irrigation schemes, the Oued el Abid project has been studied but the engineering is not yet completed. The cost of this project was estimated at D 1.2 million; for the other projects the cost estimates are still very provisional. Only after the results of the studies now under way with the help nf AID on the various projects concerned become available will it be possible to pass any judgment on their feasibilityt 58. The forestry program of D 10 million is well prepared. There are no grave institutional bottlenecks; the forestry service is efficient and a comprehensive research program is underway. The D 2.2 million fisheries investment may require rephasing in view of the lack of trained fishermen during the first part of the plan period. 59. The proposed institutional investments (D 16 million) are relatively high; most of them are probably justified, however, as there is great need to extend applied research, to improve extension services and to prepare a comprehensive inventory of available resources. The program for local and regional studies, amounting to D 8 million, might be too ambiticus and should probably be reviewed and linked more closely to the equipment program. 60, About 60% of the agricultural investment program can be expected to give an immediate although not full annual return during the period of the Plan while h0% are intended to reverse the declining trend in soil fertility and prepare the way for a more distant increase in production (tree planting, soil conservation, large irrigation schemes, institutional invest- ment). - 18 - 2/ Industry 61. Of the D 110 million of net capital formation planned for industry during 1965-1968, the chemicals branch would take the largest part (D 25 million) while mining, textiles and petroleum products would each absorb D 20 million. The mechanical and electrical industries would invest D 13 million. The agricultural processing and construction material sectors would come behind with D h million each and almost D 3 million would be spent for woodworks and paper. Tourism, which is not included in the above total of D 110 million, but which is examined under the industrial sector has had its original program of D 13 million already expanded to D 17 million. 62. Much of the proposed investments would consist of relatively large units. Of the D 25 million for the chemicals branch, D 20 million are allocated to the creation of an ammonium phosphate fertilizer plant, the so-called "Industries Chimiques Maghrebines" (I.C.M.) project. Although there are many problems associated with it, it seems attractive enough to deserve closer examination. Particular attention is still required to problems regarding the production of ammonia and nitrochalk, the location of the plant and the market. The capital and operating cost estimates are likely to require some revision. The financing plan would have to be modified substantially if the operation is to have a sound financial base, I.C.M. has recocInized the need for a foreign partner and is trying to locate possible candidates. This partner would provide finance, technical know-how and market outlets. 63. The program for mining is ambitious, the contemplated level of D 20 million being four times the investment executed during the Pre-Plan, and it is not at all certain that expenditures so high as envisaged can be reached. Technical skills are limited, particularly at the management level. Many small mines are in a bad financial position. Also, there is a consider- able number of small projects, many of which have not yet been studied in detail, but it is already known that several will be more costly than fore- seen in the Plan. On the other hand, half of the investment in the sector is to go into the phosphate industry, for an important program of modernizing a and mechanizing the mining of phosphate rock and expansion of the producb:ion of super-phosphates. The phosphate industry has plentiful resources, a strong and growing demand, experienced and efficient management and is a major foreign exchange earner. 64. As for the textile sector, D 10 million are for completion of projects already started during the Pre-Plan period. The other D 10 million are to go into nine new projects, five of them are for the further expansion of existing plants. It appears that most of the new projects have already been started and the financing has been arranged. However, heavy reliance 1 Data for industrial investment presented in accordance with later information supplied by the Planning Agency to the Mission, which introduces some changes in the distribution of planned investment as originally shown in the Plan document, the new total of D 110 million being somewhat below the first D 112 million target. - 19 - has been put on suppliers credits in most cases and the high debt/equity ratio is troublesome. On the whole, the planned expansion of the textile industry appears economically justified. Ways will have to be found, however, to improve the financial position of the main textile companies and more arrangements for technical cooperation, such as recently concluded with Evench and Czech textile producers, will have to be made in order to help reduce the scarcity of local technical know-how and technicians. 65. Oil has been struck at the El 3orma oil field in Southern Tunisia by a joint Tunisian-ENI enterprise. The present forecast is to produce about 2 million tons of crude by 1967 and production should start during 1966. Efforts will be made to go beyond this tonnage. Sizeable investments will have to be made, some of which may have to be deferred until more is known about the extent of the El Borrta field about which there are promising speculations. Several other oil prospecting companies have mentioned their intention to spend something more than now estimated in the Plan for the period 1965-1968. For these reasons, the Plan estimate for 1965-1968 should be considered as a very tentative and, under the circumstances, a conservative estimate of future expenditures by the oil companies. 66. Total investment in the mechanical and electrical industries is expected to be D 12.8 million of which 6.5 million were for the completion of the steel plant in 1965. The steel project appears to be as well con- ceived as could be expected for such a small unit. However, production costs before interest and profit are likely to just be about the same as the landed costs of comparable imports. Thus, if the plant is to meet its interest payments from current receipts and generate any profit, some protection will probably be required even when it is operating at full capacity. The other proposed investments in the mechanical industries seem definitely marginal, given the present state of the industry, which is quite disorganized and inefficient. With an adequate reorganization, further ex- pansion of this sector might well be justified, both for continued import substitution (on a more rational basis) and for export to Europe. The latter possibility seems particularly appropriate for much of the labor intensive light mechanical and electrical appliance field because of the advantage Tunisia has in its low wage level. In order to strengthen efficienoy adequately, it would be very important to attract foreign private capital into this field. 67. Investments in canned food and other agricultural processing industries will be only about D 2.5 million from 1965 to 1968, below the level reached from 1960 to 196h. The sector is presently characterized by underutilization of capacity and by the existence of many small, badly or- ganized units. For the medium term, it is, therefore, possible to assume some growth of output without significant investment. The mission believes that priority should be given to the development of industries to process fruits, vegetables and juices for export, with particular reference to the nearby European markets. The emphasis would be on shipping fresh fruits and vegetables during the late fall, winter and early spring; but there will remain surpluses to supply the needs of processing industries which could also benefit from the labor availability in the country. - 20 - The success of this effort will, of uvurse, depend in considerable mea- sure on the viability of arrangements with the European Common Market. The only relatively large investment in the sector is a cigarette fac- tory which will cost D 2 millionl/ and is to be located at Tunis. The present plant is old and most of the equipment has to be replaced. 68. In the construction materials sector, the addition of a fourth kiln to be installed at the Tunis cement plant (D 1.4 million) and the completion of the first hollow glass factory (D 0.6 million) have good prospects. On the other hand, the faience tile factory (D 0.5 million), the sanitary-ware plant at Bizerte (D 1.1 million) and the flat glass project,at first sight, raise serious doubts as to their economic viability. 69. As mentioned earlier, the original plan target of D 13 million for tourism has recently been revised upward to D 17 million. Private initiative is very active in this sector. Tunisia has the natural conditions needed to transform tourism into a major source of foreign exchange earnings. Investments for this purpose in hotels and other facilities deserve very high priority. The Plan's revised esti- mates are probably still relatively low. Foreign exchange receipts from tourism which have gone up from D 2 million in 1960 to D 5 million in 1964 could reach some D 10 million or more in 1968. 70. The mission considers that with the exception of the mechanical industries, the proposed investment in the major subsectors of industry is generally justified. However, its realization will re- quire a great deal of entrepreneurial and managerial talent. This talent is not likely to be found in Tunisia without making the greatest possible use of the potential of the private sector. As noted at the outset, the government has recently taken a number of steps which should help to improve the climate for private investment. Further action could usefully be taken along these lines, and the government has additional steps under consideration, 1/ The Plan provision is D 1.6 million. - 21 - Power 1/ 71. The Plan allocated D 29.3 million for electric power, in order to provide for an extension of generating capacity to meet rapidly growing demand in the period immediately beyond the Plan period (D 9.L million), an extension of the 150 KV transmission network (D 6.0 million), a consiaei able amount of rural electrification (D 7.9 million) and an extension of the existing distribution systems (D 6.0 million). Of the total D 6.3 millon will be absorbed by the completion of generation and transmission works begun during the Pre-Plan. The mission feels that STEG (the Societe Tunisienne d'Electricite et du Gaz) is capable of carrying out this program. 72. The target figures, averaging about D 7 million per year, look large in relation to expenditure under the three-year plan. However, it can physically be accomplished since STEG's policy of employing overseas con- sultants on design, and contractors for construction enables it to expand its program expenditure very rapidly when required. Existing operating capacity is capable of meeting the demand up to and including 1967 but construction of major additions must be commenced during the present plan period to deal with the period from 1967 to 1971. An additional 50 MW at La Goulette II and a new oil burning steam station of 100 MW at Gabes are therefore included in the plan for commissioning in 1968 and 1970. To avoid a power shortage in 1968, orders must be placed soon. The La Goulette II project can be deferred only if a bulk supply agreement could be reached with Algeria before the end of 1965. Since many other factors may enter in negotiations between the countries on this matter, an early settlement of the bulk supply question may be difficult. Nevertheless, it would be in Tunisia's interest to attempt it, as expenditures of D 6.k million could be deferred for two years or more with only relatively minor expenditures on voltage regulating equipment to increase the carrying capacity of the existing 90KV lines from Algeria. 73. The building of a new steam station at Gabes, the other major generation project in the Plan, is conditional on developments in the chemical industry in this area. If the proposal for a chemical complex goes ahead as intended, additional generating capacity will be required by 1970. This capacity could be suitably located at Gabes, along the lines of the current plan. The reduction in size of the initial installation from 100 MW to 50 MWAT, which is probable, would not result in any substantial reduction in expenditure in the current plan period (D 2.2 million). 7L. Of the two new major transmission projects, the 150 KV line to Gabes (D 1 million) can be partially justified on economic grounds. It will replace expensive diesel units by relatively low cost power from La Goulette, and will avoid the renewing of obsolete diesel plant and adding to the capacity of the present Gabes station. The line will be essential if the Since the Plan figures were established (D 21 million) an American loan (AID) for distribution projects was authorized ($ 7.h million) which together with local expenditures by STEG would add some D 8 million to the original program. - 22 - chemical industry develops as planned, both as back-up for the proposed station and toenable it to feed into the main grid. The 150 KV line from Metlaoui to Kasserine and Tadjerouine (D 1.5 million) will not only replace the aging generating plant of the cellulose industry in Kasserine, but also will close the ring around Tunisia via the 90 KV lines from Tadjerouine to Tunis. Bot. these projects are desirable from the standpoint of improving supplies to all consumers on the main grid, as well as to the cellulose industry, but they could probably be deferred if necessary for a few years. 75. The distribution program, more than half of which is covered by AID projects, will bring supplies to 12L new areas and connect 18 previously isolated developments to the grid. Outside the AID program, the distribu-. tion pro:-ram (D 6 million) is largely devoted to renewal and extension of existing mains. Considerable economies in operating costs should result from the extension of mains to 18 areas now supplied by small, but costly diesel stations. With minor exceptions this program can be considered essential to maintaining existing supplies, reducing operating costs or to meeting increasing demands. On the other hand, the AID program (d 7.9 million) consists very largely of social amenity projects which, but for the assistance of the U. S. Government could, or would, have been deferred, STEG may find it difficult to complete the distribution program during the Plan period because it consists of a multitude of minor projects. However, considering the consistent increase in performance during the three years of the first plan - in the face of massive administrative problems during the setting up of STEG - the mission estimates that nevertheless some 80-85V of the distribution program may be achievable. 76. With the completion of STEG's four-year plan there would be few places of any importance in Tunisia which will not have electricity supplies. Development thereafter would be mainly restricted to supplies for new industrial projects, expansion of existing supply areas, and rural electrification. Transportation and Telecommunications 77. The 1965-68 Plan envisages investments in transport and communica- tions amounting to D 55 million in net investments. Although not all of the projects included under this amount are of equally high priority, it can probably not greatly be diminished because the costs of many of the projects involved have been underestimated. The D 10.6 million for replacement of road construction and maintenance equipment, ferries and port boats, and renewal of the vehicle fleet appears to be clearly insufficient. There are a number of critical problems in the present organization and administration of transportation facilities. The government is generally aware of them and also of the need for a more systematic approach to planning in the transport sector. Outside assistance will be required to help coordinate and carry out the various studies which will have to be made. Competent consultants should be engaged to advise on improving the transport adminis- tration and to develop a Master Transport Plan for the country as a whole. 78. The road construction program would demand D 6.2 million (exclusive of D 1.8 million for bridges), of which D 4.2 million is related - 23 - to projects carried over from the previous period. Economic and engineering studies have, in most cases, not yet been made for the new projects, which may affect the timing of their execution. Almost all of the newly planned roads are closely related to projects in the agricultural, industrial and tourist sectors. Their place in a priority scheme, will, therefore, depend largely on the economic importance of the related sector projects. Cost estimates are uncertain, but costs appear generally to have been under- estimated. The most important urban development projects (D 2.5 million) are for Tunis and Kairouan. In view of the size and nature of these project6s, the use of foreign consultants will be necessary to affirm their economic merits, to carry out detailed engineering and design work, and eventually to supervise construction. 79. Projected expenditures for the National Railways - D 4.5 million - appear to be very conservative; costs are apparently underestimated. First priority should be attached to the reinforcement of track and the procure- ment of rolling stock. The investments planned in this respect must be considered as insufficient; they not only will not meet growing traffic needs, but are likely to fall behind replacement requirements: the replace- ment gap which already exists in this field would thus continue to increase. Second priority projects would include the improvement of shop facilities. The lowest degree of priority should be allotted to the Tunis railroad station project, the economic need for which has not yet been established. No design has yet been prepared for the construction and even the station's location has not yet been determined. 80. During the Four-Year Plan,the Sfax-Gafsa Railway Company plans to invest D 2.9 million, of which D 1.2 million would be for the reinforce- ment of the Graiba-Gabes line. The program appears appropriate to sustain the company's continued operation. The reinforcing of the Graiba-Gabes line should be coordinated with plans for the chemical complex. 81. Excluding the port of Ghennouch (Gabes) which is an integral part of the Ghennouch chemical complex project, investments in ports scheduled in the 1965-68 Plan amount to D 9.3 million in net investment and D 0.14 million in replacements. The most important item in the Plan is the exten- sion of the commercial port of La Goulette estimated at D 6 million. Construction on this project started in 1964 and is being carried out by contractors under the supervision of consultants. An IBRD loan of US$ 7 million equivalent (about D 3.5 million) has been provided to assist financing the project. Closely related to the La Goulette commercial port project is the new fishing port at La Goulette which would cost D 1.2 million. The final design for this project has been made by consultants The port of Ghennouch (Gabes) would cost some D 3 million. An economic feasibility study and preliminary engineering for the chemical complex, including the port, has been made by consultants. Final engineering of the port has started with site investigation. 82. Investment of D 1 million is scheduled for the port of Tabarka which handles presently a small tonnage. Consultants made a preliminary economic and technical evaluation for enlarging and modernizing this port and equipping it with special fish-storage facilities. It is very unlikely, - 24 - however, that future traffic expectations would justify the construction of the port at this time. 83. The "Compagnie Tunisienne de Navigation" (CTN), a government-owned company, operates scheduled ship lines between Tunisia and France, Italy and Libya. In the near future, new lines are planned to be opened with other Middle Eastern and African countries and with Western Europe (Rotterdam, Bremen, Hamburg and London); coastal traffic is also planned to be further developed. Investment for CTN scheduled under the 1965-68 Plan amounts to D 5.3 million, of which D 1 million is for renovation of the existing fleet. Market studies should be made to determine the commercial feasibility of this investment and the proper timing of its individual components. 8h. Investment planned for airport facilities under the 1965-68 Plan amounts to D 7.6 million; the largest project would be the Tunis El Aouina terminal building complex (D 5 million). Financial projections made in connection with the planned airport project indicate that future receipts are not likely to cover costs including amortization and interest on loans obtained on conventional terms. The mission recommends that the project be scrutinized as to its economic justification, and most appropriate phasing of investment and staging of construction. The purchase of two more Cara- velle planes is included in the 1965-68 Plan for Tunis Air. Accounts of the company show reasonable benefits. Market studies should be carried out to determine the commercial feasibility and the appropriate timing of the planned aircraft purchases. 85. Investments by the Post, Telephone and Telegraph Department (PTT) could be held flexible to a degree. Many of the projects concerned are not of high priority and can easily be adjusted to changes in budget allocations. The 1965-68 Plan includes PTT investments in an amount of D 7 million of which D 1 million would be used for the continuation work started before 1965. The projects include the construction of a cable between Tunis and France, four cables in Tunisia to complement existing radio connectionls, post offices and facilities, and the automation, modernization and extension of the telephone connections. The major project would be the cable between Tunisia and France, in an amount of D 1.5 million, which represents 50% ci tne estimated total cost of the cable. Education 86. The program for investment in education, comes to D 43.6 million for the Plan period. This amount is divided among primary education (D 9.8 million), secondary education (D 18.4 million), agricultural and other vocational (D 7.2 million) and higher education (D 8.2 million), correspond- ing to disbursements which are expected to occur during 1965-68. Total commitments authorized by the Ministry of Education are, however, D 10 million higher - D 46 million - which could imply, depending on the pace at which expenditures will be contracted, that actual investments could be higher than the Plan figure. The amount mentioned in the Plan represents somewhat over half the amount that the Ministry of Education had originally requested. It was arrived at mainly by arbitrarily decreasing investment cost per classroom in the primary sector and per student in the secondary - 25 - level; the system of enrollment was left unchanged in both cases. 87. The mission suggests a thorough review of the educational system as a whole in order to reduce costs which are rising and will continue to rise, if no drastic measures are taken at an alarming rate. Special attention should be paid to two factors. In the first place, measures shoulo be taken to reduce very substantially the proportion of repeaters in the primary schools which now is excessive (27% of total annual enrollment). Secondly, the future development of the secondary school system should be revised; too large a proportion of its output now goes into supplying new teachers needed for anticipated future expansion of school enrollment. Thile measures are being taken to normalize the growth of enrollment at the secondary level and while a systematic re-examination is being made of the cost of the various projects involved, investments in secondary schools should retain a high degree of priority; the country should, to the fullest extent possible, be allowed to reap the benefits of the efforts which were made in the past years in the primary sector. 88. A source of additional funds for this pressing area might, perhaps: be found by transferring at least part of the D 17 million allocated for mass media, youth and cultural activities. This program is based on general cultural policies rather than on an immediate economic need. The program for higher education, which in any case is stated to be contingent on the "availability of funds", permits greater flexibility than the rest; it is possible to effect short run savings by sending university students abroad to continue their education. Summary 89. The review of the individual sector programs indicates that, on the whole, these programs are well conceived and that, in general, they consist of projects which appear to be justified economically. This does not, of course, mean that the mission would support the priority and the timing of each individual project. In sectors such as transport and communications and power, for example, certain economies seem to be attain- able without real harm to the overall growth of the economy. However, e-en Lf it would be possible to realize such economies by deferring,changing or abolishing certain items in the program, this will have little, if any, effect on total investment because cost underestimations are evident in some of the programs, and because greater allogance needs almost certainly to be made for replacement than is implied in the aggregate depreciation allowance contained in the Plan. The mission considers that a very special effort will have to be made to prevent a continuation of the sharply rising costs of education in general on the basis of a systematic and thorough revision of the educational system as a whole. - 26 - qn. With respect to the distribution of capital formation by agent as foreseen for 1968, the Four-Year Plan projects a further decrease in the share of total investment carried out by government administrative bodies (see Table 1.5.3.). The Plan attempts no breakdown between public enterprise investment and private investment. However, in the economic budget, the share of private investment is estimated at about 200 for the years 1965 and 1966 or slightly less than in 1964. Summary of Actual and Planned Domestic Capital Formation (in millions of Dinars Pre-Plan Proj. Actual (Gross) Four-Year Plan (net) 1962-1964 1962-1964 (net)Proj.1965-68 (millions of (millions of (millions of 1957 dinars) curr, dinars) curr. dinars)a/ Agriculture 114.7 56,6 150.5 b/ Industry 49.1 61.5 112.0 Electricity, water 12,1 8.2 29.0 Construction - 4.8 - Transport, telecommunications 23.5 23.7 55.0 Housing, urbanism 19.7 38.7 16.8 Other services 9.8 8.3 19.1 Administration 38.1 56.6 67,6 Handicrafts & unspecified 3.0 9.5 5.0 Subtotal: Net Fixed Capital Formation 270.0 xx 45500 Depreciation 60.0 xx (50.0) TOTAL: Gross Fixed Capital Formation 330.0 267.9 (505.0) Notes: xx Not relevant a/ Based on an estimated 1965 price level for investment goods approximately 15% higher than the actual average for 1962-64. b/ Including rural housing Source: See Appendix Table 18. - 27 - V. PROSPECTS FOR OUTPUT, EIPLOYMENT AND FOREIGN TRADE 92. The Four-Year Plan projects growth of total gross domestic product from a 1960 base at an average annual rate of about 6.0%. 1/ Since the actual average annual increase from 1960 to 1964 was 5.95, the annual increase from 1964 to 1968 implied by the 1968 targets is 6.2%. (Tables 9 and 10). New job creation is projected at a rate of about 2% annually between 1964 and 1968, or slightly less than the esti- mated rate for the recent past (Table 12). But counting the projected reduction in under-employment in terms of full time job equivalents, the overall target is an ambitious 5% annually. The agricultural sector is expected to make an important contribution to output growth and the major contribution to employment creation (including the reduction of under- employment). However, it is in manufacturing and mining that the main stimulus to total output growth is expected. Agriculture 912* Between the years 1964 and 1968, the plan projections imply a growth in total value added by agriculture (including estimated in- come from rural households) of about 2.6% annually at constant prices. It is likely that the actual growth between these two years will be somewhat lower than this, mainly because the targets for wheat pro- ductions appear too optimistic. These imply an increase of about 50% by 1968 over the 1964 level. According to published data the latter was about 6% above the average for five years 1960-64, but about 4% less that the four-year average for 1960, 1962-64 which would exclude the very bad year of 1961. Even from this higher base, the 1968 target would re- present an increase of about h%, as compared with no increases at all over the past ten or fifteen years. Given the efforts discussed in Chapter IV to increase productivity with grain producing areas through the expansion of production cooperatives, some increase in average yields should be possible in this period, but since it is unlikely that the pro- gram can be carried out at the pace envisaged, a significantly lower rate of growth seems likely - say 20% over the 1960-64 average, or 15% over the year 1964. However, the shortfall in value added by wheat production (as compared with the Plan) is likely to be somewhat smaller than these lower growths in volume would suggest, since a good deal of the increased output targeted in the Plan is presumably due to the assumption of con- siderably greater use of fertilizers and other imports than is likely to be achieved in practice. 1/ The growth rate estimates differ slightly depending upon whether the 1960 figures taken as the base are those in the Plan document or those as re- vised by the Service de la Comptabilite Nationale (in percent): On basis of 1960 in On basis of Plan Document Revised 1960 GDP at factor cost 5.9 6.1 GDP at market prices 6.1 63 - 28 - 93. The future output of wine is a major questionmark, because of the ending of sales to France. In 1965, large stocks have accumulated because of the inability to locate new markets. Nevertheless, the Plan assumes constant production in volume through 1968. This is certainly technically feasible, but clearly the wine would have to be sold at much lower prices unless preferential arrangements with France are restored. For the longer run, however, it would probably be economic for Tunisia to convert its vineyards to other crops. 94. It is estimated roughly that average annual olive oil pro- duction in 1965-68 will be around 20% higher than the next four years than in 1960-64 period, which was somewhat below the long term trend line. The projected increase between 1964 and 1968 is about 10% or an average of 2.5% annually. With both years assumed to be average good crop years, this increase reflects available information on new trees likely to come into bearing in the period. After 1968, this rate will accelerate, as the result of comparatively high rate of new plantings which took place during the 1955-65 period (it takes from eight to fifteen years for an olive tree to start producing). The 20% growth in output foreseen between the 1960-64 average and 1968 will permit a moderate increase in exports over the 1960-64 average of 40,000 tons. The expanded plantings of recent years will lead to much more rapid growth of output in the 1970ts. 95.- Expanded plantings of citrus trees in 1960-64 should also lead to an acceleration of output in the next several years. Acreage in production will increase about 25% between 1964-68, so that even without an increase in yields, output should go up by the same rate. However, the Plan targets call for an important additional increase in output from irrigation and fertilizer use, with a total expansion of over 40% in value added to constant prices. These targets seem some- what on the optimistic side although they might be obtainable with good management. In principle, an even more rapid growth rate after 1968 seems possible on the basis cf planting already made. However, given the rapid increase in export availabilities from other countries as well as Tunisia which is in prospect, downward pressure on prices is likely. However, it should be possible to alleviate the fresh fruit marketing problem in some degree by eventually going into the production of fruit juices. 96. Output and exports of other fruits and vegetables have been growing quite rapidly in recent years. There is every reason to expect this growth can continue, given reasonable progress with the irrigation programs underway and planned, and given some arrangements for ready access to the European market. The Plan document, does not appear to make adequate allowance for probable growth in income from this source, but this in all probability will be offset by somewhat less rapid growth than projected in some of the other agricultural sector. One important sector where production for 1968 does appear to be over-estimated is live- stock products, where an expansion of nearly 30% is implied in value added - 29 - in the four-year period. I/ The mission believes that an increase in the -rder of 10%-15% is more plausible. This lower growth would be approxi- mately offset by the higher growth likely for fruits and vegetables. 97. In sum, an average growth rate in value added by agriculture of around 2% annually between the year 1964 and 1968. This would corres- pond to an acceleration in the average growth rate from around 2% in the period between 1955-59 and 1960-64 to one of about 3% between 1960-64 and 1965-68. Total value added would go up on the average by around D 10 million over the 1961-64 average and 1965-68, as compared with a total investments projected at around D 130 million (1960 price). Even allowing for probably slippage of investment in this sector of as much as 30% in the agricultural sector, this implies a capital output of nearly 10%. This reflects the relatively high proportion of long lead investments in the crops, soil conservation, irrigation etc., which will begin to yield their full returns well after the Plan period. However, as indicated in the foregoing discussion, growth of agricultural output should begin to accel- erate significantly in the 1970ts. Manufacturing and Mining 98. The Plan projects a growth rate of 14% in value added by manu- facturing between 1964 and 1968, Percentage-wise by far the most impor- tant increases are projected in chemicals, textiles, and metal products. In the latter, a good part of the output will come from the steel project which will be completed this year. However, the total growth target rate averaging 35% annually for this sector is not likely to be achieved in view of the difficulties being experienced in other parts of this sector. An even more important shortfall is likely in chemicals output where a ten-fold expansion is projected on the assumption that the I.C'M. plant will be in production by 1968. However, it seems likely that this plant will not start production before 1970, given the additional preparation needed. In the case of textiles, a moderate shortfall in output also seems likely, but given the comparatively advanced state of investment preparations, a growth rate in the order of 15% seems possible, as com- pared to the 23% rate projected in the Plan. Other moderate shortfalls are expected in value added for food processing which will probably average around 4% a year, rather than 5% as projected because of the slower growth than forecast in meat packing and in cereal products. 99. Overall, a growth in manufacturing output at around 10% annually between 1964 and 1968 seems likely, as against an actual growth rate of 7% achieved in the previous four years. In comparison with the planned investment level of around D 100 million at 1960 prices this would imply a gross capital output ratio of around 4:1 for manufacturing as a whole in this period. This high ratio reflects: a) the generally high capital 1/ A complete forecast for this sector is not given in the national account3 projections. However, it is possible to infer a growth rate by pro- jecting the missing elements. - 30 - intensive nature of the main investments (in steel and chemicals etc.); and b) the fact that one of the main investments likely to be started in the period (the I.C.M. plant) will not be in production until after the period ends. 1000 Part of the expected shortfall in manufacturing is likely to be made up by higher crude oil production than the conservative plan fore- cast of 1.2 million tons for 1968. It seems quite likely that production will reach 2.0 million tons by 1968 which would bring total value added by the mining sector from the projected D 18 million to D 20 million by 1968, as only against D 9 million in 1964. In total the probable growth rate for manufacturing and mining would thus be around 12.5% for 1964-68 against 15.0% projected by the Plan, and 6% in 1960-64. Other Sectors and Overall Output 101. With investment at constant prices expected to increase at a slower rate than GDP in the period, the value added by the construction trades is expected to rise by only 3.3% annually in the period, as against 16% in 1960-64. This seems plausible especially in view of the increasing component of machinery and equipment in the investment planned for 1968. The high growth rate projected for the service sector (8.0% when domestic servants are excluded) reflects the probability of a rapid growth of tourism in the next four years. In two sectors, growth seems understated in the Plan. These are transport which is projected at only 4.3%, and in the contribution of public administration (2.9%). Both of these are likely to go up considerably faster than this, which would approximately offset the shortfalls expected in agricultural and indus- trial output described above. Thus on balance, an overall growth rate of around 6% seems feasible in the period. An overall capital output ratio of about 4:1 is implied, as the ratio of investment to output in the sectors other than agriculture and manufacturing seems generally favorable. Implications for Employment 102. The Four-Year Plan foresees an increase of 85,000 persons in the total labor force from 1964 to 1968 (see Table 12), and an in- crease in civilian employment of 110,000 and in the armed forces of 5,000, thus a decrease in unemployment of 30,000- Of the increase in civilian jobs (see Table 13), 20,000 are expected to be created in agriculture and 50,000 in industry and handicrafts. A good part of the latter would probably have to be absorbed in handicrafts, since detailed examination of the industrial projects a maximum figure of new job creation of around 30,000. The construction industry, which provided a quarter of the new jobs between 1960 and 1964, will expand much less during the Four-Year Plan period than during the Pre-Plan and is expected to provide only 9,000 new jobs. Services and govern- ment administration are each expected to create 13,000 new jobs. In - 31 - agriculture, the main improvement in the employment situation is expected to take the form of a reduction in under-employment, with an increase in the average number of days of employment per worker in agriculture from 130 in 1964 to 150 in 1968. This is the equivalent of 100,000 new jobs, and would have the effect, in part, of reducing the demand for jobs to be provided by the national unemployment works program. 103. If there is some slippage in the major programs in industry and agriculture, as seems quite possible, the amount of employment created would be less than forecast, and there would be a smaller reduction of unemployment and under-employment. Perhaps an even more important con- sideration is the probability that the labor force will grow by more than the 85,000 indicated in the Plan. Recently, estimates of the past popu- lation growth rate have been increased from earlier estimates of around 2.0% or less to 2.5%. If indeed past growth has been as high as 2.5% for any length of time, it seems quite probable that labor force growth will tend to approach this rate in the near future. Therefore, a growth rate of around 2.0% annually would seem a safer assumption for 1964-68. This would mean that even if the full target for new job creation in the period would be reached, the absolute level of unemployment would remain the same as in 1968 in the absence of the works relief program. However, presumably some reduction in under-employment can be achieved in the period even if not quite to the extent projected. Implications for Exports 10. The Plan projects a rise in the value of exports of goods 1 of nearly 50% between 1964 and 1968 at the old exchange parity. (See Table 49). It seems that the actual increase will be somewhat less. :Receipts for wine exports have already dropped sharply and are not like- ly to recover to more than D 4 million by 1968 over only half the level projected in the Plan - which is the same as that reached in 1964. This is due to the likelihood that Tunisia's wine will have to be sold at world market prices which are about half the French preferential price that they were receiving until 1961. Exports of hard wheat can probably be unaltered at the 120,000 tons level reached in recent years and pro- jected for 1968, but here too, receipts will be lower than projected as a result of the loss of preferential treatment in the French market. With total olive oil production likely to average about 80,000 tons in the next four years, it should be possible to achieve an export average of about 50,000 tons annually, as compared with one of 40,000 tons in the past five years. Average export prices for Tunisian olive oil will be somewhat affected by higher French duties. Total receipts for olive 1/ The presentation of the external accounts in the Plan does not allow their examination from a balance of payments point of view; the mission prepared a balance of payments projection for 1968, starting from the trade projections which are given in the Plan, - 32 - oil are estimated at D 11 million as against D 9.4 million projected in the Plan. As to other agricultural exports, only fruits and preserved vegetables are expected to increase to D 8 million, compared to an average of D 4.4 million in 1960-64, the remainder keeping constant at the early sixties level. 105. Exports of mineral products and manufactures will go up con- siderably during the Plan period, mainly as a result of petroleum products which are expected to exceed the Plan estimates by around D 3 million. However, fertilizer exports will fall short of the target by D 7.5 million since the I.C.M. plant will not be in production in 1968. Receipts for lead metal will probably be somewhat higher than the Plan target because of higher world prices which are expected to prevail for the next four years. Thus, in the aggregate exports of goods are pro- jected by the mission at D 72.5 million in 1968 (old parity) as compared with a plan target of D 80.0 million and an actual average of D 50,, million in 1960-64. 106. Exports of non-factor services are likely to rise substantially, mainly because of growth expected in tourist receipts and sales to other governments (mainly royalty payments on the pipeline) (Table 48). In total, this category of earnings is projected at D 37 million in 1968 as against D 27 million in 1964 (old parity). Imports 107, With regard to imports of foodstuffs, the Plan calls for virtual elimination of soft wheat imports (Table 50). However, given the lower production estimates devised earlier, and allowing for hard wheat exports of 120,000 tons about 250,000 tons of soft wheat will, in part, probably have to be imported in 1968 together with some rice and other cereals. Imported sugar is planned to be partially substituted by the domestic product, On the other hand, imports of only 10,000 tons of soya oil are likely to be needed to satisfy total consumption requirements given the olive oil production and export estimates indicated earlier. This is one- third of the amount projected in the Plan. 108, Complete substitution of the imports of petroleum products is planned, and seems quite attainable. A heavy increase in the imports of coal is planned, partly to be used for the production of pig iron. How- ever, major items in the imports of raw materials and intermediary pro- ducts are iron and steel products, which will partly be produced locally so that import needs for these items will be about 25% less in 1968 than in 1963. Imports of lumber and cotton will increase, however. The imports of finished products consist mainly of equipment, and the relative importance of this item will further increase during the Plan period, be- cause of the increased share of equipment in total investment. It is foreseen in the Plan that these imports will increase to D 40 million in - 33 - 1968 or over 40% of total imports, as against 35% in 1964 and 28% in 1960. With regard to the imports that are not dealt with above, it seemed rea- sonable to the mission, in view of the increase experienced in the last four years, to estimate them at D 31.0 million as against D 27 million in 1964. Summarizing, the mission feels that total imports will amount to about D 109 million in 1968 as against D 104 million (old parity) in 1964, and a Plan target of D 99 million. Factor Services 109. Imports of non-factor services are expected to rise by 4.k% per annum from their 1960-64 average of D 26.1 million to about D 34.0 million (Table k8). This increase consists mainly of a rise in trans- portation charges and in the cost of travel abroad both of tourists, officials and students. 110. It should be noted that the projected level of imports of goods and non-factor services in 1968 represents a somewhat lower percentage of GDP (27%) than in the period 1960-64 (30%). This would be the result of the import substitution policy which the government adopted in its oon- tinued drive for industrialization. Resource Gap 111. After allowing for adjustments of imports of goods from a trade basis to a balance of payments basis, the net balance of goods and non- factor services as estimated above for 1968 would amount to D 30 million as shown in the table below. This compares with a resource gap of D 27 million in 1960 which increased steadily to D 45 million (current price, old parity), However, in the current year (1965) the resource gap is likely to be moderately higher than 1964 and then start to fall significantly only in 1967-68, as some of the main export increases would not take place until that period. Thus for the four-year period, as a whole, the gap is estimated at around D 160 million at the old parity (or D 200 million new parity). - 34 - Summary of Imports and Exports of Goods and Non-factor Services (millions of dinars, old parity) 1960/64 Projection 1960/64 Projection Exports of: Average 1968 Imports of: Average 1968 Hard wheat 2.9 3.6 Wheat 7.4 8.0 Fruits and preserved vegetables 4.4 7.9 Other foodstuffs 8.9 9.4 Olive oil 9.9 11.0 Petroleum products6.0 - Wine 8.3 4.2 Iron and steel 5.6 4.8 Other agricultural products 7.5 7.5 Cotton and textiles 5.7 6.7 Equipment 27.3 40.0 Peturoleum products - 6.0 All other n.e.g. 30.6 40.3 Phosphates (lime) 6.7 10.7 Lertilizer 2.8 6.7 All other n.e.g. 7.9 14.9 Total goods 50.4 72.5 Total goods 91.5 109.2 Adjustment to B.0.P. Adjustment to Bacis 1.4 - B.O.P. Basis -2.0 -4,.2 51.8 72.5 89.5 105,o Nont.-factor services 27.2 36.5 Non-factor of which services 26.1 34.0 Tourism (2.9) (10.0) of which Govt. receipts (16.4) (15.0) Freight (9.3) (114.5) Foreign travel (5.0) (7.5) Total goods and non- factor services 79.0 109.0 Resource gap 36.6 30.0 Total goods and non-factor 115.6 139.0 services 115.6 139.0 - 35 - VI. NATIONAL EXPENDITURE AND THE FINANCING OF INVESTMENT 112. The pattern of output growth, investment and foreign trade implied in the Four-Year Plan would permit a real growth in total consumption (at 1960prices) of only 4.6 percent annually, requiring a marginal domestic savings rate of 35 percent between 1964 and 1968. 1/Within total consumption, the public sector is projected as growing at 11.0 percent annually, which implies a growth rate in private consumption of 3.1 percent. The latter would mean a growth in per capita private consumption of less than 1.0 percent annually, even if the population growth rate is as low as projected, and quite possibly no growth at all if the latter rate is approaching 3.0 per- cent, as seems quite possible. This contrasts with an apparent growth in private consumption of around 5.0 percent in 1960-64 - or around 2.5 percent per capita. 113. Several questions emerge from these projections. First, as already suggested, recent savings experience makes a 35 percent mar- ginal rate seem implausible. By the same token, the projection of the total consumption growth rate seems low, especially with respect to private consumption. However, one may also question whether a real growth in public consumption as high as 11 percent annually seems justified under the circumstances. Finally, a different type of question needs to be posed about all these expenditure projections: what impact will price changes, particularly those following the 1964 devaluation, have on these relationships? 114. It is perhaps best to dispose of the latter question first: It has already been noted that in the official Plan estimates, the cost of investment goods in 1965-68 is estimated at 20 percent above the 1960 price level and about 12 percent above the 1964 price level. In the mission's view, this probably understates the increase, which is more likely to be around 24 percent and 16 percent respectively, when taking into account the probability of some price increase in the domestic component of investment over the 196 level - a factor apparently not taken into account in the Plan estimates. (On this basis. total investment for 1965-68 would be around D 525, rather than the D 505 shown in Chapter IV.) As to consumption goods, prices in July of 1965 were 9 percent over the 1964 average, as measured by the official cost of living index. On this basis, it might plausibly be assumed that total consumption costs for 1965-68 will average about 10 percent of the 1964 level (16 percent above 1960). 115. Prices of public consumption are heavily dependent on wage policy, and although no explicit allowance is made in the Plan, it seems likely that an increase of at least 5 percent in wage rates is likely. Taking into account probable price increases in purchases of goods by the public sector, an average price rise of 8 percent for 1J The Plan projection of national expenditure (Table 3) is based on a GDP growth rate of 6.8 percent annually, which is derived from the series for GDP at market prices; this, however, includes an element of price increase resulting from the assumption that indirect taxes will rise faster than GDP at factor cost. The above calculation eliminates this inconsistency. - 36 - public consumption seems plausible between 1964 and 1968. The resource gap may be computed at 25 percent over the 1968 Plan target of D 22 million (which, as indicated in the previous.1chapter, also appears to take account of prospective price changes in the foreign exchange price of the main commodities). The net result for GDP of all these assumptions would be a ten percent overall price increase. In the case of savings, the implied marginal increase would be in the order of 32 percent rather than 35 per- cent, because the value of the resource gap would increase by more than investment under these price assumptions. Nevertheless, the key question about these projections is whether even this lower rate can be considered realistic. The Four-Year Plan Expenditure Projections (millions of dinars) 1960 Prices Current Prices 1960 1964 1968 196 1968 GDP at market prices 330 415 528 U0 618 Resource Gap 22 L6 22 52 27 Available Resource 352 461 550 492 645 Expenditures: Investment 48 95 109 102 135 Consumption 304 366 441 390 510 Public 56 66 101 70 109 Private 248 300 3L0 320 400 Domestic Savings 26 49 88 50 108 Government Savings 116. In the case of the Central Government, it has been noted that savings have risen rapidly in the past three years and probably will ex- ceed D 20 million in 1965. The Plan projects an increase to D 33 million(l) on the assumption of an average 7.6 percent growth rate in revenues between 1960 and 1968. Since the actual revenue growth rate was only 51 between 1960 and 1964 (in current prices) this would require a growth rate between 1964 and 1968 of nearly 12% to achieve the overall target. The 1960-68 projected growth of expenditure was 6.5% which compares with a 4.4% growth in current prices between 1960 and 1964. The projected rate for 1964-68 is 11%. (2) 1960 prices. - 37 - 117. On the basis of present indications, it seems conceivable that something like the target growth for revenues can be achieved in the 1964-68 period, but only on a current price basis, taking advantage of the average growth projected in money GNP of 9% annually foreseen for the period. Taxes on imports (or related directly to imports) which amounted to around D 24 million in 196 might go up to about D 31 million by the next year or two, despite the slow growth of imports, in as much as the taxable base has risen significantly for many items as a result of the devaluation. Other indir- ect taxes came to D 38 million in 1964 or about 10% of GDP at factor cost. Like all other taxes, these were subject to a 10% cross the board increase in 1965. Thus, it would seem quite possible to achieve an increase in this ratio to about 12% of money GDP by 1968, or around D 60 million. Direct taxes amounted to some D 18 million in 196 or about 5% of GDP. Given the 10% rate increase and some improvements in collection, an increase to D 30 million or 6% of GDP should be feasible by 1968. Total taxes in 1968 might thus amount to 24% of GDP, compared with 21% in 1964 and nearly 24% in 1960. Allowing for a moderate growth in miscellaneous revenues (including royalt- ies)from the pipeline which are paid in foreign exchange), total collections by 1968 could amount to about D 135 million as against 90 million in 1964, an average increase about 11%. 118. It is the announced intention of the government to offset any increases in public expenditure due to wage increases by limiting real consumption growth. However, if the rise in the fiscal burden indicated above is regarded as a maximum feasible in this period, any reduction in consumption would probably have to take place in the growth of public consumption, rather than private. Indeed, even with no price increases, the 11% increase in growth of current expenditure implied between 1964 and 1968 would probably be incompatible with an adequate public savings effort. Assuming a ceiling of 7.5% real growth rate in current expend- iture over the 1964 level and an average price increase of 2.0% annually, this would set a limit of about 9.5% in the total for this period, which would still be somewhat faster than the growth projected in money GNP. In this connection, it may be noted that the Tunisian authorities have recently indicated their awareness of the desirability of not permitting current public expenditures to rise much faster than the overall growth in total incomes. Indeed, in the Economic Budget for 1966, central government expenditures are projected as rising by only 8% annually from 1964 to 1966. (However, these may not take full account of the price increases likely in this period). 119. As presently projected in the Four Year Plan, total current expenditure would rise from D 73 million in 1964 to about D 112 million by 1968 after allowing for a continuation (at D 4 million) of estimated current outlays on the works relief program (Table 23). This compares with a ceiling implied for 1968 of D 106 million if the 9.5% growth rate were accepted as a limit. The main increases in current expenditures are foreseen in education - from D 17 million in 1964 to D 31 million in 1968; in supporting services for agriculture and other economic activities (D 8 to 13 million); in public health and social affairs (D 14 million to D 22 million); and in current operating subsidies to public enterprise (D 2 to 8 million). In the case of education, the mission regards the projected increase as fairly inevitable, given the commitments already - 38 - made in terms of school building and the probable expansion of enrollment. Some economies might be feasible during the period by reducing the number of repeaters. However, any such economies in real expenditures are likely to be offset by the probable rise in wages and prices. After 1968, the growth rate in education expenditure should slow down provided that steps are taken, as recommended in Volume VI of this report, to reduce the growth rate of enrollment at the primary level. The growth in the second category appears well justified by the need for expanded agricultural extension services, road maintenance etc. Thus, it would seem likely that downward adjustments would have to be concentrated in the latter two categories - including, if necessary, some increase in the prices charged by the government enterprises (e.g. the railroads) in order to hold down the sharp increase foreseen in current subsidies. 120. Given current revenues of around D 135 million in 1968 and current expenditures of D 106 million, current savings of the central government would amount to about D 29 million, as against a Plan target of D 33 milliont and around D 16 million actually realized in 1964. However, this would still correspond only to about one-quarter of the total domestic savings required (D 108 million) by the original Plan targets as adjusted to 1968 prices. The residual of D 78 million would correspond to about 12% of projected GD? for 1968, as compared with the corresponding residual D 34 million or 8% of GDP in 1964. It should be possible for other savings to rise somewhat faster than GDP but it seems doubtful that such a rapid increase can be achieved. Public Enterprise Savings 121. As noted, savings of public enterprises have risen rapidly in recent years as new enterprises have been setup and some existing private enterprises taken over by the State. Comprehensive estimates on the net savings of these enterprises are available for 1963 (Table 65) and globa7. estimates of trends are available for the period 1960-64 (Table 31). For most of them, information is inadequate to provide the basis for a well documelted projection of future savings. However, for a few of the principal enterprises some indications are available. In the case of petroleum, it is reasonably certain that substantial gross profits will be generated by 1968, perhaps in the order of D 5.0 million as against none in 1964. However, these profits will start to become important only in 1967. The expansion underway in phosphates should also lead to a substantial rise in profits from the enterprises in this field - to perhaps by D 3.0 million by 1968 against D 1.0 million at present. In both petroleum and phosphates, about half of the profits will go to foreign shareholders, but most of them will probably be reinvested in Tunisia in this period. The Electricity Authority (STEG) expects a large increase in internal cash generation - from about D 2.8 million in 1964 to D 5.7 million by 1968 (including capital contributions from consumers estimated at D 0.h million in 1964 and D 0.9 million in 1968). However, unless the accumulation of unpaid bills (which had grown to D 5.h million at the end of 1964) is stopped, this target will not be reached. On the other hand, if it can be reversed the target might be exceeded. A number - 1960 prices. - 39 - of other government enterprises are also expected to expand substantially in the next several years, but in many of them much greater attention will need to be given to improved efficiency and appropriate pricing policy if they are to contribute substantially to increased public savings. The government is generally aware of this need and has begun to take more energetic action toward this end over the past year or two. Assuming reasonable success in these efforts, it might be plausible to project an increase of around 50%0 or D 5.5 million in the gross savings of all other enterprises over the D 11 million level apparently reached in 1964. This would bring the total to around D 30 million by 1968, as compared with an estimated D 15 million in 1964, and only D 5 million in 1960. Private Savings 122. Even given the comparatively ambitious increase in total public savings effort indicated above - from D 31 million in 1964 to D 59 million by 1968, it is clear that a major increase in private savings would be necessary to even approach the total savings target of the Plan. The implied increase to reach the full plan target would be from D 19 million in 1964 to nearly D 50 million by 1968. This would seem to be quite un- realistic. As indicated in Table 21, private savings have failed to rise hardly at all in the past five years. Indeed, from the indications available, it appears that the only reason private savings did not fall during the period was the temporary increase in willingness of the house- hold sector to hold cash in the period which is reflected in the declining velocity of money circulationl_/. However, as noted, this trend has apparently been reversed in 1965, with the money supply'remaining stable in the face of a growth of GNP in current prices which probably will exceed 10/o for the year as a whole. 123. N4evertheless, given appropriate government policies, it should be possible to achieve a significant increase in private savings during the 1964-68 period. The key will be the government's attitude toward private enterprise. The start made recently in encouraging private entrepreneurial activity in the tourist business holds considerable promise for the generation of increased private profits (and savings) in this sector. If similar encouragement can be given in some other sectors over the next four years, private enterprise savings by 1968 might expand to a level significantly higher than they were in 1960-61. 124. As to household savings, the Government is stimulating the cre- ation of regional investment societies as a means of encouraging people to save. The sort of investments under consideration for such societies are local hotels, and possibly shares in profitable public enterprises. Given good management this effort could well have some impact on private savings. Another factor which will help to promote private savings is the increase in home ownership in the recent period which was financed 1J The Economic Budget (Annex 1, Table 5.1) indicates a fall in private enterprise savings over the period from around D 13 million in 1960-61 to D 9 million in 1963-64. If these estimates are deducted from the total private savings estimates in Table 21, they imply a significant increase in household savings which is probably explained mainly by this consideration. - 40 - initially to a large extent by Government credit. The need to repay past loans should help to promote savings in this period. All in all, a growth in private enterprise and household savings of as much as 75% over the 1964 level of D 19 million might be within the bounds of poss- ibility by 1968. This would bring total private savings up to about D 33 million in 1968, which would correspond to 7.0% of private disposable income projected for 1968, as against an average ratio of 6% in 1960-64. This implies a marginal private savings rate of around 10% which is admittedly optimistic, but which might be achieved, given favorable government policies in relation to the encouragement of private enterprise and private profit generation. Summary of domestic savings and consumption prospects 125. In total then, domestic savings might be projected at just over D 90 million by 1968 as compared with D 50 million in 1964. On this basis, the average for the four-year period 1964-68 might reach D 75 million as against one of D 39 million in 1960-64. The marginal rates would be 23.5% between 1964 and 1968 and 21% between 1960-6L, and 1965-68. These compare with a marginal rate of about 20% achieved between 1960-61 and 1963-6h. It should, however, be stressed again that the achievement of such savings rates in the 1964-68 period depend on (a) fairly optimistic assumptions about government revenue collections; (b) greater restraint in the expan- sion of current expenditure than projected in the Plan; (c) improved efficiency and price policy in public enterprises; and (d) policies favorable to the expansion of private enterprise, at least in selected fields. ACTUAL AND PROJECTED SAVINGS LEVEL 1960 1964 1968 1960-64 1965-68 av. av. Central Government Current revenue 73 90 135 77 117 Current expenditure 59 7 106 65 92 Central Government savings lU 16 29 12 26 Public enterprise savings 4 15 30 8 23 Private savings 9 19 33 19 26 Total Savings 27 50 92 39 75 GDP at current prices 330 439 618 379 550 Savings ratio 8.2-1/ 11.5 14.9 10.3 13.6 1/ Exceptionally low, the average for 1960-61 was about 9.6%. - 41 - The Rclaticnship of Savings to Consumption and Investment 126. As noted in paragraph 1-14, the Plan projections of fixed invest.- ments, which are given at D 505 million in 1965 prices, are probably the equivalent of D 525 million in average 1965-68 prices. Adding a rough allowance of another D 25 million for under-estimates of real investment needs, in such things as replacement, the gross investment bill implied in the Plan analysis (which is almost entirely in terms of net fixed investment) might.be in the order of D 550 million measured at prices likely to prevail in the period. However, as noted in chapter IV, there are likely to be some lags in the implementation of the investment program, and there are also some projects which very probably could be deferred or eliminated on the grounds of low priority, even though it might be possible administratively to carry them out in the Plan period. As a rough approxi- mation, these two factors together would probably warrant a scaling down in the above estimate of D 550 million by around 15%, which would reduce the total bill for fixed investment to some D 470 million. 127. However, the Plan makes no allowance at all for increases in inventories.. As noted, the national accounts estimates indicate a net draw down of inventories between 1960 and 196b, mainly because of the use of olive oil stocks. This will not recur in the 1965-68 period. Assuming a more normal trend in inventory accumulation in the period, the net build-up in the stocks might be estimated at around 6% of total fixed capital, or about D 30 million for the four years. 128. With domestic savings at D 300 million, this level of investment would mean a resource gap of D 200 million (new parity), which would be consistent with the estimated gap, based on balance of payments analysis, discussed in chapter V. This balance between investment and savings would imply a growth rate in private consumption of 4.6% annually in the 1964-68 period, or between 1.5% and 2.0% per capita, depending what the actual population growth is. This would be a somewhat lower growth rate in per capita consumption than in the 1960-6L period, although not as low as the rate implied in the Four-Year Plan. The overall modifications in the Plan national expenditure projections which seem appropriate to the Mission are summarized in the Table below. Revision of Expenditure Projections (million dinars in current prices) Plan Mission Estimates 1964 1968 196 1965-68 Gross domestic product L40 618 618 2200 Resource Gap 52 27 38 200 Total resources 4T92 76,00 Expenditures: Investment 102 135 130 500 Fixed 103 13 122 70 Inventory - 1 - 8 30 Consumption 390 510 526 1900 Public 70 101 101 Private 320 h09 425 1550 D,mestic Savings 50 108 92 300 - 42 - Longer Run Prospects 129. After 1968, it is quite possible that Tunisia's real growth rate of output and exports can be speeded up somewhat over the rates foreseen for the next several years. Past investments in tree crops will definitelyr lead to more rapidly increasing surpluses for export in the early 1970's; and there is good reason to believe the European market for Tunisian vegetables should be well established and also expanding at the healthy pace by then. Moreover, long run prospects for a dynamic expansion of tourist earnings are good if recent trends in other Mediterranean countries are any guide. It is alas possible that further substantial expansion of patroleum exports can be achieved after 1968, although this is admittedly rather speculative. Finally, with the experience gained over the next five years in sorting out the difficult problems of reorganization in domestic agricultural activity and in industrial development, growth rates in these sectors may well also speed up. In industry, however, the poten- tial for rapid expansion of output for import substitution with be less in the 1970's than it is at present, and much will depend on the prospects for exports, both to Europe and to the other Mahgreb countries. 130. If such an acceleration in growth and exports can be achieved, it should be possible to achieve a continuing expansion of the marginal savings rate and a narrowing in the resource gap, with a resulting reduction in Tunisia's dependence on public capital inflow. However, to achieve this objective smoothly will require continuation of large capital inflow during the next several years. And since most of the more promising prospects for future growth remain to be confirmed, prudence would dictate a considerably more cautious policy in the accumulation of conventional debt during 1965- 68 than has been true in the past several years. Foreign Financing Requirements and Prospects 131. In addition to the foreign capital requirements for 1965-68, indicated by the illustrative resource gyap shown above, Tunisia will have to import capital to meet: a) its deficit in factor income payments; b) the amortization charges on existing debt and on any new debt incurred in the period; and c) the need for some replenishment in its foreign exchange reserves. 132. The estimated deficit or factor services for 1965-68 amounts to about D 50 million at the new exchange rate. This amount includes investment income payments in foreign capital that entered the country prior to 1965. For 1968 these payments are estimated at D 7.5 million (new parity), consisting of D 3 million in payment for interest on medium and long term debt (including undisbursed) and of D 4.5 million of payments to foreign private investors. No allowance is made in the above figures for interest payments on debt to be contracted during the present plan period. Cost for planning studies that can be allocated to factor services will average about D 6.3 million per year during 1965-68 (Table 49). - 43 - 133. Amortization of existing debt will rise to about D 38 million in the 1965-68 period (Table 1) as compared with only about D 12 million in the previous four years, mainly as the result of payments due on suppliers' credit incurred in the past four years. Finally, net exchange reserves need to be built up in the period by a minimum of D 35 million from their negative position of D 7 million at the end of 1964. This would result in a position by the end of 1968 equivalent to less than two months imports of goods and non factor services (estimated at around D 180 million by 1968). Thus, the need for gross capital inflow in the 196 068 period might well be in the order of D 320 million or $610 million( ), if a development program of the size envisaged is to be carried out. This would amount to an average gross inflow of over D 80 million or $150 million annually for the next four years, as compared with the peak level actually reached in 1964 of about D 62 million (new parity) or about $120 million. On a per capita basis, these 1965-68 gross capital inflow targets would be relatively high - around $30 per head per year or 14% of estimated average per capita GDP of around $210 in the period. 134. Private foreign equity capital inflow can be expected to finance a portion of total requirements in the nextt.four:.ycars. Reinvested earn- ings of firms now operating in Tunisia might amount to around D 10 million over the four years, mainly from the foreign partners of the pertroleum and phosphate operations. In addition, new private inflow of as much as DL million annually is expected to finance most of the new oil exploration activities included in the Plan. In addition some other foreign private equity investments may be expected if government policies toward private enterprise in other sectors succeed in creating the climate of confidence essential to stimulate such inflow. Tunisia's need for such foreign participation lies as much in the entrepreneurial and managerial skills that come with this type of investment as in the financial resources themselves. On moderately optimistic assumption about the evolution of such policies, total private long term equity capital inflow might be projected in the neighborhood of D 15 million per year or D 60 million for the four year period. 135. This would still leave need for public capital inflow (or. publ.c. guaranteed private loans) in the order of D 270 million(") or around $515 million for 1965-68. A significant amount of public capital had already been committed, or agreed in principle, at the end of 1964 - around $240 million (Table 53). Of this, an estimated $60 million had been disbursed in the first half of 1965 - (a year when the current balance of payments gap is expected to be as muci as $120 million). Assuming all of the $240 million could be disbursed in the four year period, there would remain an additional amount of $275 million in disbursement from new commitments required for the period. Allowing for a pipeline at the end of the period of around $100 million this would require new public commit- monts of rcughly $375 million for 1965-68. (2) Before consideration of need to service new debt to be contracted during period. (R3) Including service of new debt (see Table 56). - )44 - 136. These are large sums. Nevertheless, it may be feasible for Tunisia to obtain commitments and disbursement in this order of magnitude over the next several years. However, even assuming a reduction in net capital requirements in the 1970's, the achievement of a reduction in gross inflows in that period would require than an important part of the inflow in the next five to ten years made available on soft repayment terms. For the 1965-68 period alone, the terms of assistance will not have much impact on tot4 debt service. For example, the difference between provision of $500 millionk-1) in aid in the period on hard torm.9 (15 years repayment at 5% with 1 year's grace) and soft terms (25 years at 3% with 5 year's grace) would be $12million in debt service requirements in the period itself. However, by the early 1970's, the difference would grow to around $20 million annually. By the end of the Four Year Plan (1968), the debt service ratio would be 15% in the harder case and 12% with the softer conditions (Table 59). Even assuming a steady decline in net inflow, the hard terms would require a main- te,nance of gross inflow, at around $110 million annually to supply and net inflow of some $35 million by the mid-1970's and would lead to a debt service ratio of 23% of exports of goods and services. This assumes an export growth at 6% per annum and would permit imports to increase by only about 1% annually, which would seem definitely too low. If it turned out that export growth were significantly less, the ratio would become significantly.higher, and the country's ability to import correspondingly lower. Therefore, it would seem definitely advisable for Tunisia to seek public capital inflow during the period on terms corresponding to the softer assumption, which would lead to a debt service ratio of around 12% by the mid-1970's. Assuming some funds continue to be provided on a grant basis and on IDA type terms, this would still permit a significant portion of borrow- ings to be on conventional terms, particularly of a long term character. However, it would not permit continuation of the build up in suppliers' credit finance at anything like recent rates. Estimated Foreign Financing Requirements for 1965-68 (millions of dinars - new parity) 1960-6 1964 1968 1965-68 average Resource gap (1) 46 56 48 200 Factor Services (net) (2) 4 9 15 50 Investment income 0 2 6 18 Other 4 7 9 32 Balance in current account (3=1+2) 50 65 53 250 Amortization of existing contracted debt (4) 3 7 9 38 Change in net foreign exchange position (5) -9 -10 9 35 Foreign financing prior to new debt (6=3+4+5) 13 62 71 323 Private equity foreign capital (7) - (7) 15 60 Public capital inflow requirement prior to new debt (8=6-7) - - 56 263 Service of new debt to be contracted (9) - - 1 6 Total foreign financing requirement, Public Capital (10=8+9)* - 60 269 . Assuming that 15% would be provided as grants and 85% as loans, which approximate the proportions prevailing in the final part of the 1962-64 period; and that 80 million dollars have already been accounted for in the service of existing debt, which covers undisbursed amounts. - 45 - The Need for Local Currency Financing 137. Another important consideration for the next four years is the continuing need for capital inflow of a type which is not tied to the financing of the import component of projects. The total import component of the D 470 million investment level can be estimated at some D 206 million (new parity), out of which D 185 million would be related to the investment program, the difference being attributable to the import component of replacement investment not included in the program. (Table 60). Private foreign equity equipment investment is estimated at D 40 million, leaving some D 165 million available to be supplied through public capital. inflow. Assuming that only 80% of this amount would be eligible for public project financing and that a D 10 million amount of replacement investment could be obtained on the same basis, total public project financing could reach some D 130 million or $250 million. As the total need of public capital inflow was estimated at $515 million, $265 million (around $65 million a year) would have to be made available through program grants and loans or project loans which could be used to meet local currency costs. During the Pre-Plan period (1962-1964), disbursements of this type of financing were estimated to reach $150 million ($50 million a year). 138. The need for this sort of finance can also be viewed from the standpoint of the monetary implications of the above analysis of domestic savings and foreign capital requirements. The growth in the funds of the banking system from domestic sources consistent with financial stability might be estimated at around D 55 million in the period. This is based on the assumptions of an average 6.5% growth in the money supply over the end 1964 level of D 133 million (or about 8.0% over the mid-1965 level, which remained unchanged from December 1964); and of average annual increase of around D 4 million in time and savings deposits (against an average of D 3 million in the previous four years). Such an expansion would correspond to around 50% of the private savings projected in the period, while in the period 1960-64, about 75% of the growth in private savings was held in increased monetary accounts. However, if exchange reserves are to be expanded by D 35 million in the period, it means that net domestic credit expansion would have to be limited to around D 20 million, as against D 90 million in 1961-64 (when exchange reserves were drawn down by D LO million and the money supply increased at an excessive rate). This means that of domestic savings of arcund D 300 million, only around D 265 million would be available to finance the total bill projected for gross investment, factor income payments and foreign debt service of about D 595 million. This difference of D 330 million compares with the estimated foreign exchange component of public project financing of D 130 million. The difference of D 200 million would be covered by D 60 million of private foreign equity financing and D 140 million ($265 million equivalent) of foreign financing of local costs. - 46 - The Need for the "Economic Budget" Approach 139. Development plans are almost always ambitious in some sense. They dramatize the need to forge ahead as quickly as possible, trying to reach in a relatively short period the goals of economic viability and rising income standards. Ambition in aims, however, has to be tempered with realism in execution, so as to avoid financial difficulties that may hinder the achievement of such a growth process over the 'Longer run. 140. The Four-Year Plan shows in many ways that the experience obtained during the Pre-Plan has not been wasted. Its ambition resides not in the level of investment "per sell - which could be carried out if the adequate financing measures were available - but in the tentative distribution of the two sources of financing: the domestic savings effort and the level of foreign assistance. 141. It has already been said that the savings target as stated in the Plan seem rather optimistic. The execution of the desired level of investment depends also on the extent to which the major sources of capital will be willing to support the targets of the Tunisian Government. This situation evidently calls for a large measure of flexibility in the execu- tion itself of the investment program particularly so because the leeway afforded to some extent by the existence of ample foreign exchange sources and compressibility of imports has to a large extent been already used up. 142. The Government of Tunisia fully realizes this situation, and is introducing a highly desirable element of flexibility into the execution of the Plan. Whereas in the past the financial allocations for public projects or programs tended to be made primarily on the basis of total investment requirements as estimated by the individual government entities concerned, there will now first be an annual review of the real resources expected to be available in the economy. Every year an "economic budget" will be prepared which will contain in a coordinated way projections of production, balance of payments, public finance, etc. for the next year. The conclusions following from these projections will in turn be decisive for the preparation of a detailed development budget for that year. Tunisia is now making a start with this new approach; the first "economic budget" has just been completed. It should enable her to tailor her investment much closer to the resources available from time to time including, if and when known, foreign aid commitments, and thus help to avoid a recurrence of the serious financing difficulties experienced during the Pre-Plan period. 143. Two additional reasons give particular relevance to the adoption of the "economic budget" approach, which will give operational significance to the basic lines of action established by the Four-Year Plan. The sectoral analyses have indicated that there are cost under-estimations in the investment program. The yearly "economic budget" will be the oppor- tunity to proceed to a thorough analysis of the projects which are going to be carried out, evaluating them much more precisely from the point of view of actual expenditures which have to be taken care of. - 47 - 14. Moreover, the examination of the sectors has shown that in the Pre-Plan period the relationship between projects which were in the Plan and project execution was rather loose. This was true not only for the point of view of level of expenditures but of actual choice of projects to be carried out. It is true that the Pre-Plan period was the first experience in actually carrying out a planned investment program. The Government of Tunisia has strengthened the hnds of the planning authori- ties by combing the Secretariat of State of Planning and Finance with those for Agriculture and for Commerce and Industry into one Secretariat of State for Planning and National Economy. As a result it can be expected that there will be more coordination in the overall planning process as well as a better control on the use of funds for development purposes and on the progress of investment projects. The "economic budget" will provide the operational basis for the carrying out of these fundamental activities. Conclusion 145. Tunisia's long-run prospects are good, assuming that political stability and pragmatic and sensible government policies continue to pre- vail. The country should be able to benefit increasingly from her favor- able geographic position, her ties both with the North African countries and with Europe, her relatively well-developed infrastructure and the qualities of her people. Tunisia already has a civil service of very high standards at the top level. As the great emphasis of recent years on good education and training begins to bear fruit, standards elsewhere will improve as well. Despite the Government's active interest in popula- tion control, the employment problem will remain quite difficult for some time. However, as the Tunisian economy in the future becomes more closely coordinated with the economy of the region as a whole through closer ties with the European Common Market (which are now under negotiation) and perhaps also within the framework of some future North African economic integration, it should be possible for it to maintain a growth rate adequate to cope with this problem as well as providing for sustained growth in per capita incomes and substantially reduced dependence on foreign aid.