Tunisia - Current economic position and prospects (Vol. 1 of 2) : Main report

RESTRICTED Report No. AF-56c 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 The report may not be published nor may it be quoted as representing their views.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 THE CURRENT ECONOMIC POSITION AND PROSPECTS OF T UNISIA (in two volumes) VOLUME I MAIN REPORT March 10, 1967 Africa Department  F OREWORD This report was prepared by a Mission which visited Tunisia in October-November 1966, and again briefly in early 1967. The Mission consisted of the following: John A. Edelman Pa.ulo H. Pereira Lira Walter Cohn (IFC) Miss Aida Eid (FAO) Jacques Guillot-Lageat Epiphane Mawussi Robert Maubouche Alfred Pusar Francis Soges Martial Van Gent All Mission members a.ssisted in the preparation of this report. Gavin Wyatt, Saleh Hussein and Miss Barbara Eschenbach also assisted the Mission on its return to Washington. Messrs. Edelman and Maubouche are the chief a.uthors of this volume.  TABLE OF CONTENTS Page No. Bt.SIC IYtTAe.......oe--..-.....m.eo.fle..o.....o.........o. i - iii SUMMARY AND CONCLUSIONSI....................,..o.e..... iv - xi I. RECENT ECONOMIC PERFORMANCE*....O*...,..**....*..*....o. 1 A, Development in 1960-65,,,..o.r++ *00o..e*.**.*..*...00- 2 Production ...........,,,,,,. 2 Price Changes .......... . .. 4 Investment ........... 4 Balance of Payments ............ 6 B. Developments in 1966 ....... ..-..... . * 6 C. The Economic Budget for 1967.......................... 10 D. Implementation of Investment compared with the Four Year Pl...... ...... , .... , ,,,,,, 13 II. PROSPECTS IN THE MAIN SECTOR,,, ......... ... ..... 16 Medium run investment prospects and policies...,.... 18 Petroleum Development...................ot...... ...** 20 Phosphate and Phosphatic Fertilizers .....,,o....... 21 Other mi nerals, .............. ... . .. 23 Other manufacturing .... ............. . 23 Transport and Communications........................ 26 Other Sectors ............ ,,,........ ..... g.e.. 26 Summary of Investments and Output Prospects for 1967-70 .......... , e D 27 III. THE OUTLOOK FOR THE EAIANCE OF PAYMENTS, DOMESTIC SAVINGS AND EXTERNAL FINANCE .............................. 31 Summary of Prospects for Exports and Imports........ 31 Public Fnne......; ,,34 Enterprise and Household Sa vi . . . 38 Exchange Reserves and Credit Policy.e*,. ***.....*... 39 Foreign Financing Requirements...................... 40 Debt Service and the Longer Run Outlook.........,,** 43 The Need for Program Lending...4..................... 414 ANNEX ON THE MAIN SECTORS A. Agriculture B. Rock Phosphate Mining Industry C. Phosphatic Fertilizer Industry D. Other Manufacturing E. Tourism  - i - BASIC DATA Area: h8, Y0O square miles; 12.5 million hectares Population: (millions of persons) 1966 Census 1256 Census Total he53 3.94 Tunisians 4.46 3.60 Non-Tunisians 0.07 0.34 Rate of growth (1956-1966) Total population 1.4% Tunisian population 2.2% 9.4 per square mile Gross national product as market prices Total (1966): D 500 million Per capita : U.S.$211 Gross domestic product at factor cost 1966 1960 Total in millions of current dinars 440 284 Total in millions of 1965 dinars 433 321 Sectoral distribution as % of average GDP 1965-1966 1960-1961 Agriculture 19 24 Mining and industry 19 18 Transport 9 7 All others 53 51 Rate of Growth (at 1965 prices) 1960-1965: 5.9% 1960-1966: 4.9% 1960/61-1965/66: 5.0% Percent of GDP at market prices 1966 1960 Gross fixed investment 24.7 17.7 Public sector 19.2 10.4 Private sector 5.5 7.3 Change in stocks - -3.3 Domestic savings 14.3 7.3 Resource gap 10.4 7.1 Factor income payments abroad 2.8 0.3 Balance of payments on current account 12.6 6.9 Resource gap as % of investment 41.9 48.9  Money and prices Preferential marketing and tariff arrangements with Franc currency area. (partially restored in May 1966) December 1966 Change 1964-1966 (D millions) (in % p.a.) Total money supply 150.2 5.7 Time and savings deposits 45.8 31.0 Central Bank credit to Government 56.0 19.8 Other bank credit 229.0 14.4 Rate of change in prices (cost of living in Tunisia) 4% 5% Public sector operations 1966 % of GDP Change 1960-1966 (D millions) (at market prices) (in % p.a.) Government current receipts 117.9 22.9 8.3 Government current expenditures 98.0 19.0 8.7 Current surpluses 19.9 3.9 6.3 Government capital outlays 53.8 4.4 6.8 External trade 1966 % of GDP Change 1960-1966 (D millions) (at market prices) (in % p.a.) Exports of goods and services 112.2 21.8 6.5 Imports of goods and services 165.6 32.2 8.8 Commodity comaposition of exports 1966 1963 1960 (%of merchandise exports) Rock phosphate 18 13 12 Olive oil 16 19 12 Crude oil 6 - - Wine 2 19 15 Hard wheat 4 7 14 Others 54 42 53 Balance of payments (U.S.$ millions) 1966 1964 Trade, net -101 -112 Invisible, net -23 -22 Current account, net -124 -134 Private capital inflow, net 23 41 Public capital inflow, net 81 83 Change in reserves, net 20 10  - iii - External financial assistance (U.S.$ millions) 1964-1966 Total 279 Grants 77 Public Loans 202 Major donors (grants and public loans) 1965-1966 United States 105 Western Germany 13 Italy 13 France 10 IBRD/IDA 8 Foreign exchange position (U.S.$ millions) Gross foreign exchange reserves 8 (or less than one month's imports) DMF position Quota 35 Drawings 23 External debt Total public debt outstanding (June 31, 1966) U.S.$ 396 million Total private debt outstanding (December 31, 1965) U.S.$ 11 million Debt service ratio (% of 1966 export earnings) Public debt 16.5 Private debt 1.5  - iv - SUMMARY AND CONCLUSIONS 1. In the first half of the 1960's Tunisia achieved an avera.ge growth ra.te in its gross domestic product of 5.5 percent annually. The main stimulus to growth was provided by increa.ses in investment activity and in output for domestic use. Export of goods and services remained practi- cally stagnant. Total investment went up from 14 percent of GDP in 1960 to 28 percent in 1965; in real terms fixed investment averaged 24 percent for the period as a whole. This high ratio of investment to the increase in total output wa.s primarily a reflection of a) a comparatively heavy emphasis during 1960-63 on investments in administrative buildings and housing; b) heavy investments during 1964 and 1965 in minerals and manu- facturing which did not yield results until 1966-67, and c) the slow yield- ing nature of investments in agriculture, which also increased substantially in the period. 2. This pa.ttern is now changing considerably. In 1967, the government intends to reduce fixed investment to D 110 million or 20 percent of GDP. Even if this ratio is not increased significantly in the following few years the growth in real output sbould increase to over 6 percent annually between 1965 and 1970, with exports of goods and services rising by over 10 percent a year. This shift is due primarily to a.) the coming-into production of the projects in crude oil exploita.tion, phosphates and manufacturing which were started in 1964-65, b) a ra.pid growth of tourism and c) a substantial reduction during 1965-67 in Uhe share of investment going to housing and administra.tive buildings. An important factor in the increase in the productivity of capital expected in this period is the growing role being given to private investors in mining, tourism and manufacturing. In the agricultural sector which still employs over half the labor force, the capital output ratio will probably remain quite high during the next several years, but by the early 1970's increasing returns from pa.st investments together with improved selection of projects and better farm management should make possible a significant reduction in this ratio. 3. Net public and private long-term foreign capital inflow played a major role in supporting the high investment levels of 1964-66, averaging nearly $100 million annually or 12 percent of GDP in these three years. Domestic savings increased in the period from less than 9 percent of GDP in the early 1960's to around 13 percent in 1965-66. Nevertheless, in most years, these sources did not prove a.dequate to finance the full amount of investment. The difference was made up by a drawdown of foreign exchange assets averaging $20 million annually between 1960 and 1964 and by use of suppliers' credits particularly in 1963-65. The deterioration in the financial position was halted in 1965, following a 25 percent devaluation in la.te 1964 and an important increa.se in foreign capital inflow. However, in 1966 fixed investment exceeded the Economic Budget estima.tes by 7 percent while long term capital inflow fell below the Government's target. The gap wa.s financed by an increase in domestic credit which led to a renewed loss of reserves and a 9 percent rise in the money supply. Since GDP was stagnant during the year a.s the result of a serious drought, the rise in the money supply resulted in a corresponding increase in liquidity and some pressure on prices. The drawdown in net foreign exchange reserves amounted to $20 million, lea.ving gross reserves at the end of the year at $25 million or one month's imports, while gross liabilities stood at $50 million, including a $23 million drawing on the IMF.  4. This deterioration in the financial situation was the main factor which led the Government in late 1966 to cut its investment plans for 1967. The limit for fixed investment was determined on the basis of estimates of foreign aid in sight and the probable level of domestic savings. The esti- mates of official foreign aid include allowance for disbursements against firm commitments of grants and loans of $100 million, and includes only a $ 12 million allowance for loans now under negotiation. Use of suppliers' credit i projected at only $17 million, as compared with actual use of $40 mil:-I.cn in 1965 and $20 million in 1966. The Economic Budget for 1967 allows for a substantial build-up of inventories equivalent to 2 percent of GDP, designed to meet the pressures of import demand which were building up at the end of 1966. It also calls for restraint in credit expansion designed to ensure both a reduction in liquidity and a modest improvement in the net foreign asset position. 5. The decision to reduce fixed investment in 1967 to D 110 million represents a courageous act, particularly since the main cuts will take place in housing, primary schools and other programs of considerable social appeal. There will undoubtedly be considerable pressures to make some upward adjustments in these sectors. Quite apart from this possible source of difficulty, there are other factors which make it difficult to say at present whether all the 1967 Budget targets can be completely realized. The carry-over of financial commitments from 1966 into 1967 now appears to be somewhat larger than was realized at the time the Economic Budget was prepared. Moreover, the exigencies of on-going projects, particularly those being financed by foreign aid may well lead to a somewhat higher rate of commitments under the Central Government's capital budget than originally planned. As of mid-February, the Government was just starting to examine in detail the expenditure implications of its commitments for 1967, and it is not yet possible to judget to what extent there will be over-spending relative to Economic Budget. It is, however, probable that for the Central Government, there will be at least a moderate excess; whether this can be compensated by somewhat slower spending by the enterprise sector is not clear. At any rate, experience to date tends to confirm the need for an intensification of Tunisia's efforts to improve its expenditure planning in a manner which will permit decisions on new commitments to be related more closely with the resources likely to be available to finance them. 6. Having seen a probable need for more resources, the Government has begun to take action to mobilize them. Firstly, plans are being made to issue in April, a compulsory loan of around D 6 million (which will be raised by a temporary sur-tax on incomes). Secondly, several medium term external loans are being negotiated to raise additional local currency for the Treasury. These external loans, which were not specifically allowed for in the Economic Budget, might total as much as $16 million. However, as noted, the Budget does contain an allowance of $17 million for suppliers' credits. Even if the total use of medium term credit does not substantially exceed the latter figure, total capital inflow should prove sufficient to permit the Government to largely achieve its goal of improving its net for foreign asset position during the year, along with domestic financial stability. However, this would require continuing restraint in new invest- ment decisions and the implementation of fiscal and wage polices designed to keep consumption within the limits projected on the Economic Budget.  - vi - To the extent that the 1967 targets for fina.ncial stability are not completely realized, it may well require a continuation and possibly an intensification of the Government's stabilization measures through 1968. 7. There remains the question of what would be an appropriate - and feasible - investment rate for the following few years. Obviously, this depends both on the quality of investment projects which are available and on the level of financial resources which can be mobilized. In the recent pa.st, Tunisia. has demonstrated its ability to implement a substantially higher level of fixed investment in total than now planned for 1967, although its capacity to invest effectively has not been uniformly high in all sectors. A significant part of the program was of a comparatively low yield- ing type, designed more to meet social objectives than to achieve early economic returns. In 1967, these elements will be cut down considerably. At the same time, the possibilities for investments yielding good economic returns have been considerably enlarged in the past year. This is due in significant measure to pa.st efforts in exploration for petroleum and water resources, to improvements in government administration and the training of skilled manpower, and to a growing willingness to utilize the entrepreneurial talents of the private sector. The main possibilities for new investment during the 1968-70 period in the directly productive sectors consist of the following: a) mineral development - where further petroleum exploration and expansion of phosphate rock output could yield very good returns; b) tourism - where investment twice the level foreseen for 1967 may well be justified by 1970; c) expanded fertilizer production - where the govern- ment is actively exploring two possibilities for major projects in partner- ship with foreign capital; d) a range of projects in a.griculture, including expansion and improvement of the co-operative farms in the North, completion of two large irrigation projects now underway, and expansion of the well programs, coupled in a number of area.s with continuation of work in soil conservation and. reforestation, possibly a.t a. moderately reduced level; e) development of a ship repair yard in co-operation with a foreign partner; f) expansion of food processing and light manufacturing products for exports; and, g) perhaps some further investments in the main import substitution industries (steel, textiles and construction materials) to improve their efficiency. In the main supporting sectors, continued investment at a fa.irly high level will be required in electric power and in transport to make possible the growth of activity elsewhere tha.t is envisaged during the period. There may well also be a. need for some expansion in secondary education and in urban water supplies during the next few years.  - vii - 8. Many of the project possibilities in these fields depend on further analysis of costs, market demand and arrangements with foreign partners. It is unlikely that all of them will be realized in the period, although increased technical assistance in a number of sectors might well help considerably to expand the number of projects ready for effective implementation. On the other hand, some of these projects are quite large and could lead to peaks of investment well above the average for temporary periods. For these reasons, it is not possible to give any precise esti- mate at this time for the level of investment that could be justified by reasonable economic returns in the 1968-70 period. However, allowing very roughly for these elements of uncertainty and adding a modest allowance for expansion of investment in housing and administrative buildings over the comparatively low amounts projected for 1967, a level of around D 135-140 million by 1970 would seem to be a plausible range for total fixed investment in that year. If a further modest allowance is made for inventory investment (say D 5 million) this would bring the total to about 21 percent of the gross domestic product which might plausibly be pro- jected for 1970. 9. Tunisia could finance such a rate of investment if, a) it could increase domestic savings to around 17.5 percent of GDP by 1970, and, b) it could maintain the present absolute level of gross capital inflow. An increase in domestic savings to this rate should be feasible if total production and exports expand at the rate which now seems possible in the next several years. It would allow a growth in total per capita consump- tion of 2.5 percent annually between 1965 and 1970, and one of 3.7 percent annually between the 1967 target and 1970. This compares with a growth in per capita consumption of around 3.0 percent between 1960 and 1965. It implies a marginal domestic savings rate of over 31 percent between 1965 and 1970, and a marginal national rate of 26 percent for that period. The former rate is just about the same as that projected by the Tunisian Government for 1965-1968 in its Four Year Plan. Although too ambitious for that period, it should prove feasible during 1965-70. While these rates would represent a significant increase over the past five years (when the marginal domestic rate was about 25 percent and the national rate about 19 percent), real income growth is expected to be significantly higher in 1965-70 (6 percent) than it wasin 1960-65 (5 percent), and it would seem reasonable to suppose that Tunisia could save a higher propor- tion of a more rapidly rising GNP. 10. However, achievement of such rates would require that prompt action be taken to reverse the deterioration of government savings which occurred between 1965 and 1966, and that measures be taken to ensure adequate profitability of the enterprises - public and private. Given the rise in revenue expected from petroleum it should be possible to increase total government revenues moderately relative to GNP in the next few years without hurting economic development. If all non-petroleum receipts were to maintain the 1966 relationship to GNP (22.5 percent) in 1970, total revenue would be up to around 24.0 percent, as compared with 2h.5 percent likely to be reached in 1967 when allowance is made for the D 6 million compulsory loan. However, the main source of increased government savings should be sought in a reduction of the growth rate in current expenditures. These rose on the average by 10 percent annually between 1963 and 1966,  - viii - mainly because of a rapid expansion in expenditures on education and social welfare programs. In 1967, a further expansion by nearly 7 percent is expected. If these growth rates are maintained, Tunisia could well face serious problems of budgetary management in the future, particularly in any year in which the steady growth of revenue is interrupted. The Govern- ment has indicated its intention to hold increases in current expenditures to a growth rate no greater than that of national income; however, given the high growth rates of the recent past, a moderately lower rate than this would seem warranted for the next few years. Assuming this is done, it should be possible to increase the savings of the General to around D 28 million by 1970, as compared with D 19 million in 1965 and D 20 million estimated for 1967 after allowance for the projected compulsory loan. 11. After remaining comparatively stable from 1963 through 1965, savings of the enterprise sector increased sharply in 1966, mainly as the result of increased tourist receipts, export sales of crude oil and phosphates and expanded local sales of electricity, steel and textiles. A further increase in 1967 is forecast by the 1967 Economic Budget to about D 44 million, which seems plausible on the basis of a review of the prospects of the main enterprises. An important factor supporting an optimistic view of enterprise savings prospects is the increased awareness on the part of the Tunisian Administration about the need for improve profitability of public enterprises. With this in mind, the Administration has recently introduced some changes in pricing polices (e.g. transport) and in manage- ment designed to improve profitability and productivity. In transport, consultants have recently been hired to help rationalize investment and further improve pricing policies in that sector. There is undoubtedly further scope for improvement along these lines, particularly in publicly owned manufacturing establishments and it might well pay the government to retain management consultants in that field for the same purpose. Given continued improvements in manufacturing and transport as well as the other sectors, a further increase in total enterprise savings by as much as 36 percent may well be possible between 1967 and 1970. 12. Achievement of a domestic savings rate of over 17 percent and an investment rate of around 21 percent by 1970, would reduce Tunisia's external deficit on goods and services to about 4 percent of GDP, as compared with one of nearly 11 percent in 1966 and 8.6 percent estimated for 1967. However, debt service and dividend payments on foreign private investments will grow sharply in this period, so that even with such a reduction in the resource gap, the need for gross capital inflow would still be around $140 million in 1970. If allowance is made for a continued build-up in net foreign assets during 1968-70 by $10 million annually as seems desirable, the total requirement would be around $150 million, or the same as actually realized in 1966 and nearly the same as the amount expected in 1967. 13. It is not certain how long Tunisia can continue to obtain foreign capital inflow at these levels. Grants for technical assistance and current transfers might plausibly be projected to remain at past levels, around $24 million annually, at least through 1970. Private capital inflow  - ix - has also been running at this level in 1966 and 1967, but investment in petroleum will fall unless there are new finds of crude oil - which are not assumed here. Thus, a significant increase of private investment in other sectors would probably be required to maintain the recent level. Recent trends in government policy favor this possibility, but still further efforts may be required, including less restrictive policies with respect to dividend transfers. If both these groups of flows do remain roughly constant, and if use of supplierst credits is kept to an average of around $16 million annually during 1967-70, disbursements on official loan capital would have to remain at the level estimated for 1967 - around $85 million for the next several years in order to make possible a gross investment rate of 21 percent. 14. As of early 1967, Tunisia had a comparatively large pipeline of official loan funds. The undisbursed portion of committed loans amounted to about $130 million while long term loans under active negotiation total another $25 million. Of these, about $85 million are likely to be disbursed in 1967 and $40 million in 1968, with the amount dropping off sharply after 1969. Thus, to maintain the 1967 disbursement rate in 1968-70, new loans would have to be contracted to yield about $45 million in 1968, $65 million in 1969 and $80 million in 1970. 15. While it is not possible to say at present whether Tunisia can obtain new official borrowing on this scale, it can be said with some assurance that Tunisia's economic policies over the next few years will have a considerable bearing on the amount - and terms - of external assistanc, provided from official sources. If in fact, an increase in domestic savings to over 17 percent of GDP can be realized by 1970, this would help substan- tially to justify a continued high level of external support. Equally important will be the quality of the investment program, both in terms of its general composition and in terms of the prospective economic returns of the main projects. The composition of the program has been improved considerably in recent years - and 1967 will represent further important progress if present plans are realized. In terms of project preparation, there is scope for considerable improvement particularly in keeping capital costs down and in working out more careful analysis of demand both domestic and foreign. In addition, further progress should be feasible in mobilizing the entrepreneurial talents of the private sector, and in directing the Government's program for general education and training more effectively to meeting Tunisia's requirements for skilled manpower. 16. Finally, improved performance in financial management is needed at both the enterprise and the national level. Quite clearly, Tunisia cannot be certain about the exact level of domestic savings or of foreign capital inflow that can be achieved in each of the next few years. It is, however, reasonably certain that the foreign exchange reserve position will remain fairly tight in this period. Thus, Tunisia will have very little leeway for mistakes in matching investment to resources. To help reduce the room for error, Tunisia needs not only to improve its analysis and control of annual investment programs, but also to allow in its medium term invest- ment planning for the possibility that there will be shortfalls in financial resources (e.g. below the levels indicated here). What this requires is clear-cut decisions about which projects should be undertaken  at a given minimum level of availabilities, together with an indication of the priorities atta.ched to other projects which could be undertaken if additional resources become available. 17. Even if Tunisia were to obtain during 1968-70 about the same level of gross loan inflow as that projected in the Economic Budget for 1967, that is around $85 million in official loan disbursement plus $16 million in suppliers credits, the projected rise in amortization would lead to a decline in the net inflow from over $100 million in 1965 and $70 million estimated for 1967 to around $60 million in 1970. This a.ssumes tha.t new loans would be contracted on the same basis a.s recent borrowing terms. These terms have been comparatively generous for public loans, averaging about 3.5 percent interest and 23 yea.r repayment, including 6 years of grace. Suppliers' credit terms have averaged 6 percent and six years repayment including two years of grace. Total debt service on these assumptions would rise to $60 million by 1970, as compared with $40 million in 1966 and $46 million in 1967. However, with the sharp growth of export sales and invisible earnings foreseen in the period, the debt service ra.tio should rema.in at roughly 18 percent in 1970 - the same as in 1966. 18. Moderate changes in the terms of new public aid in 1967-70 would nut significantly affect the debt service burden in that period. Their main impact would be on the period after 1970. The question of whether it would be appropriate to modify these terms is therefore closely related to Tunisia's probable needs for net capital inflow in the decade of the 1970's and to its prospects of obtaining gross inflows in that period. The most critical factor in the need for net inflows in the 1970's will be the efficiency of invesment. The Tunisian government can influence this factor to a. significant extent by its own policies, particularly by following monetary and wage policies designed to ensure the competitiveness of the export sector which is where the most promising possibilities for expansion 'Lie, and by giving a greater weight to systematic analysis of economic returns in the preparation, selection and implementation of projects than has been the ca.se in the past. However, of equal importance will be the evolution of world market conditions for Tunisia's main exports, and the tariff policies of Tunisia's main trading partners. Even assuming no further oil strikes, there are good technical possibilities for expanding output of goods and services for export during the 1970's, particularly in tourism, phosphate rock, fertilizers, agricultural products and light manu- factured goods. On optimistic assumptions about market conditions and tariff policies, Tunisia might be able to achieve a continued growth in GDP and exports at ra.tes nearly as rapid as those foreseen for 1967-70, with a stable or even moderately declining ra.te of investment. This would permit the resource gap to turn positive before 1980 and lead to a substantial reduction in the need for capital inflow. On somewhat less optimistic assumptions about external market possibilities, which might force Tunisia to rely to an increasing extent on import substitution, the ca.pital output ratio coulcl well increase in the 1970's above that foreseen for 1967-70, leading to capital requirements considerably larger tha.n assumed above and to the accumulation of a. very large external debt, even assuming present borrowing terms.  - xi - 19. Therefore, it would seem prudent for Tunisia to seek to maintain average borrowing terms no harder than present ones for the next few years. If in tha.t period, the present possibilities for expanding export growth at a rapid rate during the 1970's become strong probabilities, a gradual hardening of terms might well be appropriate. Tunisia will also need continued program lending and/or foreign financing of local project costs since the direct foreign exchange component of its investment program is considerably less than its gross capital requirements - much of which are for servicing external debt.  I. RECENT ECONOMIC PERFORMANCE Introduction 1. In the period between 1960 and 1966, Tunisia's economic develop- ment was dominated by a rapidly expanding level of investment which brought the total to an average of 26 percent of gross domestic product in 1965-66, as against 18 percent in 1960-61. The high level of invest- ment in the past several years was supported by large net foreign capital inflow, corresponding to about half of investment. Domestic savings also rose substantially in the period, reaching 13 percent of GDP in 1965-66. However, these resources did not prove sufficient to avoid mounting pressures on internal prices and external reserves. The rise in domestic prices was compensated by a 25 percent devaluation at the end of 1964. In 1965, the money supply levelled off and the decline in exchange reserves was arrested. However, in 1966, internal financial pressures again began to mount, and by the last quarter of the year, concern about renewed loss of exchange reserves and excessive increases in the money supply led the Government to take steps to reduce the rate of investment substantially in 1967. 2. The growth rate of real output averaged about 5.5 percent in this period; real income grew somewhat more slowly - perhaps 5 percent annually because of a moderate deterioration in the terms of trade. The resident population increased by only 1 percent annually between 1960 and 1965, with a 2.3 percent growth rate in the Tunisian population being partially offset by an important drop in the number of Europeans and North Africans 1/ in the country. Thus, real income per capita rose at an average rate of over 3.5 percent annually. However, personal consump- tion in real terms went up at a rate of less than 3.0 percent, while total government consumption rose by nearly 6.0 percent annually. 3. Although existing labor force data arc not very reliable, indica- tions are that employment rose by around 2.0 percent a year in the first half of the 1960's or somewhat faster than the estimated growth of the labor force. There remains some unemployment, although this is a good deal less serious than in many other developing countries. A survey taken in 196h indicates that full time unemployment was approximately 9 percent of the labor force in that year, while under-employment in agriculture was estimated at another 8 percent in terms of full time equivalents. However, a large part of this total was absorbed by the Government's public works program, consisting mainly of soil conservation and reforestation, which are being integrated to an increasing extent with the Government's basic investment program. This program ("lutte contre le sous developpement") provides part time employment for about 200,000 workers annually, the equivalent on a full time basis of 8 percent of the labor force. 1/ Mainly Algerians who had taken temporary refuge in the country.  A. Developments in 1960-1965 Production 4. Between the year 1960 and the year 1965, Tunisia's growth in real output averaged over 6 percent,. However, this growth rate is biased upward by an exceptionally good agricultural year in 1965, parti- cularly for olives. The recorded growth rate in the whole agricultural sector for that five year period was 4.9 percent, whereas after adjusting for weather conditions and swings in the olive cycle, the "normal" growth rate in agriculture was probably closer to 2 percent. Using the latter rate for the 1960-65 period, the average annual growth in total GDP would be around 5.5 percent. 5. Agriculture accounts for about 20 percent of the total value added to the Tunisian economy and provides over 50 percent of employment. Cereal production,which accounts for about a quarter of gross value in agriculture,has grown by no more tha.n 1 percent annually, while output of olives went up by around 2.5 percent on the average. Output of wine grapes has been stable since 1962. The most dynamic items have been vegetables and citrus fruit whose combined output rose by 70 percent in the past five years. However, they still account for only 12 percent of gross value at 1965 prices. There is little direct data available on trends in livestock production which accounts for the bulk of the remainder of agricultural output, but a.s a. rough guess (based mainly on theemergence of small exports in recent years) recent growth in this sector may be estimated at around 2 percent annually or even more. 6. The main development in the mineral sector in this period was the discovery of a substantial deposit of crude oil at the El Borma field in 1964. Therecoverable reserves of this field are now estimated at around 60 million tons, and an annual export rate of 3 million per year is expected to be reached by 1969, with an export value of around D 17 million. Until 1966 when crude oil production started, phosphate rock accounted for two-thirds of the value added by this sector. Output of rock expanded by 40 percent between 1960 and 1965. However, production of the other main minerals - lead, iron ore and salt failed to rise during most of the period, so that the growth rate for the sector as a. whole averaged around 5 percent leaving total value added at less than 3 percent of GDP in 1965. 7. The 7.8 percent annual growth rate in the manufacturing sector during the 1960-65 period increased the share of that sector to 13 percent of Tunisia's GDP. Agricultural processing which accounted for over half of manufactured output in the early 1960's was 38 percent higher in 1965 than in 1960 mainly because of the good olive crop in the former year. All other manufacturing went up at a rate by of nearly 9 percent annually. Textiles, the second most important activity in 1960,grew at an average rate of 6.2 percent with a significant acceleration after 1963. The most important single increase took place in petroleum refining which started in 1964, increasing total value added by manufacturing by 4 percent points in that year alone. 8. The growth of the tourist industry, as measured by Tunisia's foreign exchange earnings from this source, was over 60 percent per year  - 3 - from 1961 to 1966. During the same period, hotel capacity increased by more than 30 percent per year. By 1966, value added at current prices by tourism was equivalent to more than 2 percent of GDP and tourism had passed rock phosphates and olive oil to become the country's largest single earner of foreign exchange. 9. Construction activity,which rose by 50 percent between 1960 and 1962,remained almost constant in real terms after that at around 9 per- cent of GDP. On the other hand, the value added by transport rose steadily by 10 percent a year through 1965, partly because of important receipts from the petroleum pipeline from Algeria which started in 1962. The contribution of government services to GDP increased by around 6 percent annually in this period, while all other services, including rents, wholesale and retail trade grew somewhat more slowly than GDP. Table 1: GROSS DOMESTIC PRODUCT 1/ Tmillions of 1965 dinars) Prov. Est. 1960 1961 1962 1963 1964 1965 1966 Agriculture 77.3 87.7 81.6 85.6 91.7 98.0 70.3 Cereals 2.9 20.8 245 _30T. 25T. 31.2 20.6 Olives 7.9 24.o 8.5 9.8 19.3 19.3 11.1 Grapes 4.4 4.2 5.5 5.1 5.3 4.9 3.5 Citrus & vegetables 7.5 9.6 10.1 9.4 11.1 11.8 13.5 All other (net of input) 28.6 29.1 33.0 30.9 30.6 30.8 21.6 Mining (incl. crude oil) 8.8 8.3 7.4 8.9 10.3 11.3 14.8 Power and water 5.9 5.9 6.2 6.7 7.0 7.4 9.0 Manufacturing 4o.7 49.9 43.8 44.8 57.6 59.2 60.8 Food industries- 20. 31.1 214.1 23.0 29.1 2.7; 249 All other 20.1 18.8 19.7 21.8 28.5 30.7 35.9 Construction 25.1 32.4 37.6 38.7 36.7 40.0 39.0 Transport 22.6 24.1 27.5 30.9 33.1 37.0 39.7 Commerce & other services 96.1 100.3 104.8 103.1 110.8 121.7 128.0 Tourism - 0.7 1.0 1.8 3. 6.4 10.5 All other 96.1 99.6 103.8 101.3 107.3 115.3 117.5 Government 44.3 48.7 54.4 56.6 56.8 6o.0 71.0 GDP at factor cost 320.8 357.3 363.3 375.3 404.0 434.6 432.6 / This table has been derived by the mission from official estimates: see also Appendix Table 6.  Price Changes 10. The deterioration in Tunisia'5terms of trade in the first half of the 1960ts arose from an increase in import prices of around 2% annually (after adjusting for the devaluation) and from a. decline in average export prices by about nearly the same rate. There were some price increases in this period for rock phosphate, fertilizers and lead, but these were morc than offect by the drop in the price of wine and wheat exports in 1965. (See Appendix Table 43). 11. According to official indicators, the domestic price level rose by around 1.5 percent annua.lly between 1960 and 1964. However, to some extent this reflected the application of price controls to a wide range of goods, and pressures were building during the period on import demand, contributing to the need for the 1964 devaluation. In the following year, the overall price level rose by around 9 percent. As a result of these price increases, GDP at current prices rose at an average rate of around 8.5 percent during the first half of the 1960's. Investment 12. In real terms, fixed investment rose by a.round 80 percent between 1960 and 1965, or twice as fast as the growth of GDP. The devaluation of 1964 increased the relative prices of investment goods - about one-third of which are imported, thereby further increasing the share of investment in GDP to a peak of 27.6 percent in 1965. The increase of investment took place mainly in the public sector, but included significant private partici- pation in several mixed enterprises, particularly in petroleum and phosphates. Purely private investment remained approximately stable at around D 28 million, declining as a share of total investment from forty percent in the early 1960's to one-fourth in 1964-65. However, the percentage has started to rise again recently, mainly as the result of rising private investment in tourist facilities, and to a lesser extent, in small scale manufacturing. 13. In the early part of the decade, about 60 percent of fixed invest- ment was in housing, government buildings, transportation and power. By 1965 the pattern had substantially shifted with only 40 percent alloca.ted to these sectors, and the rest going to more directly productive purposes. Investment in agriculture more than doubled a.t current prices between 1960 and 1965 to D 26 million in the latter year. Investment in petroleum research and development went up sharply to D 15 million in 1965 after the discovery of oil at El Borma; and outlays on phosphate development which rose from less than D 1 million in 1960-61 to nearly D 5 million in 1965. Manufacturing investment rose to a peak of D 27inillion in that year, compared with an average of D 8 million in 1961-62, mainly because of out- lays on the El Fouladh steel mill and several large textile projects. Investment in tourist facilities grew from negligible amounts in the early 1960's to ID 7 million in 1965 and is estimated at D 12 million in 1966. 1/ Actually, most of Tunisia.'s wine output in 1965 wa.s put into stock. For purposes of the official national accounts estimates, this wine was valued at the Tunisian domestic price which is much lower than the French guaranteed price.  14. In transportation, the D 14.6 million investment level of 1960, reflecting mainly the construction of an oil pipeline was followed by much lower investments in the next five years when total investment in this sector averaged only D 8 million. Housing more than doubled between 1960 and 1963, and then remained level at about D 14 million in 1964 and 1965. A rapid increase also took place in administrative expenditures until 1962, arriving at 27 percent of total investment in that year. Following a decline, they accounted for 14 percent in 1964 before going up again with an increased investment for education. 15. The overall relationship between gross investment and the increase in output during 1960-1965 was not particularly favorable. Calculated at 1965 prices, the ratio was just about five to one. This is a result of several factors: firstly, the comparatively neavy concentration of invest- ment on housing administrative buildings and basic infrastructure in the early part of the period; secondly, the slow yielding nature of investments in agriculture; and, thirdly, the fact that a good part of the large invest- ments in minerals and manufacturing during 1964-1965 did not yield results until 1966. In qualitative terms, the investment program in this period may be characterized as rather uneven. In petroleum, phosphates, chemicals and tourism, returns from recent investment have,on the whole,been quite good. On the ot?er hand, economic returns from most of the investments in agriculture - ir-igc,-ion, tree planlting and soil conservation - are comparatively low because of their long gestation period. The steel mill and several other public investments are also likely to yield rather low returns. In both agriculture mnd man-ufacturing, low returns can be at- tributed in some cases to inadequate study of costs and the market, and in some others to an excessively high valuation of direct benefits (e.g. in the case of water) and to rather genercus allowances for indirect benefits (e.g. steel). However, in current project plamning, a good deal more emphasis is being plaved on the goal of achieving satisfactory economic returns than was evident a few years ago. Savings 16. Domestic savings, which averaged 9 percent of GDP in the early 1960's,rose to nearly 13 percent in 1965. There was a substantial rise in net factor income payments in this period reflecting increased salary remittances of technical assistance personnel and rising interest on external debt. Thus, national savings went up somewhat more slowly than domestic savings, reaching 11 percent of GLTP in 1965. 17. Savings of the General Government grew annually by nearly 10 percent from a low level in 1960 to reach D 19 million in 1965, that is 36 percent of Tunisia's national savings in the latter year. This in- crease was due mainly to an 8 percent average increase in current revenue, resulting from several increases in tax rates and to the devaluation of the dinar in September 1964, which increased collections from customs duties significantly in 1965. In the 1960-65 period, current government expenditures grew at 7 percent annually, with the major increases being for education. Savings of enterprises - mainly public - rose from D 8 million  in 1960 to D 27 million in 1965. The most important increases caire from the electricity company (STEG), the new petroleum refinery, and from the phos- phate enterprises. 18. However, the growth in national savings and in long term foreign capital inflow was not sufficient to prevent a loss of exchange reserves and growing internal financial strains during 1960-1964. In September 1964, these pressures led to a decision to devalue the dinar by 25 percent and action to restrain domestic credit expansion during 1965. In 1965, an in- crease in foreign capital inflow, including a large amount of supplier credits, helped to reconcile these limitations with the growth of investment to record levels, while arresting the decline in exchange reserves and keeping the growth of money supply below the growth rate in GNP. In 1966, however, the financial situation began to deteriorate again (see Section B below). The Balance of Payments 19. The rise of the investment effort between 1960 and 1965 led to an increase in imports of goods and services of 6 percent annually in real terms, in spite of some decline in consumer goods imports. Exports of goods and services did not rise at all in this period. In 1965, a rise in export earnings from phosphatseand tourism was offset by a drop in receipts from wine and other agricultural exports which resulted from the cancellation of French preferential treatment for these imports in retalia- tion for the Tunisians' nationalization of foreign-owned farms in 1964. 20. Gross foreign capital inflow increased from about $60 million in 1960 to $180 million in 1965. Public foreign aid accounted for more than $100 million in the latter year. Tunisia's reliance on supplier credits also grew quite fast, especially in 1964 and 1965, with a gross inflow of $24 million and $41 million respectively. Foreign private investment, mainly in petrpleum grew from an average of $22 million in the early 1960's to $33 million in 1965. 21. The external medium and long term ublic debt of Tunisia, including undisburseo,had risen to $354 million by the end of 1965, equivalent to more than 35 percent of 1965 GDP. Outstanding private external debt was about $10 million as of that date. Total service on external debt amounted to $7 million in 1964 and $13 million in 1965, so that the debt serVice ratio jumped from 8 percent to 12 percent of gross current external receipts between those two years. This sharp growth in debt service led the Govern- ment to take steps during late 1965 and early 1966 to limit the use of supplier credits much more strictly than had been the case in 1964-65. B. Developments in 1966 22. Prelimipary estimates for 1966 indicate that there was a moderate reduction in the investment rate in that year - to 24% of GDP, and a stagna- tion in overall output as a result of a serious drought. Moreover, foreign capital inflow and government savings both declined in the year, resulting in a significant deterioration in the overall financial situation.  23. The 1966 drought had about the same impact on most of the rainfed crops as the 1961 drought, but 1961 was a peak year in the olive cycle, whereas 1966 was a low year. Thus, even though output of irrigated crops - vegetables and citrus - continued to increase, total agricultural output in 1966 was nearly 20 percent lower than in 1961 and 30 percent less than 1965. This considerably curtailed farmers' income and consumption, and will probably affect 1967 foreign trade. Agricultural exports actually went up in 1966, reflecting sales from the 1965 crop of hard wheat and olives, and the partial re-instatement of preferential treatment by France on wine and full reinstatement on other agricultural products. 24. A 13 percent increase in other productive activities, including the beginning of the crude oil exploitation and a more than 50 percent growth in tourism led to substantial improvements in export earnings in 1966, and partially offset the impact of the decline in agricultural production on GDP. Nevertheless, GDP, excluding government services, went down in 1966 by 3 percent. Government services apparently rose in real terms by nearly 20 percent during the year, so that total GDP at constant prices in 1966 is estimated at less than 1 percent below 1965. However, the terms of trade improved significantly during the year as the result of higher prices received from France for agricultural exports. Therefore real income was probably slightly higher in 1966 than in 1965. 25. Because of the increase in government salaries, public consumption increased substantially in 1966 whereas private consumption declined by 3 percent, owing mainly to the bad crop and also in a lesser extent to the more severe controls on imports. According to preliminary official estimate, (contained in the 1967 Economic Budget) domestic savings reached 14.3 percent of GDP in 1966 as against 12.7 percent in 1965. However, more recent information suggests that the 1966 rate was probably closer to 13.5 percent. Even at this lower rate, there was a substantial reduction in the resource gap - from around 15 percent of GDP in 1965 to about 11 percent in 1966. Total export earnings in 1966 were up to D 114 million compared to D 99 million in 1965, while imports of goods and services went down to D169 million, about 3 percent below the 1965 level. 26. In 1966, a smaller part of Tunisia's gross investment was fi- nanced by foreign public loans and grants than in 1965. Foreign aid which had mounted to D 55 million in 1965 fell to D 44 million in 1966, although total fixed investment was only reduced from D 133 million to D 127 million. However, the high level of 1965 foreign aid resulted in part from an Italian (ENI) loan of D 6 million linked with petroleum acti- vities and from exceptionally high US disbursements under PL 480. After deducting these two inflows of capital, it is possible to ascertain that about 38 percent of Tunisia's investment program was financed by other public foreign aid in 1966, or about the same percentage as in 1965 and 1964. 27. The large inflow of medium and long term private loans, chiefly suppliers' credits, which had characterized the year 1965 was considerably diminished in 1966. Thanks to government's control on new commitments,  the D 21 million gross inflow of these credits in 1965 was reduced by half. The amortization of medium term debt more than doubled in 1966, leading to a net decrease in this type of debt. Other debt service also began to increase significantly, bringihg total service to about D 18 million or 18 percent of exports of goods and services. 1/ 28, Consolidated current revenue of the Central Government increased by 10 percent in 1966, reaching a level of D 118 million, equivalent to 22.5 percent of GDP, Whereas direct tax proceeds had failed to grow in 1965, the high level of 1965 incomes together with an increase in tax rates brought direct tax revenue up to D 18 million in 1966, almost D 5 million above the 1965 level. Indirect taxes went up by D 8 million. TRAPSA payments for crude oil transportation started declining because of a greater reliance on the third pipe line within Algeria, while Tunisia oil revenues had not yet started to accrue. 29. However, total current expenditure jumped by 17 percent in 1966, owing partly to a 5 percent salary revision for civil servants which took place early in the year, but mainly to a large increase in real services, particularly on education, which now accounts for over one-quarter of the budget. Subsidies to enterprises also increased moderately. With current expenditures standing at a level of D 98 million in 1966, Central Government savings fell to D 20 million. After adding in savings of local authorities and social security system, and deducting receipts of foreign technical assistance 2/,Central Government savings declined from D 19 million in 1965 to D l million in 1966. 30. According to official estimates, cash generation of enterprises (after interest and taxes) went up to over D 39 million in 1966, as compared with D 27 million in 1965. It is difficult to account for so large an increase on the basis of the available data on the principal enterprises. Since the official estimates for enterprise savings in 1966 are derived as a residual, this suggests that investment by enterprises (and total investment) may be overstated - perhaps by around D h million. It seems likely that total national savings were also down by about this amount. Most of the shortfall is reflected in a higher balance of payments 1eficit than officially estimated in the 1967 Economic Budget. The latter shows a current deficit after factor income payments of D 65.1 million, whereas more recent data indicates a deficit of D 68.6 million. This compares with a current account deficit of D 85.2 million in 1965. 1/ This ratio relates to total debt service. Excluding service on unguaranteed private debt, the ratio was 16 percent in 1966. / Which appears in the national accounts as a capital receipt on external account and a current expenditure, thus a dis-saving item in Government's accounts.  Table 2: National Savings by Agent (D million) 1964 1965 1966 official est. General Government 16.5 19.4 15.2 of which: Central Govt. (21.1) (23.8) (19.9) Enterprises (incl. banks) 24.8 27.3 39.5-/ Households 8.1 7.5 7.5 Totals 49.4 54.2 62.2a/ 2a-probably too high by about D 4 million. 31. The savings of enterprises (as officially estimated) were suf- ficient to finance 62 percent of the enterprises' investment in 1966 compared to 52 percent in 1965. But since foreign capital inflows accruing directly to enterprises fell from D 43 million to D 27 million, the enter- prise sector had to rely more heavily on domestic credit. Credit to the government also rose substantially in 1966, with the result that total domestic credit went up by 18 percent during the year, as compared with 13 percernt in 1965. Moreover, quasi money and counterpart funds grew somewhat less rapidly in 1966 than in 1965. The result was a reduction in net foreign assets by D 11 million and an increase in the money supply by 9 percent, as compared with virtually no change in foreign assets and a money supply expansion of only 3 percent in 1965. The cost of living index rose by an average of 5 percent in 1966, presumably reflecting in part the increased monetary pressures resulting from this expansion in money supply in a period when real output was stagnant. Moreover, the pressure of demand for imports was making itself felt increasingly toward the end of the year, in the form of a mounting backlog of unfilled requests for import licences at the Central Bank. 32. This situation led the Government to call for a cut in investment during 1967 that would permit credit expansion to be held within the limits of the increases foreseen in quasi monetary liabilities and a 5 percent increase in the money supply, while allowing for a moderate improvement in the net foreign asset position. Table 3: Monetary Survey 1964 - 1967 (outstanding at the end of the year, D million) 1964 1965 1966(est.) 1967(target) Domestic credit 214 2h2 285 302 Quasi money -79 -102 -122 -135 Foreign assets, net -1 -2 -13 -9 Money supply 13h 138 150 158  C. The Economic Budget for 1967 33. As part of their efforts to introduce greater flexibility into economic planning, the Tunisian Government introduced for the first time at the end of 1965, an annual Economic Budget, which incorporates the Government's budgetary and investment targets for the coming year into a national accounting framework, including detailed projections of output, expenditure and finance. Actual developments in 1966 differed from the Economic Budget forecasts mainly because of the dry spell which adversely affected production and because investment exceeded the Budget estimates by D 8 million, or 7 percent. Exports exceeded the Budget estimates by about D 3 million, and imports by about D 6 million. In addition, net invisible earnings were moderately lower than estimated, so that the external deficit was about D 6 million higherY/. Foreign capital inflow was also about D 6 million more than was in sight at the time the Budget was prepared. Foreign exchange reserves dropped by D 10 million, or just about the amount shown in the Budget as the uncovered gap for the year. 34. In October 1966, a draft of an annual Economic Budget for 1967 was prepared by Tunisian authorities and discussed with INF and INR1 missions. This draft included a tentative allowance for fixed investment of D 141 million in 1967 as compared to D 127 implemented in 1966. However, on analysis, it became clear that it would not be possible to finance this level of investment in a manner consistent with internal or external financial stability. Even assuming an 11 percent increase in foreign assist- ance and a 6 percent growth in domestic savings, these projections implied an excessive increase in money supply and a large deficit in the balance of payments. These considerations - and the deterioration in the financial situation during late 1966 - led the Tunisian Government to reduce its projections of gross fixed investment drastically to D 110 million. However, a D 10 million allowance was added for inventory accumulation, mainly to take account of the pent-up demand for raw materials, spare parts and consumer goods reflected in the back log of demand for import licences at the end of 1966. The overall level of D 120 million is felt by the Mission to be consistent with the monetary limitations indicated in paragraph 32. 35. The revision of the 1967 Economic Budget also created a need to review carefully the allocation of investment. The result should be a more satisfactory balance among the sectors than was the case in 1965-66. The projected share of agriculture in total investment is up from 20 to 27 percent, wrhile administrative capital expenditures should fall from 19 to lk percent. Housing investment is to be cut by 30 percent. A reduction in manufacturing investment is also projected, partly because some of the main project possibilities are not fully ready for implementation this year. 1/ Actually, the biggest difference between the Budget and realizations was in the balance of payments deficit for l965, which the Budget had estimated at D 71 million, as compared with an actual deficit of D P5 million (befnre factor incnme paymer.ts in both cases).  - 11 - 36. The decision to reduce fixed investment in 1967 to D 110 million represents a courageous act. There will undoubtedly be considerable pressures to make some upward adjustments, particularly in the social sectors. Quite apart from this possible source of difficulty, there are other factors which make it difficult to say at present whether all the 1967 Budget targets can be completely realized. The carry-over of financial commitments from 1966 into 1967 now appears to be somewhat larger than was realized at the time the Economic Budget was prepared. Moreover, the exigencies of on going projects, particularly those being financed by foreign aid, may well lead to a somewhat higher rate of commitments under the Central Government's capital budget than originally planned (D 35 million). As of mid-February, the Government was just starting to examine in detail the expenditure implications of its commitments for 1967, and it is not yet possible to judge to what extent these will be over-spending relative to Economic Budget. It is, however, probable that for the Central Government, there will be at lea.st a moderate excess over the D 40 million allowed for Central Government capital expenditures and transfers to enterprises. Whether this can be com- pensated by somewhat slower spending by the enterprise sector is not clear. However, on the basis of indications to date, it might be more realistic (or a.t least safer) to plan on the basis of tota.l investment expenditures including stock changes, reaching D 125 million in 1967, rather than the D 120 million projected in the Economic Budget. The question remains as to whether additional resources can be mobilized to cover such an excess relative to the Budget and still achieve the essentia.l goal of maintaining financial stability during the year. 37. It is unlikely that GDP in 1967 will rise any faster than the 6.7 percent projected in the Economic Budget. (See Appendix Tables 4, 5 and 6 of Volume II for the official projections). Value added by crude oil might rise by more than projected. Moreover, tourist receipts, which fell 15 percent; short of the estimate for 1966, are likely to be around 20 percent less than the Budget forecasts for 1967. Other services (commerce, retail trade, etc.) are projected to rise by about 8 percent, which seems implausibly high.On the other hand, the growth forecast for agriculture in 1967 (8%) seems somewhat low. In all probability, there will be a very low olive crop, due to the delayed impact of the 1966 drought and the fact that 1967 is a low year in the olive cycle. However, other crops should recover to normal harvests during 1967, since the rainfall has been about average so far this year. This would bring value added by agriculture to a level about 5 percent over the Budget forecasts, and should roughly compensate for the probable overestimate of the increase in the service sectors. 38. The Economic Budget projects personal consumption in 1967 some 6 percent higher than 1966 (which was 4 percent below 1965) and personal savings at some 14 percent higher (an increase from D 7 million to D 8 mil- lion). This may prove to be on the high side. Sa.vings of the General Government are projected at a slightly lower level (D 14 million in 1967 as against D 15 million in 1966) because expenditures are expected to rise by around 7 percent whereas revenue growth is estimated at 6 percent. The latter reflects the assumption that the low incomes of 1966 will have an inhibiting effect on direct tax receipts in 1967. Enterprise savings are  - 12 - projected at D 44 million, an increase of D 4 million over the official preliminary estimates for 1966, and D 8 million over the Mission's estimates for that year. There are grounds for optimism about the prospects of a number of enterprises: SITEP, the company producing the crude oil could well generate over D 3 million in savings in 1967, as compared with D 1 million in 1966. STEG, the electricity company projects cash generation of D 4.5 million in 1967, as against D 3.3 million in 1966. El Fouladh (the steel company) should soon be generating a sufficiently large cash surplus to meet its large debt service payments; the tourist sector, whose cash gener- ation was estimated at D 2.5 million in 1966, could well exceed D 3.5 million in 1967 on the basis of the 40 percent expansion in activity fore- seen. The SNCFT (the government railroad) has recently had a tariff increase which promises to turn an operating deficit into a small surplus in 1967; finally, the shipping ports and Air Tunis have been quite profit- able recently and should do even better in 1967. However, a number of other enterprises are not doing as well as expected earlier, so that total enterprise savings could well fall moderately short of the 1967 target. On balance, it appears probable that total national savings in 1967 could well fall short of the Budget goals by about the same as the shortfall estimated for 1966 - around D 4 million, if no further action is taken. 39. Howiever, the Government is planning to take additional action to improve the savings picture. It intends to issue in April a compulsory loan (in the form of a temporary sur-tax on incomes) designed to yield around D 6 million during 1967. This should help to hold consumption down during the year to the level projected by the Budget. Thus, it seem probable that the overall national savings targets for 1967 will approx- imately be realized. 40. The prospects for export earnings in 1967, as presented in the Economic Budget are somewhat on the optimistic side, particularly for olive oil and tourism. In 1966, there were larger exports out of olive oil stocks than estimated earlier, and given the poor crop outlook, it is likely that export sales in 1967 will have to be held to about 20,000 tons, as compared with 40,000 in 1966. A moderately higher price might be expected, but earnings will still be about D 5.5 million below the actual levels realized in 1966 and D 4 million below the Budget forecasts for 1967. In the case of tourism, limitations of hotel capacity are now expected to keep total earnings to around D 18 million in 1967, as compared with D 22 million projected for that year by the Budget and D 13 million realized in 1966. 41. In the case of merchandise imports, it seems likely that the projections of the Economic Budget can be realized, since the compulsory loan should help to hold consumption growth down, and since imports for supplying tourist trade should be moderately less than expected earlier. Invisible payments projected by the Budget seem somewhat on the high side, particularly the D 9 million item for "other services" - mainly studies carried out by foreign consultants. In total, it seems likely that imports of goods and services might be a-round D 2 million below the Budget forecasts, while exports of goods and services might be D 8 million lower. This would lead to an increase in the deficit on current account by D 6 million bring it to a total of D 60 million (after net factor income payments as  - 13 - compareIl with a Budget forecast of D 53.7 million for 1967 and an estimated 1966 deficit of D 68.6 million. 42. It is possible that a part of this excess will be financed by somewhat larger disbursements against official loans already committed than the D 42 million envisaged in the Budget. In addition, the Government has already contracted several medium term loans totalling D 4.2 million which will help the 1967 balance of payments (D 1.5 million for wheat from the U.S. and D 2.7 million financial credits from European banks). Moreover, arrange- ments have been made to finance up to D 4.4 million of imports of spare parts and consumer goods under a medium term credit from France. None of these credits is explicitly allowed for in the Economic Budget, However, the latter does contain allowance for use of supplier credits up to about D 9 million. Tunisian officials now believe that some of these credits originally planned will not be used. However, even if supplier credit financing does not significantly exceed the Budget allowance, it would appear likely that total canital inflow should be sufficient to permit Tunisia to achieve the D 4 mi2L.4jn increase in net foreign assets projected in the Budget. In fact,, these a3ssets could go up by moderately more than this if restraint on invest- ment and consumption is exercised to the extent that would seem desirable. It woul.d inc.eed be a good thing if reserves did rise by more than indicated, since these new medium term credits will significantly increase debt service in the next few years. Two of these totalling D 3.5 million have only a three-year term, whereas, the D 4.4 million credit from France will have a five-year term. D. Implementation of Investment Compared with the Four Year Plan 43. In early 1965, the Government issued a Four Year Development Plan covering the period 1965-68. Total investment at 1965 prices was projected at D 505 million. Actual investments in 1965 and 1966 were somewhat more than half of this. However, assuming that the reduced fixed investment targets for 1967 are realized, this would bring fixed investment for the first three years of the Plan to D 371 million. Since it is unlikely to be possible on financial grounds to realize an increase of fixed investment to D 134 million in 1968, a slight shortfall in the overall level of fixed investment foreseen by the Plan now seems probable. This probability wa.s recogClized in the report of tne I,D Mission which reviewed the Plan in the second half of 1965. Ihat reportl estimated that a level of around D 470 mill-on wa.s a more likely target for fixed investment, but also suggested allowances be made for inventory accumulation of D 30 million. If inventories are built up by D 10 million in 1967, as projected in the Economic Budget, and by another D 5 million or so in 1968, this would bring the total for that item to around D 20 million for the period. If fixed investment in 1968 is 1/ Review of 1965-68 Development Plan - Tunisia (AF-39a) da.ted November 2, 1965.  increased to around D 115 or 120 million, then a total for gross investment of D 505-510 million will have been realized for the period, 1965-68, of which about D 490 million would be fixed investment. 44. Thus in total, the overall Plan target for investment is likely to be reached. Moreover, if the general composition of investment called for in the 1967 Budget is retained in 1968, the percentage share going to the directly productive sectors should nearly reach the 60 percent ratio projected in the Plan. (In 1965-67 it should reach about 57 percent). However, within this broad category there have been major departures from the Plan provisions. 45. The major changes as compared with the Plan are a considerably lower level of investment in agriculture and manufacturing, and a substan- tially higher level in minerals and tourism. In the three years 1965-67, gross investment in agriculture will total about D 80 million as compared with about D 165 million projected for 1965-68, while in manufacturing the comparable figures are D 50 million realized in three years as against D 80 million originally planned for four. Investment in mineral development (mainly petroleum) on the other hand is likely to total D 52 million for the three years,-compared with a D 45 million allowed in the Plan, and in tourism, a three-year total of D 27 million should be reached against an allowance of only D 13 million in the Plan. 46. Since the mineral sector and tourism are yielding considerably better overall returns to the economny than most investments in agriculture and manufacturing, this shift is probably all to the good, and reflects commendably on the ability of the Tunisian administration (and in tourism, the private sector)to take quick advantage of good investment opportunities not foreseen at the time the Plan was prepared. It also reflects the realism of the Government in deciding not to implement several projects in agriculturb and manufacturing as fast as originally intended in the face of a shortage of trained manpower, which has affected the implementation rate in agriculture, and in the fact of both financing and marketing problems which have led to delays in the most important of the investments planned in manufacturing - a large new chemical fertilizer cnmplex. In both sectors, shortfalls relative to the Plan will probably prove eneficial in that they provide an opportunity to deal with these problems more effectively and therefore to carry out the projects envisaged in the Plan (or similar ones) on a more efficient basis somewhat later. 47. Among the other categories of investment, outlays on electric power, water supplies and transport will approximately be on schedule as compared with the Plan, if the 1967 targets are realized. Housing will be considerably above the planned rate, even allowing for the cut planned for 1967. However, the Four Year Plan was probably unrealistically low as far - as housing was concerned, After taking account of the sharp cuts in Govern- ment administration (including education) made in the 1967 budget, this category will be at about the average rate for 1965-67 as that foreseen in the Fbur Year Plan. However, it appears that within this total,education outlays are below the originally planned rate, while other outlays are above it.  - 15 - Table 4: ACTUAL AND ESTDMATED GROSS ThVESTMENT FOR 1965-67 COMPARED WITH THE FOUR YEAR PLAN (millions of D) 1965 1966 1967 1965- 1965-1968 Prov. Est. E.B.Proj. 1967 Four Year Plan Gross 1/ Net Agriculture 26.4 26.1 28%W 81.3 165 150 Petroleum development 15.4 11.1 11.6 38.1 20 20 Other Minerals 4.7 4.3 3.5 12.5 25 20 Manufacturing 26.8 14.2 9.7 50.7 80 73 Food industries (1-3) (2.3) (2.9) (6.5) (6) (4) Steel Mill (11.1) (0-5) (0.6) (12.2) (7) (7) Textiles (9.7) (5.9) (2.8) (18-4) (22) (20) Chemicals (0.3) (0.9) (0.9) (2.1) (25) (25) Other IvIanufacturing (4.4) (4.6) (2.5) (11.5) (22) (17) Tourism 6.7 11.8 8.3 26.8 15 13 Power 7.8 6.6 7.4 21.8 21 21 Transport 8.0 16.0 16!,5 40.5 65 55 Housing 14.0 11.8 7.9 33.7 30 17 Commerce and other services 1.0 0.9 0.5 2.4 6 6 Administration 22.6 214.5 15.8 62.9 70 67 Education (9.1) (10.0) (6.0) (25.1) (44) (44) Water (est.) (2.0) (2.0) (2.0) (6.0) ( 8) (0) Other (11-5) (12-5) (7.8) (31.8) (26) (23) Total 133.4 127.3 110.0 370.7 505 455 1/ The Plan did not allocate replacement by sector; the allocation here has been made by the Mission.  - 16 - II. PROSPECTS IN THE MAIN SECTORS The Main Production Possibilities 148. In the 1960-65 period, the main stimulus to real income growth was provided by increases in investment activity and in output for domestic production, with exports of goods and services remaining practi- cally stagnant. A major shift in this pattern has already started and is likely to continue for the next several years. As noted, investment will be cut substantially in 1967, and it is not likely to rise any faster than GDP in the next several years. On the other hand, exports of goods and services started to expand rapidly in 1966 and are likely to continue to rise at an average growth rate of 10 percent or more between 1966 and 1970. The growth rates in agriculture and manufacturing for domestic use should also rise at least moderately over the average rates of recent years. The growth rate in total output could well average over 6 percent. Real in- come growth should expand almost as fast as output, if wine exports to France regain-their earlier levels, since this improvement would nearly offset the price declines (below the 1965 level) foreseen in other export prices - mainly phosphate rock, phosphate fertilizers, and olive oil. 19. There are some uncertainties in the medium-term outlook: Among the major exports, petroleum sales should reach a level of D 17 million by 1970 on the basis of production expected from El Borma. Another small field, now being investigated, might yield another D 2 to D 3 million annually by then, but it is not yet certain exploitation will be undertaken. In phosphate rock, exports could well reach 4.5 million tons by 1970, but competition is keen in this product at present, and an early reduction in the North African price will probably be required to reach this level. In the case of agricultural exports, the growth of output of olives, citrus and vegetables should permit a significant expansion of volume after 1967, but here also there is an important question about prospective prices and markets - posed mainly by the present uncertainties about the arrangements with the European Common Mlarket which will replace Tunisia's present posi- tion of preference in the French market. 50. Another uncertainty about the 1968-70 period is the level of in- vestment that will be feasible. As indicated later in this chapter, it is the Mission's impression that a maintenance of investment rate of around 21 percent of GDP could be justified on the basis of prospective economic returns. However, it is not certain at present whether it will be possible to mobilize the resources needed to finance such a level of investment. The main considerations affecting the outlook for domestic savings and capital inflow are discussed in Chapter III. It is sufficient to remark here that any substantially lower rate of investment than 21 percent of GDP during the 1968-70 period is likely to lead to a significantly lower growth rate in output and incomes than would otherwise be feasible.  - 17 - 51. For the longer run, maintenance of a growth rate in real income of arourA 600 percent or more will almost certainly require a continued expansion in export earnings at a faster rate than GDP if the investment rate is to be kept stable into the 1970's. The reason for this is that the Tunisian market is too small, and its agricultural resources too limited to enable the economy to expand rapidly on the basis of import substitution, except at a steadily increasing capital output ratio. A continued expansion of exports at 8.0 percent or more annually in the 1970's should not be impossible to achieve, but it is by no means certain now that it can be: In minerals, petroleum is a big question mark. Sales from known deposits will stabilize after 1969 at around D 17 million. There is always the possibility of another important strike, but this is clearly impossible to predict. In phosphate rock (and phosphate fertilizer), on the other hand, it is technically quite possible for there to be a continued rapid expansion well into the 1970's. Output of rock is projected on fairly conservative assumptions about market possibilities to rise by 75 percent between 1965 and 1970. A similar expansion could take place between 1970 and 1975 if Tunisia could find sufficient new markets but that is much less certain, given the expected growth of demand - at between 6 percent and 8 percent annually, and the sizeable expansion in production capacity planned in Morocco and the Spanish Sahara. kn important factor here will be the extent to which Tunisia can maintain or improve its competitive position in relation with other producers. This factor is of course also relevent to other export possibilities, including tourism. Tourists receipts, which more than doubled between 1964 and 1966, can probably be increased another two and one-half times by 1970, if prices remain attractive in Tunisia, but after than, the growth rate is likely to decline progressively simply because of the large numbers that would then be involved. 52. By the early 1970's, it is likely therefore, that Tunisia will have to have other sources of expanded earnings if it is to sustain an adequate growth rate without a progressively increasing rate of investment. The main possibilities are expanded exports of olive oil, citrus, vegetables, livestock products and light manufactured products. In agriculture, Tunisia already has the advantage of a fairly well diversified group of exports, and it would be wise to further diversify to the extent feasible. Both olive and citrus production in Tunisia will rise quite rapidly in the next ten years as a result of plantings already made or planned. If domestic consumption of these crops is kept at a 3-4 percent growth rate (and if soyabean oil imports are maintained at recent levels), the export volume of both olive oil and citrus could rise by 7-8 percent annually between the level now estimated for 1970 and 1975. The technical possi- bilities for expanding exports of early vegetables can be increased substantially by irrigation projects now underway and planned. Tunisia has a natural advantage over most of its main competitors for these crops in the European market. Finally, livestock products should have longer run possibilities for becoming a significant export item, given the good natural conditions for lamb and mutton producticn. However, for all these products, Europe is the main market, and all of them are competitive in some degree with present European producers. World  - 18 - prices for some of these items are likely to drop significantly in the next ten years because of the rapid increases in total output. How- ever, Tunisia could probably cope with such a drop. But if, in addition, European tariffs against Tunisian exports are raised substantially in comparison with the present situation (which gives Tunisia and other North African countries preference on the French market) this could constitute a damaging blow to what otherwise are very good export pros- pects in this sector. 53. In light manufacturing, Tunisia should have a considerable competitive advantage over Europe for labor intensive lines of production (e.g. clothing, electronic assembly, etc.) because of its low wage rates, provided technology and management are equal. In order to bring in management and technology, foreign private investments would certainly be required in this field for some time. There is good reason to believe such inve.stment would be attracted to Tunisia if output could be ex- ported to Europe without significant tariff barriers. 54. Possibilities for expanded import substitutions are still important in agriculture, particularly in cereals, where Tunisia has shifted from being a net exporter to a net importer in recent years. There are also prospects for some further expansion of import substitu- tion production in manufacturing: e.g. construction materials, metal products and textiles, but these will develop at a lower rate than the surge of activity in this field which is occurring now as the result of the large investments in the past several years. Medium Run Investment Prospects and Policies 55. rhe level and composition of investment for 1967 as outlined in the Economic Budget seems well geared both to the overall financial prospects and to the specific project possibilities and priorities of the Tunisian economy. For the period 1968-1970, it would seem plausible to assume that fixed investment will go up at about the same rate as GDP. However, a somewhat lower level of inventory investment would probably be needed once the backlog is met in 1967, so that total in- vestment might expand at a moderately slower rate than GDP. An overall limit to investment based on general financial considerations seems appropriate in Tunisia. Although the Tunisians have demonstrated they are capable of implementing a larger investment program than now foreseen for 1967, a fair part of past investments was quite low-yielding. This includes part of investments in agriculture, housing, primary education, and other administrative buildings. Clearly, there are impelling social reasons for maintaining investments of this type at some level. Employment creation is an important one. Provision of a reasonable minimum standard of housing and health service is another. Expanding schooling for primary school age children, at least at the same rate as the growth in their population, is another. Yet if Tunisia is to become largely independent of net foreign capital inflow by the end of the 1970's as it wishes to, investments of this type must be held below the capacity of the country to absorb them. A major step in this  - 19 - direction was taken in 1967. In the period 1968-70, only moderate increases can be permitted in these sectors over the 1967 level if the possibilities for higher priority investments are to be realized with- in an overall investment rate of 21 or 22 percent of GDP Agriculture-/ 56. Compared to many of the other investment opportunities which have emerged since the Four Year Plan was prepared, the quality of the main investment possibilities in agriculture would appear to justify the reduction in priority of this sector reflected in the shortfall relative to Plan. Even allowing a four-year lag between investment and output, the capital-output ratio has been quite high - in the neighbor- hood of eight to one. To some extent, this reflects the need to make up for the disinvestments of the past, represented by deforestation and poor cultivation practices resulting in serious erosion, and to the loss of experienced farm managers following nationalization of the foreign- owned farms. However, it also reflects the fact that Tunisia's natural conditions for agriculture are not generally favorable. Nevertheless, with over 50 percent of the working population engaged in this sector, substantial investments will still be required for some time to come, since there will clearly not be sufficient investment opportunities outside of agriculture to cope with the employment and income require- ments of any large part of this labor force for some years to come. 57. Moreover, several factors indicate that it should be possible to achieve a significant reduction in the capital output ratio in the future. Firstly, with greater emphasis on farm management, and improved technology - particularly the use of better seeds, fertilizers, and improved animal husbandry, output can be increased substantially in some areas with only a moderate level of new investLments. Secondly, effective use of the underground water resources has started and offers promising possibilities for more reasonably economic expansion of irrigation. Several deep wells provide water at costs per hectare substantially below the cost of most dams for storing surface water. Shallow wells have also been yielding good results. Moreover, in the case of the two large surface water irrigation projects now underway, the Nebhana and lower Mejerda, the largest part of the investments has been made, so that the investments required for completion of these schemes should bring rela- tively good returns. 58. More work needs to be done to establish the costs and benefits of the particular projects which might usefully be undertaken in the next several years. To achieve this, a more integrated approach to project analysis is needed than permitted by the present system under which each service tends to be concerned only with one part of a program. This would seem to be an area where Tunisia could make use of expanded technical assistance. Pending future analysis, the main possibilities may be tentatively summarized as follows: 1/ See Annex on the Main Sectors for a more detailed discussion.  - 20 - (a) Continuation and improvements of the program to in- tensify rainfed agriculture in the North, mainly in the context of producers cooperatives, which are designed to integrate the traditional farms in the area with the modern farm lands taken over from foreign settlers. IBRD-IDA financing for about half of a two year program has recently been arranged. The project has an estimated ecnnomic return of around 11 percent. (b) Continuation and possibly an expansion of the programs of irrigation by deep wells and improved livestock husbandry in the center and of the reconversion of oasis in the south would seem justified if the recent experience with the deep wells in those areas proves typical. Construction of shallow wells should continue to be encouraged. (c) The Nebhana and Lower Mejerda projects should be completed. Subject to comparative analysis with the well program, another large irrigation scheme could be started when the Nebhana project is finished, possibly on the Upper Mejerda. Continuation of smaller surface water irrigation projects at around recent rates might also prove justified. (d) Continuation, but perhaps at a reduced level, of the general programs of reforestation and soil conservation, which have been running at a total of between D 5 and D 6 million in recent years. 59. Within such a framework, total investment outlays in agriculture might be projected at D 37 million by 1970, as against D 26 million in 1965-66 and D 29 million allowed in the Economic Budget for 1967. The cooperative farms project and the well programs should cbntribute significantly to output growth in the period. Most of the other invest- ments will not bear fruit until after 1970, although greater care in project selection and greater emphasis on improving farm management could help significantly to ensure optimum returns in 1968-70 and beyond, even from these projects. However, part of the investment in tree crops and irrigation made before 1966 will begin to contribute to output in this period. In total, a growth rate in gross output of 2.9% is projected between 1965 and 1970, after adjusting for normal crop conditions, as against one of about 2.0% in 1960-65. However, the use of inputs will have to rise significantly to achieve this, so that value added by agriculture might be projected to rise at a rate of 2.5 percent in this period. Petroleum Development 60. Exploration investment for petroleum which averaged around D 4 million between 1960 and 1964 paid off in 1964 with an important strike on the ENI concession at El Borma near the Algerian border. In 1965 and  - 21 - 1966 investment in exploration went up to D 9.5 million. In early 1966, there was another small strike at Djebel Doulep by a Franco-Tunisian company (SEREPT). On the basis of these indications, it is estimated very roughly that investment in exploration will average around D 8.0 million in the next several years even if there are no major new finds in that period. Development of the El Borma field in 1965 and 1966 was carried out at a cost of around D 8.0 million, and with a further investment, of D 2.0 million in 1967, the project will be complete. Development of the Doulep deposits would cost about D 4.5 million, which could be completed during 1967, if the company decides to proceed. A firm decision on this has not yet been taken, however. 61. The recoverable reserves at El Borma are estimated at over 60 million tons, and annual production is projected to level off at a maximum of 3.0 million tons in 1969. The Doulep field could produce a maximum of 0.6 million tons by 1970, but it seems premature to allow for this in projecting exports and income for that year. However, export earnings from El Borma alone should reach D 17.2 million in 1970, against D 3.9 million realized in 1966 and an estimated D 11.2 million in 1967. Value added to the domestic economy before taxes is estimated at roughly 74 percent of the export value, while interest and dividend payment abroad are estimated at around D 2.5 million in 1970. Phosphate and Phosphatic Fertilizersl/ 62. Between 1960 and 1966, rock phosphate output expanded by 60 percent reaching 3.3 million tons in the latter year with a value added of around D 8.3 million or 2 percent of GDP. About 2-.4 million tons were exported at a value of D 12.7 million, accounting for 11 percent of the value of total current account receipts in that year. About 700,000 tons were used in the domestic production of fertilizers, nearly all of which were exported, yielding a value of D 6.8 million in 1966. 63. The expansion of phosphate rock production has been achieved by investments averaging D 2.0 million annually in 1963-6h, and nearly D 4.0 million annually in 1965-66. Investment of D 3.7 million seems possible in 1967, although the Economic Budget allows only D 3.5 million for all extractive industries in that year. In any event, further large investments seem likely for 1968-72. On the basis of investments now underway, production capacity will reach 4.8 million tons in 1970. Quite possibly another million tons may be added to this level by then. Investments could well average as much as D 6.0 million per year in the period 1968-70 on the basis of plans of the existing three companies. In addition, two foreign companies are considering joint ventures for the production of rock in this period, one (Occidental Petroleum) in con- nection with a proposal for a large fertilizer plant. Even if only one of these two projects were realized, production capacity could easily 1/ See Annex on the Main Sectors for a more detailed discussion.  - 22 - exceed 5.5 million tons by 1970. If all the projects now under con- sideration were realized they would raise production capacity to 9.3 million tons by 1975. 64. For 1970, it would seem reasonable to assume a total of 4.5 million tons in exports. Since most of the additional production and exports will consist of higher grade rock than present production and exports, this tonnage is equivalent to around 4.73 million tons of present exports (i.e. an average upgrading of 5 percent). However, because of the increase in world supply, the average North African price is expected to drop by around 15 percent, from the present level of D 5.3 per ton for present grades to D 4.5 for the same grades by 1970. This would yield export earnings of D 21.3 million in that year. 65. Superphosphates are presently being manufactured for export by two companies. Together they plan an investment of around D 1 million in 1967-68, which will raise their capacity to around 400,000 tons of TSP plus small amounts of other fertilizers. Output of hyperphosphates is expected to remain steady at the present 110,000 tons. The total output in 1970 would require about 1.0 million tons of rock phosphate. Prices of fertilizers are also expected to drop from the 1965-66 level by around 15 percent in the next several years. This would yield total export earnings of around D 9.5 million by 1970. 66. The Tunisian Government is still trying to find a foreign partner to participate in the major fertilizer project included in its Four Year Plan - Industries Chimiques Maghrebines. The concept underlying this project, however, has substantially evolved in the past few months. Instead of trying to promote a nitrogenous fertilizer project, which would produce di-anmonium phosphate for export and ammonium nitrate for the local market, the Government now appears to be interested primarily in the creation of a new plant to process Tunisian rock phosphate into chemical fertilizing materials for export, leaving to the foreign partner the choice of the particular product to be produced. Occidental Petroleum is now considering a project that would involve the production of 1 million tons per year of rock phosphate and the transformation of this raw material into 400,000 tons of superphosphoric acid for export. The project would cost D 9 million in addition to the mining operation. Investment could start in 1969, and exports valued at around, D 18 million annually might be reached by the mid-1970's. 67. The Government wants to have the ICM plant established at Gabes. This would require a port costing at least D 7 million. However, it seems possible, on the basis of information available to the Mission, that the Port of Sfax rniht have sufficient capacity for the export of fertilizer and rock now envisaged at a cost significantly less than the estimated cost of the Gabes port.  - 23 - Other Minerals 68. Output of iron ore from Tunisia's two mines at Djerissa and Tamera is now running at 1.0 million tons annually, and is expected to rise to 1.2 million by 1967 on the basis of investments recently made. The El Fouladh steel mill will take about 170,000 tons of the ore, so that exports should be maintained at around 1 million tons, worth D 3.0 million. Investments in reconversion of the Djerissa mines and in a beneficiating plantfor the low grade ore of Tamera may take place during 1968-70, at a total cost of around D 1.5 million. 69. Output of lead expanded from 11,600 tms in 19614 to D 14,200 in 1965, with an export value of D 2.5 million, partly as the result of high lead prices in that year. On the basis of recent investments}. of around D 1.0 million, output is expected to rise to around 16,000 tons by 1970. However, some decline in the present lead prices is expected by then so that the value of exports should be approximately the same then as the 1965 level. 70. A D 1.0 million investment in the development of mercury and fluorspar was made in 1965 by the Government, and another D 1.5 million is projected over the next several years. These mines are reportedly among the richest in the Mediterranean area with reserves of 5 million tons. Exports of D 0.3 million started in 1966 and are expected to reach D 1.8 million by 1968 and then remain level. Of interest for the longer range future are preliminary indications of substantial potash deposits. Other Manufacturinl/ 71. With the completion of the steel mill, investments in manu- facturing dropped from D 26 million in 1965 to D 14 million in 1966. They will drop further in 1967 - to around D 10 million both as a result of the general austerity program and of the completion of several large textile investments. On the basis of projects now in sight, an expansion to around D 15.0 million might be envisaged by 1970, including allowance for around D 2.5 million in phosphatic fertilizers (as compared with around D 1.0 million in this sector during 1966). The main possibilities are sum- marized below: a) An expansion in the capacity of the steel mill costing around D 4.5 million is under preliminary study. This might increase the profitability of this operation if market demand proved adequate to take the additional output. However, this point needs careful study before an investment is made. In the metal working industries, projects for a wire drawing plant costing D 1.4 mil- lion and a machining plant costing D 1.0 million are also under study. 7 See-Annex on the Main Sectors for a more detailed discussion.  - 24 - b) An agreement in principle with an American company has been signed for using the former French naval base at Bizerta as a ship repair yard. The company would guarantee D 5 million annually in business by 1970. Cost of the investment is estimated at D 6.0 million. c) Studies are being made of further projects in cotton spinning and weaving and in synthetic cloth which might total as much as D 5.0 million in 1968-70. However, careful analysis of market prospects and probable profitability should be made before these investments are undertaken. Smaller investments in clothing manufacture for export might also prove well justified, especially if tariff policies are favorable. Several European companies have already indicated interest in manufacturing clothing in Tunisia for export to Europe. d) Investments in food processing of as much as D 7.0 million might also be justified in this period, both to improve productivity of the present out-dated factories and to permit expansion of canned and frozen fruit and vegetables pro- duction if export possibilities warrant. e) Investment in construction materials of as much as D 1.0 million annually may be warranted by the need to replace presertly obsolete plant, and to provide for some ex- pansion of capacity, both for further import substitution, and to meet an increase in demand expected to result in the period from the shift in the composition of investment toward a heavier share of construction relative to equipment goods. f) An expansion of the oil refinery from its present capacity of 1 million tons to 1.5 million may be justified by the present growth of demand. Along with smaller investments planned in asphalt and lubricants, this would bring total investment in this sector to around D 1.5 million in the period 1968-70. 72. It is likely that a good part of these investments could usefully be started in the period 1968-70. However, in order to ensure proper timing in relation to market prospects and adequate attention to productivity and profitability, it would be desirable to expand further the role of the private sector whenever feasible. The Government has expressed its desire to do so, and some significant steps have already been taken in this direction: a number of small private manufacturing projects have been approved for financing by the SNI in the past year; several small government plants have recently been sold to the private sector, and the Government is seeking to sell others. In addition, a new Investment Code is about to be established. This would consolidate into one law a large number of separate pieces of legislation affecting private investment, as well as increasing the degree of automaticity for  - 25 - qualifying firms in respect to the benefits they can receive by way of protection tax relief, etc. An Industrial Promotion Center is also being set up in Tunis with help from the Ford Foundation. Its main object will be to provide publicity on the possibilities for private investment in manufacturing in Tunisia and to help potential private investors deal with the legal and administrative requirements of making an investment in the country. 73. To the extent that the Government is not successful in dispos- ing of existing publicly-owned manufacturing enterprises to the private sector, it might still be highly useful for it to obtain expert assist- ance in the form of management consultants who could advise on possible measures to improve the efficiency of these enterprises from the stand- point of operations, pricing policy and marketing. While some improve- ments in management have been made in the recent past, most of the present management is handicapped by lack of experience in industrial operations and marketing problems, having for the most part been transferred to their present responsibilities from a background of Government administration. Moreover, as suggested in the foregoing discussion, in the preparation of new projects, greater attention needs to be devoted to costs and market possibilities than was true in some of the earlier investments. Some of the latter probably will not prove to be very efficient for quite some time because they were conceived and constructed in a much more elaborate fashion than was warranted and because their output is not well adapted to domestic market requirements. 7h. Assuming reasonable success in implementing the investment possibilities in manufacturing in sight for the next few years, the growth of output in this sector (including chemicals) should increase by nearly 8 percent annually between 1965 and 1970, or about the same as between 1960 and 1965. This would imply an overall capital-output ratio around three to one for this sector, assuming a two year lag between in- vestment and output in this period. With no important investments of the same capital intensity as the steel mill foreseen in the next several years, the ratio should improve in the early 1970's. However, the growth rate in output is also likely to drop unless the growth of manufactured exports can be accelerated. Tourism- 75. During 1966, about 200,000 tourists visited Tunisia, spending a total of around D 13.0 million, as against 138,000 tourists in 1964 who spent D 6.2 million (at the 1965 exchange rate). In the two years 1965 and 1966, investment in the tourist industry amounted to around D 18.5 million, as against an estimated D 6.0 million in 1963-64. These sharp increases in tourist entries and spending are the result of a large "spill-over" of tourists from the northern shores of the Mediterranean to the southern shores wqhich was begun three years ago. There is no sign of it'letting up. Tunisia has done an impressive job of mobilizing re- sources to meet this rise in demand. It made effective efforts to attract 1/ See Annex on Main Sectors for more detailed discussion.  - 26 - private investors to this sector, providing them with considerable amounts of credit, often on subsidized terms, to facilitate their investment. 76. For the next four years, it would seem quite plausible to assumre an increase in the number of tourists earnings by two and a half times, that is an average growth of 25% annually, as compared with nearly 60 percent in the past two years. To accommodate this number would require increasing the number of hotel beds from an estimated 17,000 at the end of 1966 to 30,000 at the end of 1969. At an average cost of D 2,500 per bed, this would total D 32 million. In 1967, the Economic Budget allows only D 9.0 million for total investment in tourism including D 2 million for the Comissaret General au Tourisme et Thermalisme. However, the Mission assumes this total can and should be increased to D 15 million annually in 1968 and 1969, which should be adequate to provide for the 30,000 beds estimated to be needed by the beginning of 1970. Value added by tourism should grow under those assumptions by D 18 million between 1965 and 1970. Transport and Communications 77. Investment in transport and communications jumped to D 16.8 million in 1966, as against D 8.0 million in 1965, and is set at D 15.5 million in the Economic Budget for 1967. The major increase in 1966 was for replacement and expansion of the trucking fleet. Full details are not yet available on the composition of investment proposed from this sector in 1967, but the general order of magnitude seems consistent with needs of the country at this time. Pending further studies which need to be made on costs and benefits of proposed investment projects in this sector, a tentative average of around D 17.5 million might be set for financial planning purposes in 1968-70. 78. Further work needs to be done to improve policies and planning in this sector. A start has been made by the establishment of a Directorate of Transport within the Tinistry of Public Works and Transport to help improve coordination: consultants have been engaged to carry out transport cost studies, and the whole structure of road and rail tariffs is being reviewed. In addition, the Government has applied to the UNDP for help in preparing a master plan for the Transport Sector. Until this study gets well underway, the Government should exercise considerable caution in undertaking major new projects. Plans for a few new projects at present seem somewhat amibtious, in particular those for ports (e.g. Gabes) and for a large new airport terminal at Tunis, each of which would cost around D 7 million. In contrast, there appears to be an urgent need for investment in the railroad (SNCFT) which is not being adequately met at present expenditure rates. Other Sectors 79. There appears to be a need for at least a moderate expansion of investment in urban water supplies in the next several years. Recent outlays for this purpose have been averaging around D 2.0 million annually.  - 27 - Judging by the needs indicated for expansion in Tunis and Sfax, an increase to a-bout D 3.0 million might prove to be justified. However, present water rates are well below costs, which seems particularly inappropriate in a country whose total water resources are as limited as Tunisia.'s. A significant increase in rates would appear needed in order to ensure its economic use. 80. Capital outlays on education averaged around D 9.5 million in 1965-66 or about the same rate as envisaged in the Four Year Plan. However, it appears likely that to achieve the overall cut ma.de by the 1967 Budget in government administra.tion - from D 24 million to D 16 million, some cuts in education will ha.ve to be ma.de. Perhaps this will speed up the review of the educational policies that seem urgently called for by the need to halt the very rapid growth of current expenditures. Total current expenditures of the Ministry of Education doubled between 1960 and 1965, and then went up by another h0% between 1965 and 1967. The latter increase is partly due to the overall salary increa.se mentioned earlier, but even in 1967 when this is not a factor, expenditures are expected to go up by 13 percent. The major part of the increase in recent years has been in the secondary schools. There, the growth of enrollment has been so great that virtually the entire increase in output of the schools (which is much lower than the first year enrollments) is needed to supply the system with the extra teachers to keep up with enrollments. However, even with some improvements in policy in this area during the next few years, capital outlays-of around D 9 or D 10 million annually are likely to be needed in 1968-70. 81. As noted, investment in housing is to be cut substantially in 1967. This is probably justified on grounds of economic priorities, and of the fact that the past level of housing investment (at around 3 percent of GDP in 1962-66) was relatively high, considering Tunisia's level of income, and the fact that the resident population was growing by only around 1 percent annually in this period. For the next few years investment in this sector should probably be held close to the 1967 ratio of expenditure to GNP (1.5 percent). A careful study of present a.nd prospective housing needs should be undertaken before any significant increase in this ratio is permitted. Much of the basic data. required for such a study should be available from the 1966 census which is now being tabula.ted. Summary of Investments and Output Prospects for 1967-70 82. The allocation of investments indicated by the above discussion is summarized in Table 5 on page 29. It will be seen that fixed invest- ment projected for 1970 by the Mission is just about at the same level as tha.t actually realized in 1965. Investment in stocks might average around D 4 or 5 million in the period after 1967, so that total invest- ment would be around D 143 million in 1970. 83. The output prospects for the next several years are summarized in Table 6 on page 30. After adjustment for the exceptionally good olive crop and grain harvest of 1965, it may be seen that value added by agri- culture is expected to grow by 2.5 percent annually between 1965 and 1970.  - 28 - The extractive industries, in total should nearly triple their output in that period, mainly because of crude oil production. Mbnufacturing is projected to grow at an average rate of around 8 percent, after allowing for the exceptional effects of the 1965 olive crop. If investment expands as projected, construction activity should recover by 1970 to slightly over the 1965 level, while growth in value added by transport is expected to slow down moderately from the high growth rate of earlier years. In the service sectors, tourism should, as noted, prove to be a very dynamic source of income. Government administration is projected to grow by 5 percent annually between the present estimate for 1967 (which is based on the Government Budget) and 1970. The result for total GDP at constant prices is a growth rate of nearly 6.5 percent after a.llowing for a normal trend in agriculture. Declines in the prices of phosphate products and olive oil seem probable, but if prices for wine exports recover to their earlier levels, as it now appears possible, real income growth would only be slightly lower than this expected growth rate in GDP.  - 29 _ Table 5': PROJECTIONS OF INVESTMENT (million D a.t 1965 prices)l/ 1965 1966 1967 1968 1969 1970 Prov. Est. Projection Agriculture 26.4 25.7 28.8 32.0 34.0 37.0 Mining and Petroleum 20.1 15.7 15.1 15.9 15.3 14.5 Petroleum 15.4 11.3 I7I 10.0 0- 6.0 Extractive ind. 4.7 4.4 3.5 5.9 7.3 8.5 Electric Power 7.8 6.6 7.4 7.0 7.7 7.5 Manufacturing 26.8 13.3 9.7 8.1 11.7 14.5 Food processing 1.3 2.3 -T7 1.7 2.5 3.0 Metal and mechanical 14.5 1.4 1.4 1.8 3.0 4.o Chemicals 0.3 1.0 0.9 0.9 2.4 3.0 Textiles 9.7 5.9 2.8 1.8 1.8 2.0 All other 1.0 2.7 1.7 1.9 2.0 2.5 Tourism 6.7 12.2 8.3 14.5 15.0 16.0 Transport and Communi- cations 8.0 17.0 16.5 16.3 17.5 18.5 Housing 14.0 12.4 7.9 8.5 9.0 10.0 Commerce and other l.\ 0.8 o.5 o.6 0.7 1.0 Administration 22.6 24.5 15.8 17.0 18.0 19.0 water suppries . (2.O) (2.0) (2.5) (3.0) (3.0) Education (9.0) (10.0) (7.0 (8.0) (9.0) (lo.0) All other (11.6) (12.5) (6.8) (6.5) (6.0) (6.0) TOTAL 133.4 128.2 110.0 119.9 128.9 138.0 1/ The 1967 figures are froa thc Tunisian Economic Budget whic)hi are at current prices. However, the implied price index (1960 = 100) shows very little change between 1965 and 1967. 1965 1967 125.8 125.0  - 30 - Table 6: PROJECTIONS OF GDP (millions of dinars at 1965 prices) 1965 1966 1967 1970 Prov. Est. Projection Agriculture / 98.0 70.3 79.4 98.0 Mining and Petroleum 11.3 14.8 21.2 30.4 Crude Oil 2 o.6 3.h XI 8. 12.7 Extractive industries 10.7 11.4 12.6 17.7 Power and water 7.4 9.0 9.7 12.8 Manufacturing 59.2 60.8 63.7 85.5 Food industries 1/ 2 1/ 24.9 23.9 36.0 Mechanical 2.0 3.8 5.9 7.3 Chemicals 2.4 2.4 2.7 3.7 Textiles 10.8 12.7 13.5 16.7 Oil refining, etc. 2.4 2.4 2.8 3.6 All other 13.1 14.6 14.9 18.2 Construction 40.0 39.0 32.7 42.0 Transport 37.0 39.7 42.0 50.0 Other Services 121.7 128.0 135.6 173.1 Tourism 3/ 6.4 10.5 12.6 4/ 24.5 Rents 16.9 17.7 19.0 21.1 Commerce 66.5 63.8 65.5 84.0 Other 31.9 36.0 38.5 4/ 43.5 Government 60.0 71.0 77.0 89.0 TOTAL 434.6 432.6 461.3 580.8 1/ To put agriculture and food processing on a normal trend., i.e., abstracting from variations in weather and. the olive cycle, the estimates for agriculture, food. processing and GDP should be roughly as follows: (D million at 1965 prices) 1962-1966 Average 1965 1966 1967 1970 Agriculture 84.6 86.5 88.5 90.5 98.0 Food industries 26.0 27.5 29.0 30.5 36.0 GDP 402.0 424.1 452.1 478.1 580.8 (see following page)  - 30a - Footnotes to Table 6, continued 2/ Estimated by the Mission on the assumption that value add.ed corres- pond.s to 74 perc.ent of the value of exports. 3/ Estimated by the Mission on the assumption that value added corres- ponds to 70 percent of foreign exchange earnings, g/ Adjusted by the Mission as compared with Appendix Table 6 which took only into account the changes in terms of trade. The present table includ.es the Mission's judgment on the probable development of value added in 1967. It may be seen that the difference with Appendix Table 6 cancels out, leaving the total GDP the same.  - 31 - III. THE OUTLOOK FOR THE BAIANCE OF PAYMENTS, DOMESTIC SAVINGS AND EXTERNAL FINANCE 84. The prospect of a rapid expansion of exports in the next several years is the crucial factor in the expected acceleration of the tota.l growth rate in the domestic product. As noted, there are uncertainties in the outlook, but the probabilities are strong that a growth rate of over 10 percent in exports of goods and services can be achieved between 1966 and 1970. If realized, this will have important implications for the savings rate as well as for the total output. One of the major factors limiting the expansion of domestic savings in the past has been the foreign exchange constraint imposed by the slow growth of exports. It wa.s in large part for this reason that the 32 percent marginal growth rate for domestic savings projected between 1964 and 1968 in the Four Year Plan was implausible at the time, especially since the export growth expected then was even lower than now foreseen for 1968, and substantially less than now seems likely for 1965-70. The more optimistic outlook for exports now means that Tunisia, has a realistic prospect of increasing its savings rate quite substantially during the latter period, quite possibly by as much as the 32 percent marginal rate projected in the Four Year Plan for 1964-68. Summary of Prospects for Exports and Imports 85. In total, it seems likely that merchandise exports will rise to over D 100 million by 1970, as compared with D 74 million realized in 1966 and D 63 million in 1965. The most dynandc elements in this outlook are: olive oil, whose exportable surplus should recover by 1970 to around 50,000 tons, with a value of about D 15 million; phosphate rock, where total exports of 4.5 million tons might be projected at a. value of D 21 million; and crude oil exports a.t a minimum of D 17 million. Tourist receipts are projected in 1970 at D 36 million or twice the estimate 1967 level, while all other invisibles might rise from around D 27 million in 1965-66 to about D 35 million by 1970. Details of the project are shown in Table 7 on the following page. 86. By contrast to the rapid growth foreseen for exports, the growth of import demand associated directly with the probable growth of output is more moderate than in the past because such a large part of the increase in output is for export and has a low import content. While imports of equipment goods were a major factor in the growth of import in the past, these are expected to decline in 1966 and 1967 and then to recover to only about the 1965 level by 1970. Imports of petroleum will rise rapidly (since it is likely that all of Thnisia's crude oil production will be exported, and all the requirements of its refinery imported because of quality differences). Raw material imports will also grow quite rapidly, while intermediate products will also expand fairly fast, although the rate will be held down by the import substitution taking place in steel.  - 32 - Table 7: PROJECTIONS OF THE BAIANCE OF GOODS AND SERVICES (millions of current dinars) 1965 1966 1967 1970 Actuals Eco.Bud. Actuals Eco.Bud. Proj.a/ Proj. Exports of merchandises 62.9 70.0 73.7 83.4 79.0 105.0 Agricultural produce 28.0 30.4 35.4 28.3 24.8 37.0 Cereals 0.3 4 - 3 Citrus 2.6 2.7 2.9 3.4 3.1 4.0 Other fruits & vegetables 4.3 5.8 5.8 5.2 5.2 6.5 Olive oil 13.5 11.2 13.5 11.2 7.0 15.0 Wine and other beverages 2.8 1.6 4.4 3.5 4.5 5.5 Animal and fish products 3.3 3.7 3.7 4.0 4.0 4.5 Other agricultural products 1.2 1.1 0.8 1.0 1.0 1.5 Minerals and fertilizer 26.9 28.8 28.1 42.9 41.9 54.5 Phosphate rock 11.4 12.7 12 I7W 16.9 21.0 Fertilizer 9.7 6.8 5.8 10.1 8.1 9.5 Crude oil - 3.9 4.2 11.2 11.2 17.2 Other minerals 5.8 5.4 5.6 6.o 5.7 6.8 All other 8.0 10.8 10.2 13.2 12.3 13.5 Export of services 35.8 42.2 40.21/ 51.3 47.3 71.0 Tourism 9.2 15.0 13.0 22.0 18.0 36.0 All other 26.6 27.2 27.2 29.3 29.3 35.0 TOTAL EXPORTS OF GOODS 98.7 112.2 113.9 134.7 126.3 176.0 ANI ) VUm ._Jk~~1u~ - - - Imports of Merchandises 127.7 122.8 126.2 129.8 129.8 150.0 Equipment 40.6 35.0 33.9 32.6 31.0 40.0 Petroleum products, coal 5.9 6.4 6.7 7.0 7.2 9.0 Soya bean oil 2.0 ) 5.0 ) 8.0 2.5 Other raw materials 7.7 ) 50.0 10.1 ) 56.o 11.0 15.5 Intermediate products 32.9 ) 35.2 ) 37.0 45.o Grains 8.6 5.4 8.2 8.4 9.6 6.o Other foodstuffs 9.3 10.0 11.3 10.8 11.0 14.0 Other consumer goods 22.0 21.0 20.8 20.0 20.0 23.0 Adjustment for balance of -1.3 -5.0 -5.0 -5.0 -5.0 -5.0 payments Imports of services 46.4 42.8 43.0 46.8 44.3 51.5 = ~~ = - Freight on imports 11.5 11.3 11.5 11.7 11.7 13.5 Other 34.9 31.5 31.5 35.1 32.6 38.0 / TOTAL IMPORTS OF GOODS AND 174.1 165.6 169.2 176.6 174.1 201.5 SERVICES -- RESOURCE GAP 75.4 53.14 55.3 41.9 47.8 25.5 a/ =ia d y h m s n s f e u a! Estimated by the mission a.s of February 15, 1967  - 33 - 87. Imports of foodstuffs are projected at about the 1965 level, since the growth in cereal production is expected to permit some reduction in the imports a.s compared with 1965 (when grain imports were exceptionally high). Some increase in luxury food imports on the other hand is likely to take place because of the needs of the tourist trade. Other consumer goods imports should also rise moderately, in spite of the growth of the domestic textile industry, given the increases expected both in Tunisian and tourist demand for other finished consumer goods. In total, growth of merchandise imports should average only about 4 percent in the period 1965 and 1970. Between the year 1967 (when imports are projected at the same level a.s 1965) and the year 1970, the average growth rate would be around 5 percent annually. 88. Imports of non-factor services rose from D 36 million in 1964 to D 46 million in 1965 (both calculated at the 1965 exchange rate), mainly because of an D 8 million increase in payments for studies and technical experts in connection with the steel mill investment and other projects. It is expected that this item should fall at least moderately in the next several years, so that total payments on non-factor services are projected to rise by only about 10 percent between 1965 and 1970. 89. Exports of goods and services of D 176 million in 1970, combined with imports of goods and services of around D202 million would lead to a reduction in the resource gap to about D 26 million by 1970, or around 4 percent of the gross domestic product a.t market price. This compares with a. gap of around D 48 million or 8.7 percent of GDP estimated for 1967, and one of 10.7 percent realized in 1966. Na.tional Expenditures and Savings 90. A reduction of the resource gap of this magnitude would imply a substantial increa.se in the domestic savings effort - from 12.7 percent in 1965 and 14.1 percent estimated for 1967, to around 17.5 percent by 1970. However, this does not seem implausible, given the main sources of growth expected in the period - mainly from enterprises which will be accumula.t- ing important resources for reinvestment and for the payment of interest and dividends abroad. Total net factor income payments are projected to rise from D 12.2 million in 1965 to D 25 million in 1970. About D 6 million of this increase is expected from dividend payments (in oil, fertilizers, phosphates, tourist investment etc.,) while most of the remainder would be interest on debt. The national savings effort required would still be significant - implying an increase from around 11 percent of GNP in 1965 and 12.6 percent in 1967 to about 14.7 percent in 1970. In relation to 1965, this would imply a marginal national savings ratio of 25.6 percent, while in relation to the estimated level in 1967, it would be 25.3 percent. This sort of increase should be possible to achieve if steps can be taken to hold down the growth of rates of public and private consumption. 91. In the period 1960-65, private consumption in real terms rose at an annual rate of slightly less than 4 percent. Given the fact that the population was increasing by only 1 percent annually in this period, it implies a growth in per capita consumption of just under 3 percent annually.  - 34 - For the period 1965-70, a. growth rate in private consumption of around 4.3 percent annually would be consistent with the assumptions made here. But since the total population is now rising at around 2.3 percent, this would imply a reduction in the average increase per capita to around 2.0 percent over 1965 level. Given appropriate tax and utility pricing policies, together with increased financial incentives to sa.ve (e.g. a higher interest rate on savings account), it should be possible to hold priva.te consumption within these limits. In relationship to the estimated level of private consumption for 1967, this should prove somewha.t easier since per capita. consumption could expand by around 3.5 percent annually in the 1967-70 period. 92. It would also be necessary to exercise considerable restraint in government consumption to make possible such an overall increase in the savings rate. We have projected here a growth rate in current government expenditures (which in the Tunisian accounts is equated with government consumption) at 5.7 percent between 1966 and 1970. This compares with a growth rate of 7 percent (at current prices) between 1960 and 1965, and one of 8.8 percent between 1960 and 1966, the latter being the year of the general wage increa.se. In real terms (deflating by the cost of living index), the increase from 1960 through 1966 averaged around 5.8 percent. Thus the projected rate (which is based on the assumption of no price change a.fter 1966) is about the same as the past. However, the 1966-70 increase includes a significant element of increased interest on debt, so that the growth rate in the rest would have to be slower than the previous real growth rate. The details of these expenditure projections are considered below. 93. The pattern of national expenditure resulting from these considerations is summarized in Table 8 on the following page. Public Finance 94. In order to achieve an increase in total savings of the magnitude indicated, Tunisia will have to reverse the deterioration in government savings which started in 1966. Given a growth rate in national income of around 7.0 percent annually that seems likely between 1967 and 1970, it should be possible to increase revenues by significantly more than the growth rate projected for current expenditures. 95. Tax revenues in Tunisia. have not been very responsive to income changes in recent years, but have gone up significantly mainly as the result of two sizeable increases in tax rates - one in late 1962, another in 1965. Together with rising income from the Algerian pipeline, these brought total revenue in 1965 up to 22 percent of GNP, the same level as rea.ched in 1960. In 1966, with GNP stagnant, reveniaes nevertheless continued to rise relative to GNP to 23.5 percent, apparently as the result of the carry-over effect of the high incomes o4f 1965, and improved collections.  - 35 - Table 8: PROJECTIONS OF NATIONAL EXPENDITURE (millions of D at current prices) 1/ 1965 1966 1967 2/ 1970 Eco.Bud. Est.V/ Eco.Bud. Proj.- Proj.2/ GDP at factor cost 434.6 440.2 4b0.2 471.7 471.7 587. r Indirect taxes less subsidies 69.2 74.7 74.7 75.5 75.5 90.0 GDP at market prices 503.8 514.9 5T1.9 547.2 547.2 677.0 Net factor income payments -12.2 -14.2 -14.2 -17.4 -17.4 -24.8 GNP at market prices 491.6 500.7 500.7 29. 9 652.2 Deficit on current account 4/ 85.2 65.1 686 53.7 60.0 47.9 National expenditure 576.8 565.8 69.3 53.5 589,8 700.1 Gross Investment; 139.5 127.3 126.3 120.2 125.0 143.9 Fixed 133.4 127.3 127.3 110.0 138.9 Stocks 6.1 - -1.0 10.2 5.0 Consumption 437.3 438.5 446.0 463.3 464.8 556.2 Public 84.0 98.0 98.0 150S 104.8 127.0 Private 353.3 340.5 348.0 358.5 360.0 432.2 (Current transfer receipts) (-2.4) (-2.5) (-o.9) (-5.6) (-5.6) (-2.4) (Domestic private consump- tion) (355.7) (343.0) (34A.9) (364.1) (365.6) (434.8) Savings Domestic savings 64.1 73.9 69.4 78.3 77.2 118.4 National savings 54.2 62.2 57.7 66.5 65.0 96.0 Savings Ratios Domestic (percent of GDP) 12.7 14.3 13.5 14.3 14.1 17.5 National (percent of GNP) 11.0 12.4 11.5 12.6 12.3 1h.7 1/ In effect, the prices used for 1967 and 1970 are 1966 prices, except for the prices used in estimating exports, which do allow for expected price changes. 2/ Estimates and projections by the Mission as of mid-February 1967. 3/ Adjusted upward by D 6 million as compared with Table 6 to take account of the price increase implicit in the increase of government salaries in 1966. 4/ Including current transfer receipts.  - 36 - 96. Since this ratio (which excludes social security net collections and local government savings equal to about 0.6 percent of GNP, is rather high, it would not seem reasonable to press for a much higher ration in 1970. However, maintenance of the 1966 ratio to GNP of revenues other than receipts from petroleum (22.5 percent) in 1970 would bring the total for that year up to 24 percent which would seem to be a. reasonable target. This would require total revenue to rise to around D 155 million by 1970, as compared with estimated receipts of D 118 million in 1966, and budgeted receipts of D 124 million in 1967. Reaching this target will be facilitated by revenue expected from petroleum taxes and profits, which should reach at least D 9.3 million in 1970 (including revenue from Tra.psa oil transport) as against D 5.1 million in 1966. Direct tax receipts from other sources might plausibly be projected to rise at about the same rate a.t GNP. Indirect taxes at existing rates are likely to go up somewhat more slowly because of the slow growth in imports. However, if necessary, tax rates on domesti- cally produced goods could be increased to achieve an overall growth rate around 7 percent over 1967. In addition, steps should be taken to ensure that adequate prices are paid for the goods and services of public mono- polies. 97. Tunisia's defense expenditures are quite low. Allocations to the Ministry of Defense amount to less than 1 percent of GNP. While some other defense outlays are apparently recorded elsewhere in the Government accounts, it is likely that the total is less tha.n 2 percent. Nevertheless, Tunisia has a comparatively high level of total current expenditures. Education is the most important single item, now accounting for one quarter of the budget. These expenditures increased by more than 14 percent annually between 1960 and 1967, and now account for about 5 percent of GDP, one of the highest ratios in the world. In order to keep the growth of total current expenditures under control, a significant reduction in this growth rate will be necessary. Two main steps seem possible at present: firstly, taking action to reduce the number of repeaters in the primary grades; secondly, slowing down the expansion of the intake into the second- ary schools, while at the same time trying to increase the total output of these schools. In this connection, Tunisia also needs to undertake a. manpower study to determine whether its secondary schools and other educatioral institutions are properly adapted to the country's requirements for trained manpower. Outside technical assistance might be helpful for this purpose. 98. Interest on debt covered directly by the government budget has increa.sed from D2.3 million in 1964 to around D4.8 million in 1967. About half of this is interest on external debt. By 1970, this amount is likely to rise to about D 8.0 million of which some D4.5 million would be external interest. If total current expenditures are to be held within the limits indicated earlier, this would imply a growth rate of 5 percent per year between 1967 and 1970 in all other current government expenditures - from D 100 million (after interest) budgeted for 1967 to D 116 million by 1970. Yet outlays on the main economic services - public works maintenance, and agricultural extension - should probably be increased by at least this rate and probably faster. Expenditure on public health should also continue to rise in connection with the government's population control campa.ign which is just getting started on a comprehensive basis (total health  - 37 - expenditures are budgeted in 1967 to increase by 10 percent over 1966). 99. Some economies should be possible in other fields - general administration, welfare grants and current subsidies to operating agencies. However, on balance, it seems likely that this would leave room for no more than a 7 percent or 8 percent growth rate in education expenditures in the next several years, as against 14 percent budgeted for 1967. 100. Assuming that the overall growth rates indicated here for revenue and expenditure are realized, this would lead to a. surplus of the Central Government of D 31 million in 1970, as compared with one of D 23 million realized in 1967 (before the compulsory loan). Adding a rough allowance of D 3.5 million for the surplus of local authorities and social security system, and deducting receipts of technical assistance of around D 7.0 million, the overall surplus of the government would amount t6 around D 27.6 million in 1970. Table 9: PROJECTIONS OF GOVERNMENT REVENUE, EXPENDITURE & SAVINGS ( D million) 1964 1965 1966 1967 1970 Current revenue 91.9 107.2 117.9 123.7 155.0 Direct taxes 13.3 13.7 18.4 18.8 26.2 Indirect taxes 55.1 63.0 71.0 72.2 90.1 Petroleum revenues 2.4 5.3 5.1 6.3 9.3 Other 4.4 5.2 5.4 10.0 11.3 Treasury accounts 16.7 20.0 18.0 16.4 18.1 Current expenditures 72.7 84.0 98.0 10L.8 124.0 Wages and salaries 31.0 (34.0) (41.1) 44.0 53.5 Purchases of goods & services 5.5 (5.9) (6.5) 7.0 9.3 Sovereignty expenditures 4.8 (4.9) (5.0) 5.1 5.4 Current transfers 1/ 19.8 (25.7) (32.0) 36.3 43.0 Treasury accounts 11.6 13.5 13.5 12.4 12.8 Central Government current 19.2 23.2 19.9 18.9 31.0 surp1us FroeTgn technical assistance -5.4 -6.6 -6.9 -6.9 -6.9 Local authorities 0.9 o.6 o.6 o.6 1.0 Social security 1.8 2.0 1.6 1.6 2.5 General Government savings 16.5 19.4 15.2 14.2 27.6 1/ This item includes important amounts of transfers to local authorities for schools and hospitals. It also includes the following amounts of interest payments: On domestic debt 1.4 1.6 1.9 2.5 3.5 On external debt 0.9 1.8 1.8 2.3 4.5  - 38 - Enterprise and Household S avings 101. Given the growth prospects of the main enterprises discussed earlier, gross savings of most enterprises should continue to expand substantially during the next several years. A detailed compila.tion of enterprise gross savings (profits after taxes and interest, but before depreciation) has been made for 1965 which shows a total of around D 27 million in that year. The indirect estimate contained for 1966 in the Economic Budget for 1967 indicates an increase to D 39.5 million in that year. As noted in Chapter I, this is probably an over-estimate - by perhaps D 4 million. Available indications of the prospects of specific enterprises suggest the probability of an increase to around D 42 million in 1967. An increase in this total to around D 65 million by 1970 also seems well within the range of plausibility. However, there would probably also be a significant increase in dividend payments to abroad and to the private sector in Tunisia. Balance of payment estimates indicate D 1.0 million in dividends will be transferred abroad in 1967. This might notionally be projected to rise to D 5.5 million by 1970. No estimates of domestic dividend payments to the priva.te sector are available, but these were probably small in the past. However, given the increased role of the Tunisian private sector in tourism and manufacturing, it might be plausible to allow for as much as a D 3.5 million increase in this item over the recent years by 1970. Thus, enterprise savings after taxes and dividends might be projected in 1970 at around D 56 million. 102. Household (personal) savings are estimated to have been only D 7 million in 1965 and 1966 and are estimated at D 8 million in the Economic Budget for 1967. As indicated in Chapter I, the latter may be on the high side. However, if the proposed compulsory loan is attributed to household savings, the latter could well be up to D 10 million in 1967. Given the increased incomes from entrepreneurial activity by Tunisia in the next several years ( in particular the expected rise in dividend payments) an increase in this element of savings to around D 12 million might be projected for 1970. 103. In total, then the trend of national savings might look something as follows over the next few years. Table lo: H1EAKDOWN OF NATIONAL SAVINGS (D million) 1965 19661/ 1967 -/ 1970-/ General Government 20 15 14 28 Enterprises 27 36 h1 56 Household 7 7 10 12 Total 5h 58 65 96 1/ Mission estimates  - 39 - Exchange Reserves and Credit Policy lo4. The past several years have witnessed a continuous deteriora.tion of the Tunisiats exchange reserve position. Gross foreign a.ssets a.t the end of 1966 stood. at D 13 million, or less than one month's imports of goods and services. Some improvement of this pattern is required during the next several years. A level of gross reserves corresponding to two months imports of goods would seem to be a minimum target for the end of 1970. Assuming that net foreign liabilities remain constant at around D 20 million this could be achieved by adding about D 5 million annually to gross reserves. This would bring net reserves to an amount of D 7.6 million by the end of 1970, a.s compared with a negative position of D 13 million at the end of 1966. 105. If such a. build up in the reserve position is to take place without creating pressure on prices, the expansion of domestic credit would have to be limited to the amount that could be absorbed by a growth in money supply roughly in line with GNP, and in quasi-monetary deposits, while leaving a surplus for the increa.se in reserves. The rela.tive excess liquid- ity existing at the end of 1966 will probably be largely absorbed in 1967 if the policy decisions put fonrard by the 1967 Economic Budget are implemented If the a.verage 1960-66 ra.tio of money supply to GDP remained constant during the periodi 1968-70, money supply could rise to D l90million by the end of the period, as against about D 150 million at the end of 1966. The growth in quasi money deposits may be projected to rise at a. moderately fa.ster rate. These sources of funds would permit an expansion in domestic credit to aroulnd D 3h2 million, an average annual increa.se of about 4 percent over the present target for December 1967. However, the government's capital contributions to a number of public enterprises made in 1966 and planned for 1967 should result in a reduction of medium term indebtedness of the enterprise sector to the banking system, which would add significantly to the funds a.vailable to the banks for working capital loans. Table 21: PROJECTIONS OF FOREIGN ASSETS AND DOMESTIC CREDIT (outstanding at end of the year) (D million) 1965 1966 1967 1970 Est. Proj. Net fore:ign assets -2.3 -12.9 -9.0 7.6 Mloney supply 138.3 150.2 158.0 190.0 Qusai-money 38.6 h5.8 51.h 75.0 Government lending funds 30.4 38.1 44.2 h4.2 Others 32.5 38.1 h0.1 h401 Allowable domestic credit 242.1 285.1 302.7 3h1.7  - 4o - Foreign Financing Requirements 106. The substantial drop projected here in Tunisia's resource gap by 1970 would still not be sufficient to permit a reduction in gross foreign capital inflow in the period, given the expected growth in factor income payments and amortization of debt that are expected in the period. Indeed, if foreign exchange reserves are built up to the extent indicated above, this would require the level as allowed in the Economic Budget for 1967, i.e. around D 73 million or $145 million. This compares with an actual inflow of D 94 million in 1965 and an estimated D 69 million in 1966, before counting use of reserves of D 10 million in the la.tter year. 107. Private direct investment - mainly for petroleum research and development is expected to fall from D 16 million in 1965 to around D 12 million in 1967. Investment in petroleum will probably fall further by 1970 if there are no newa strikes by then, but other private equity capital in phosphates, manufacturing and tourism should increase so that it would seem reasonable to assume for 1970 the same level estimated for 1967. Gross inflow of private export credits rea.ched a peak in 1965 of about D 22 million. Use of these suppliers' credits fell in 1966 to around D 11 million, and is projected at D 9 million in 1967 in the Economic Budget. As noted in Chapter I, total use of medium term loans (including financial credits) may modera.tely exceed this amount in 1967, but any significant excess should be reflected in a corresponding increase in reserves if adequate restraint is exercised on investment expenditures. Fbr the following few years use of such credits might be projected at around D 8 million annually. 108. Total external assistance (including current transfers) from public sources amounted to US $110 million (D 58 million) in 1965, as compared to $96 million (D40 million before devaluation) in 1964. Disbursements in 1966 are estimated at D 47 million. The numerous agreements signed in 1966 should result in disbursements of foreign aid a.gainst these commitments of at least D 50 million in 1967. Public grants and current transfers were about D 16 million in 1965 and are estimated at about the same level in 1967, after a drop in 1966. Since the 1967 total includes allowance for emergency food shipments under PL 480 Titles II and II (which are included with current transfers), this total may well decline moderately by 1970. However, the bulk of it consists of technical assistance grants from France, the U.S., the U.N., Sweden and other sources, and it seems reasonable to assume these will continue at around recent rates. 109. Total public loan disbursements amounted to D 42 million in 1965, and D 36 million in 1966. About half came from the United States in this period. U.S. loan assistance totalled D 39 million in the two years, of which D 16 million was in program loans. Western Germany was also a. major lender with about D 7 million during the last two years. Kuwait extended around D 4 million while IERD/IDA also disbursed D 4 million out of three loans. Italys appeared as an important lender because of a. medium term ENI loan of D 6 million in 1965 in connection with an agreement with Italian oil companies. Aid from Eastern countries in 1965 and 1966 amounted to about D 5 million.  - 41 - 110. As of early 1967, Tunisia had a comparatively large pipeline of official loan funds. The undisbursed portion of canmitted loans amounted to about D 68 million while long term loans under active negotiatios total another D 13 mil:Lion. Of these at least D h2 million are likely to be disbursed in 1967 and D 21 million in 1968, with the amount dropping off sharply after 1969. Thus to maintain the 1967 disbursement rate in 1968-70, new loans would have to be contracted to yield about D 24 million in 1968, D 34 million in 1L969 and D 40 million in 1970. 111. IWhile it is not possible to say at present whether Tunisia can obtain new official borrowing on this scale, it can be said with some assurance that Tunisia's economic policies over the next few years will have considerable bearing on the amount - and terms - of external assist- ance provided from official sources. If in fact an increase in domestic savings to over 1L7 percent of GDP can be realized by 1970, this would help substantially to justify a eontinued high level of external support. Equal- ly important will be the quality of the investment program, both in terms of its general composition and in terms of the prospective economic returns of the main projects. The composition of the program has been improved considerably in recent years - and 1967 will represent further important progress if present plans are realized. In terms of project preparation, there is scope for considerable improvement, particularly in keeping capital costs down and in working out more careful analysis of demand in mobilizing the entrepreneurial talents of the private sector, and in directing the Government's program for general education and training more effectively to meeting Tunisia's requirements for skilled manpower. 112. Finally, improved performance in financial management is needed at both the enterprise and the national level. Quite clearly, Tunisia can- not be certain about the exact level of domestic savings or of foreign capital inflow that can be achieved in each of the next few years. It is, however, reasonably certain that the foreign exchange reserve position will remain fairly tight in this period. Thus, Tunisia will have very little leeway for mistakes in matching investment to resources. To help reduce the room for error, Tunisia needs not only to improve its analysis and control of annual investment programs, but also to allow in its medium term investment planning for the possibility that there will be shortfalls in financial resources (e.g. below the levels indicated in-the illustrated projection made here). Wdhat this requires is clear-cut decisions about which projects should be undertaken at a given minimum level of availabili- ties, together with an indication of the priorities attached to other projects which could be undertaken if additional resources become available. 113. Table 13 on the following page provides an illustrative balance of payments projection for 1970, along with actual results for 1965, and the Economic Budget Estimates for 1966 and 1967. As indicated in Table 7, the current deficits for both 1966 and 1967 are likely to be somewhat larger than estimated in the Budget. The Mission has not been able to prepare detailed estimates of the probable changes in the capital account for these years. However, these adjustments are not likely to affect the outlook for 1970, except in respect of external debt payments which may be larger, if medium term debt substantially exceeds the Budget estimates. This could be offset by a smaller reduction in reserves for 1966 than shown (which probably was the case) and by a large increase in 1967. Other things being equal, this would require a smaller build-up of reserves  - 42 - in the 1968-70 period than indica.ted below: Table 12: PROJECTED FINANCING OF THE BALANCE OF PAYMENTS DEFICIT (in millions of current dinars) 1965 1966 1967 1970 Econ. Budget (Proj.) Good and services, net -75.4 -53.4 -41.9 -25.5 Factor services, net -12.2 -14.2 -17.4 -24.8 Profits and dividends, net - - (0.4) (- 1.2) (- 5.4) Salary and other (- 7.8) (- 8.3) (- 8.9) (- 8.9) Interest on existing debt 1/ 4- 4.4) (- 6.3) (- 7.3) (- 4.7) Interest on debt to be contracted - - - ( 5.8) Current transfers 2.4 2.5 5.6 2.4 Total on current account -85.2 -65.1 -53.7 -47.9 Private direct investment, net 16.1 10.7 12.3 12.0 Medium term loans, gross 21.6 11.3 9.0 8.0 Other priva.te, net - o.6 2.1 - - Amortization of existing debt - 8.6 -13.7 -15.8 -15.8 Amortization of debt to be contracted - - - - 4.7 Public capital transfers,net 13.6 8.6 9.8 10.0 Disbursements on public loans 42.3 35.5 42.3 43.4 Already contracted (42.3) (35.5) (36.3) (3.0) Remaining to be contracted - - (6.0) (40.4) Total on capital account 83.9 54.5 57.6 52.9 Change in reserves 1.1 1o.6 -3.9 -5.0 Errors and omissions 0.2 - - - 1/ Interest and amortization estimate for 1965-67 are from Tunisian sources. v In total, these are almost exa.ctly the same as IBRD information shoiwn in Appendix Tables 2 and 2c. However, interest is higher and amortization is lower than IBRD estima.te. The 1970 projections here are those of the IBRD.  - 43 - Debt Service and. the Longer Run Outlook 11L. Even if Tunisia were to obtain during 1968-70 about the same level of gross loan inflow as that projected in the Economic Budget for 1967, that is around D 42 million in official loan disbursement plus D 9 million in suppliers credits, the projected rise in amortization would lead to decline in the net inflow from over D 50 million in 1965 and D 37 million estimated for 1967 to around D30 million in 1970. This assumes that new loans would be contracted on the same basis as recent borrowing terms. These terms have been comparatively generous for public loans, averaging about 3.5 percent interest and 23 year repayment, including 6 years of grace. Suppliers' credit terms have averaged 6 percent and six years repayment including two years of grace. Tota; debt service on these assumptions would rise to D 31 million by 1970, as compared with D 20 million in 1966 and D 24 million in 1967. However, with the sharp growth of export sales and invisible earnings foreseen in the period, the debt service ratio should remain at, roughly 18 percent in 1970 - the same as in 1966. 11 . Moderate changes in the terms of new public aid in 1967-70 would not significantly affect the debt service burden in that period. Their main impact would be on the period after 1970. The question of awhether it would be appropriate to modify these terms is therefore closely related to Tunis:ia's prcbable needs for net capital inflow in the decade of the 1970's and to its prospects of obtaining gross inflows in that period. The most critical factor in the need for net inflows in the 1970's will be the efficiency cif investment. Ihe Tunisian government can influence this factor to a. significant extent by its own policies, particularly by following monetary and wage policies designed to ensure the competitive- ness of the export sectors which is where the most promising possibilities for expansion lie, and by giving a greater weight to systematic analysis of economic returns in the preparation, selection and implementation of projects than has been the case in the past. However, of equal importance will be the evolution of world market conditions for Tunisia.'s main exports, and the tariff policies of Tunisia.'s main trading partners. Even assuming no further oil strikes, there are good technical possibilities for expanding output of goods and services for export during the 1970's, particularly in tourism, phosphate rock, fertilizers, agricultural products and light manu- factured goods. On optimistic assumptions about market conditions and tariff policies, Tunisia. might be able to achieve a continued growth in GDP and exports at rates nearly as rapid as those foreseen for 1967-70, with a stable or even modera.tely declining rate of investment. This would permit the resource ga.p to turn positive before 1980 a.nd lead to a. substant- ial reduction in the need for capital inflow. On somewhat less optimistic assumptions about external market possibilities, which might force Tunisia to rely to an increasing extent on import substitution, the capital output ratio could well increase in the 1970's above tha.t foreseen for 1967-70, leading to capital requirements considerably larger than assumed a.bove and to the accumulation of a very large external debt, even assuming present borrowing terms. 116. This prospect would argue against any hardening of the average terms of aid for Tunisia at present, unless an even larger increase in gross inflows than suggested above can plausibly be envisaged. It would, of course, be possible to have a combination of harder terms on public  - 44 - loans, together with an increase in public grants, but this does not seem plausible given present trends in foreign aid. Therefore, maintenance of present terms of public borrowing would a.ppear the most prudent course for the next few yea.rs. If in tha.t period the present possibilities for ma.intaining a rapid growth of exports into the 1970's become strong probabilities, considera.tion could well be given to a. gradual hardening of these terns. The Need for Program Lending l'7. In the next few years, Tunisia will continue to need program lending and/or lending for the local cost of projects. Die direct import component of investment in Tunisia is estimated for the recent past at around 30 percent, and this is declining due to import substitution in steel and other construction materials. Imported services in connection with investment (engineering studies and supervisory personnel) might add another 5 percent to the total. Taking a. rough figure of one-third of the investment level projected f'or 1970 would yield a total of D 46 million as the direct foreign exchange component. Most of the suppliers' credits and pa.rt of the priva.te equity investment would presumably be used to finance direct imports. Moreover, some part of the imports for the investment program might not be considered eligible for public loan financing. Thus, probably no more t'han D25 - D30 million would be left for financing by public loans, a.s compared with a projected need for D 43 million of inflow from tha.t source. The indications are that this need would continue well into the 1970's on the ba-sis of the more conservative of the two assumptions about the longer run outlook considered above, since debt service would tend to rise relative to gross ca.pital inflow requirements.  ANNEX I Page 1 ANNEX ON THE MAN SECTORS A. Agriculture 1. The 1967 Economic Budget allocates D 28.9 million for investment in agriculture, a significant increase over the 1965-66 average of D 25.8 million. The present development effort in agriculture gives about equal weight to irrigation and to improvements of rainfed farming with annual expenditures of around D 10 million on each. Another D 6 million has been devoted to the soil conservation and reforestation activities which parti- cipate in the "Luitte contre le sous-developpement,tl the employment creation program financed partly by the PL 480 Title II grants in kind. 2. The program for improvement of rainfed farming is concentrated in the north where the best rainfall conditions exist. This work is being carried out in the context of establishing large cooperative farm units based on modern farms tal;en over from the foreign settlers, but also incor- porating importawt; are-as of traditional farms. Units have already been created on 185,0o0 hecta.res at a total cost of arourd D 20.0 million in the past several ye.rs. A proje2t covering anot.er 160 units on about 160,000 hectares to be carried out in two or tbree yvazs has teren financed for 55% by the IBRD (a $12 million bank loan and a $6 -i-'.:o-- ,hA cladit). The rate of return iz estimated at 11 perceiat on the pioJi.ct. Tctal cost is estimated at D 15.5 mill.J.on, If 1th_.project goes well, it is possible that a second phase could usefully be initiated within three years. Total out- lay might average D 8.0 million annually over the next four years. 3. A program of developing polyculture in the center of Tunisia is also under way, based on a small irrigated area (generally provided by deep wells), and including extensive livestock development, together with planting of olive trees, pasture improvement and soil conservation. Similarly, in the oases of the south, there exists a program for supple- menting the water supply with deep wells and converting the production pattern to more intensive crops. The direct irrigation benefit of the deep well can be rather attractive, since cost per hectare is generally less than for surface water. However, direct returns from the complement- ary investments (tree planting, pasture improvement and soil conservation) appear quite low. On the other hand, without such work, the agricultural areas of the center and south will hardly be able to support the existing population, much less to provide for any increase, since soils are gradually eroding. Therefore, unless sufficient employment opportunities can be created elsewhere at a lower social cost, an average expenditure rate of around D 4.0 or 5.0 million per year might usefully be devoted to these programs in the coming five years or so, including deep wells and soil conservation, 4. There are a number of irrigation projects now under way in the north. The Nebhana project has proved to have very high costs per hec- tare (D 4000). Another D 6 million is required to complete the scheme.  ALaE( I Page 2 Several other projects seem a good deal more promising. The Medjerda project is also an ongoing scheme, with a potential area of 40,000 hec- tares for which the dams have been constructed and 13,000 hectares already irrigated. The return on completing the system should be fairly good - perhaps in the range of 10 percent to 15 percent. Cost for com- pleting irrigation on another 12,000 hectares in the next four years would be around D 15 million. Given the limit of executive capacity, Tunisia should probably have no more than two large projects under way at once. However, the Nebhana project should be almost completed by 1969, at which time work might usefully be started on another larger project, e.g. the Ghardimaou project which would irrigate some 13,000 hectares on the Upper Medjerda. In acddition, a moderate expenditure on smaller irrigation works would probably be justified. 5. Irrigation by deep wells is also developing at a cost per hec- tare generally lower than most surface irrigation. A rough allowance of around D 1.0 million per year might be made for this program. 6. An attractive program in agriculture at present, from the stand- point of economic returns, appears to be a shallow well program. The bulk of the expenditure consists of small irrigation works on 5 - 10 hectares. Average cost is about D 650 per hectare and the increase in value added estimated at 20 percent of this. About 1,200 such small irrigation systems might be carried out in the next four years at a total cost of around D 6.6 million. 1J In addition, subsidized loans to private farmers for around 500 wells per year may be realized, at an average cost of around D 2,000 per well. 7. Finally, there are programs for reforestation and soil conser- vation, which together have averaged around D 5.0 million or D 6 million per year in recent years. These programs have been carried out effective- ly in the past, providing employment and yielding useful returns in many cases. However, if it is possible to increase other agricultural invest- ments significantly in the next four years, as would seem feasible, at least a moderate reduction in this program might prove desirable. 8. On balance, an increase in total investments in agriculture from the recent level of D 25.5 million to around D 37 million by 1970 would seem plausible in terms of the project possibilities and ability of the administration to execute them effectively. However, to ensure ade- quate implementation, some further strengthening of the management and technical work in agriculture will be necessary. Given a moderately / About D 1.5 million of this well program is included in the coopera- tive farm project mentioned earlier.  ANNEX I Page 3 greater use of foreign technicians, and some reorganization of the Ministry, this should prove quite feasible within the period. 9. The growth ra.te of total agricultural output in the period 1965-70 might be expected to accelerate to nearly 3.0 percent annually as compared with an estimated average of 2.0 percent in the preceding five years. The growth rate in cereals should expand as the result of increased yields which are considered attainable in the farming areas of the North, particularly in the region of the cooperative farms. It is estimated tentatively that, given the investment program now envisaged, together with increased fertilizer use, total wheat output might rise within six years by as much as 90,000 tons over the recent (1962-66) average of 570,000. Olive output in 1967 is expected to be very low because of the effect of the 1966 drought, but given normal weather in the next several years, should increase by around 3.0 percent annually over the 1962-66 average. Output of wine grapes is expected to remain stable, although the value of the crop should rise at current prices if exports to France are resumed and maintained. Output of citrus and vegetables could easily rise by around 35 percent in the period. Output of all other agricultural production might very tentatively be estimated to rise by around 2.5 percent annually, mainly as the result of the intensification of livestock production included in the present programs. 10. However, to obtain these increases in gross output, a significant increa.se in inputs would undoubtedly be required. The value of inputs into agricuilture is estimated at around 20 percent of gross production value in the period 1960-64 (later estimates a-re not available). This ratio might well have to rise to 21 percent by 1970, taking account of the substantial increase in tractor fuel, fertilizer, insecticides and transport services that would be required. This would lead to an overall increase in value added of around 2.5 percent annually in the period. The main elements of this projection are summarized below: Values at 1965 Prices Growth Rates (mill. D) for Six-Year 1962-66 Av. 1970 a/ Period Wheat 22.1 26.5 3.0 Barley 4hh 4.8 1.6 Olives 13.5 16.2 3.0 Grapes 4h.7 4.7 - Citrus 3.0 4.2 5.8 Vegetables 8.2 11.2 5.3 All other (gross) 49.1 56.9 2.5 Total 105.0 124.5 2.9 Less: inputs 20.3 26.5 4.5 Value added 84.7 98.0 2.5 a/ Assumed to be an average year, both in respect of weather and the olive cycle.  ANNEX I Page 4 B. Rock Phosphate Mining Industry 11. The Tunisian rock phosphate mining industry consists a.t present of three companies, all controlled by the Tunisian Government: the Compagnie des Phosphates et du Chemin de Fer de Gafsa (Sfax-Gafsa), the Compagnie Nouvelle des Phosphates due Djebel-M'Dilla (Ciphos), and the Societe Tunisienne dtExploitations Phosphatieres (Stephos). 12. Until recently, Tunisia insisted on keeping this industry in the hands of these government-controlled companies. During the past year, however, it has begun to take a more flexible position, and has evidenced its willingness tc allow new foreign investment to enter this field in partnership with Tunisian capital in certain cases. National Bulk Carriers (the Ludwig group) and Occidental Petroleum are now completing studies for new rock phosphate mining projects - each involving the production of 1 million tons per year - and the government has indicated it might be willing to grant Ea mining concession to Industries Chimiques Maghrebines (ICM), should the eventual sponsors of that project so desire. (See Section C of this annex for further information on the Occidental and ICM ventures.) 13. In addition to these new ventures, the existing companies are planning major expansion programs. They have already started work on opening a new mine for the production of .8 million tons of rock phospha.te per year. During 1967, they expect to start work on expanding one of the existing mines to increase output by .5 million tons per year and on expanding the capacity of the railway and port facilities. These projects, on which work is expected to start in 1967, were examined in a, study prepared by the Ralph M. Parsons Company. On the basis of recommendations by Parsons, two other projects covered by its report are being postponed pending the completion of supplementary studies. Further in the future, with the studies expected to be completed by 1968, is a. project for the production of 2 million tons of rock phosphate per year. 1. lWith the completion of the projects already decided, output should increase from 3.5 million tons in 1966 to h.8 million tons in 1970. During this same period, the requirements of the local phosphatic fertili- zer industry should increase from .6 million tons to 1.0 million tons, even leaving aside any new projects. This would leave 3.8 million tons for export by 1970 or an increase of about 1.1 million tons above the 1966 level. Nearly half of this increase will be shipped to Poland under a special agreement, and it should be possible to share the remainder, largely in Tunisia's present primary markets. 15. Average export prices in Tunisia. are presently $10.10 per ton f.o.b. (including a 15 percent export duty in Tunisia). Prices for Tunisia's basic grade during the past ten years have fluctuated between a. minimum of $8.55 per ton and a. maximum of $10.80. Prices by 1970 are expected to fall by 15 percent. However, the average quality of Tunisian rock is expected to improve by 5 percent in this period so that the average unit price for 1970 might be estimated $ 9.00 per ton. C. Phosrhatic Fertilizer Industry 16. Aside from a small plant producing about 50,000 tons per year of simple superphosphate and another small factory producing about 120,OO0  ANMEX I Pa ge 5 tons per year of ground phosphate, the phosphate fertilizer industry at present consists of two companies with a combined capacity of over 400,000 tons per year of triple superphospha.te (TSP). These companies - the Societe Industrielle d'Engrais et d'Acide Phosphorique (SIAPE) and NPK Engra.is SAT - are both located at Sfax, Tunisials main port for the export of rock phospha.te. Local consumption is small, and with the exception of the simple superphosphate, about 15,000 tons per year of triple super- phosphate, and a small amount of ammonium sulphate, the entire output of the industry is exported. Although local consumption is expected to increase substantially during the next five years, Tunisia's chemical fertilizer industry will continue to rely primarily on exports. 17. SIAPE, of which 80 percent of the shares are owned by Sfax-Gafsa, started production of TSP in 1952. During the past few years, it has begun to expancd capacity and diversify production. With the facilities that are expected to be completed by mid-1967, SIAPE should be able to produce over 240,00o tons per year of TSP, 10,000 tons per year of ammonium sulphate, and 20,000 tons per year of orthophosphoric acid (54% P205). 18. NPK Engrais SAT - owned essentially by Forenade Superfosfatfabriker (Sweden), Freeport Internationa.l (U.S.) and IFC - went into Droduction at the end of 1964. With a total investment of $14 million, it has a capacity of about 160,000 tons per year of TSP. It is now beginning to consider possibilities of diversifying its production in the coming years. 19. Export prices for phosphatic fertilizer dropped in 1966 by 6 per- cent and are expected to go down by another 10 percent by 1970. Thus, the expected value of export sales in that year is around D 9.5 million as a.gainst D 6.8 million in 1966. 20. In addition to the plants already in operation, two other ventures are now being discussed. First, Occidental Petroleum is complet- ina its studies for the production ofi 400,ooo tons per year of super- phosphoric acid (300,000 tons per year P205 equivalent). This project would be an integral part of the rock phosphate mining venture discussed earlier. The investments in the superphosphoric acid facilities would be of the order of $18 million. However, Occidental is also studying a, similar type of project in Morocco, and it is difficult to conceive of Occidental's undertaking both at the same time. 21. The Tunisian Governnent has requested the assistance of IFC in seeking an industrial partner for a. new fertilizer project, to be set up at the port of Gabes by a new company, Industries Chimiques Maghrebines. The concept underlying this project - griginally proposed to consist essentially of the manufacture of nitrogenous fertilizers, including di-ammonium phosphate for export and ammonium nitrate for the local market - has evolved substantially during the past few months. The government now appears to be interested primarily in the creation of a new plant to process Tunisian rock phosphate into chemica.l fertilizing materials for export, leaving to the foreign partner the choice of the particular product to be produced. This new attitude provides the flexibility necessary to allow a. potential industrial partner to produce a product he would be able to sell. It would now be possible, for example,  ANNEX I Pa ge 6 for a fertilizer manufa.cturer expecting to require new phosphoric acid facilities to set up a plant in Tunisia to produce phosphoric acid for export to consumer countries, where it would be used in complex fertilizers, manufactured according to the formulas required by local agricultural conditions. D. Other Manufacturing 22. With the completion of the steel mill, investments in manufacturing dropped from D 26 million in 1965 to D 14 million in 1966. It will drop further in 1967 to around D 10 million both as a result of the general austerity program and of the completion of several large textile invest- ments. On the basis of projects now in sight, an expansion to around D 150 million might be envisaged by 1970, including allowance for around D 2.5 million in phospatic fertilizers (as compared with around D 1.0 million in this sector during 1966). 23. The El Fouladh steel mill was constructed in the period 1964-66 at a cost of D 22.4 million. The company is 90 percent owned by the Govern- ment, and has no technical partners, although it is using foreign technic- ians. In 1966, production reached 42,000 tons of good quality finished products, about 60 percent of rated capacity, an impressive record for the first year of operations of a new steel mill. It is expected to rea.ch 60,000 tons in 1967. However, with the cut back in total investment planned for this year, it is now estimated that the domestic market can absorb only 40,000 tons, and arrangements are being made to export the surplus. Prices for the export component would have to be reduced below the present price of D 75 per ton, which itself may be too low to permit the company to meet its financial obligations. Therefore, the El Fouladh may have to raise the domestic price or to receive a temporary subsidy from the Govern- ment. The implementation of these possibilities largely depends on the growth in local requirements and, of course, on El Fouladh's financial position. 24. The mechanical and electrical sector is small, accounting for 4 percent of total value added by manufacturing. The existing hardware plant a.t Sousse is in difficulty because of poor layout and technical difficulties. Poland is going to send a. team of 45 technical assistants for two years to improve the situation. There are three assembly plants of some significant, STIA - for cars and trucks, an International Harvester plant for tractors, and Sutomo for diesel engines. The component of domestic parts is less than 10 percent in all three, and all three are suffering from marketing problems. A small investment is planned for STIA in 1967 to e-xpand its truck assembly capacity. 25. The main new project proposal in this sector is for a ship repair yard which would use the facilities of the former French Naval ba.se at Bizerta. An agreement in principle was signed with a U.S. company in 1966 which would guarantee a turnover of D 1.2 million in business for the first year and D 5.0 million after three years. The scheme would provide about 1,000 jobs and cost around D 6 million. However, final agreement has not yet been reached. There is also a project  Page 7 for a wire drawing plant which might cost around D 1.4 million. A Norwegian company is preparing engineering studies, but the project does not yet have an industrial partner. Finally, the idea of a machining project, which might cost around D 1.0 million, is under study. The just- ification for this project is doubtful. 26. Food and agricultural industries (including tobacco) are still the largest single sector in manufacturing industries. The main items are flour milling, tobacco, wine and olive oil which account for about 70 percent of the sector's present output. Value added for the whole sector increased at an average rate of about 4 percent per year between 1960 and 1966. It is expected to rise at about 7 percent per year between 1966 and 1970, partily because of the expansion of agricultural output described earlier, partly to productivity improvements, and partly due to more processing of agricultural output for export. 27. The main investment project now under way is in tobacco, where a new plant to replace an old one will be completed at a cost of D 1.6 million in 1967. A project for expanded milk processing of 0.4 million is also in the 1967 Economic Budget. Other possibilities for 1968-70 include expanded fish canning and a modernization and expansion of the processing industry for vegetables and fruits. As noted, the latter would have a considerable export potential in Europe if tariff barriers are not excessive. Although no major expansion plans yet exist for this sector, it might be plausible to allow D 2 million or more in the 1968-70 period for investment in this sector on the assumption that a favorable European tariff policy is determined by then. 28. After independence, Tunisia engaged in a major expansion of its textile spinning, weaving and finishing capacities, particularly of cotton. In terms of value added, textile industries now represent the second largest manufacturing sector in Tunisia after food and agricultural industries. Textile industries grew at an average 8.0 percent per year in real terms betueen 1960 and 1966 and are expected to grow at nearly 9.0 percent per year in 1966-70. A government agency, the Office National du Textile (ONT) is responsible for the entire public sector which covers about 80 percent of total output, the private sectors being composed of handicrafts, and a few small firms in cotton weaving and clothing. The public sector comprises three firms which have been re- organized under the leadership of ONT because of shortcomings in their management. ONT has begun to sell off the government-owned clothing factories and hopes to withdraw completely from these activities. It has also expressed its interest in transferring the textile manufacturing companies to the private sector if investors can be found. 29. Investment of the cotton textile company (SOGICOT) totalled D 13 million in the period 1962-66. The company's major investments have now been completed and capital expenditure for 1967 and 1968 are expected to amount to only D 2.8 million. SOGICOT has relied very heav- ily on debt financing; at the end of 1965 only 9 percent of its total assets were covered by equity; despite a capital increase provided by the  ANNEX I Page 8 Governmernt this year, equity is unlikely to exceed 20 percent of total assets in 1967. The major project for the next few years is the Moknine artificial and synthetics weaving mill involving an investment of about D 1.5 mqillion. Preliminary studies are being done for the eventual expansion of the cotton spinning and weaving mills. 30. SOGICOT sales are estimated at D 11,5 million in 1966, of which D 5 million from trade on imported goods and D 6.5 million from manufacturing. The value of sales is expected to increase to D 13.6 million in 1967, of which D 3.7 million for imports and D 4.7 million for manufactured goods. By 1967-1968 SOGICOT should be producing 26 million meters of textiles per year. Though statistics are deficient, total consumption is estimated to be considerably higher. However, in attempting to diversify production to meet the demand of the local market, SOGICOT may find itself troubled by the limited demand for indiv- idual items. 31. SOGIC is a government owned company set up in 1962 to develop and run factories in the ready-to-wear industry. Several units were planned to be installed in different locations. This program was only partly realized (5 plants). The idea was to scatter workshops to provide employment in different areas but this has proved difficult to manage. Some workshops have to be modernized while in one case excess equipment was purchased. On the whole, this company has not been very profitable. It is now envisaged to sell off the various factories belonging to SOGIC ancl to use the funds to pay off the debts of SOGIC. Two of them have already been sold tothe private sector, and a third one may be sold to SOGICOT to manufacture overalls with SOGICOT material. The ONT hopes to sell the remaining factories to STB, SNT, regional trading companies, or private entrepreneurs. Tunisia is also discussing the reconversion of the large factory at Menzel Bourguiba with a number of French firms which would provide technical assistance and export markets. This could have an important export potential in the longer run, if close ties could be developed iwith European management and sales organizations. 32. Output of construction materials was stagnant since between 1964 and 1966 but is expected to rise moderately over the next several years because of expansion in construction activity and some further im- port substitution. Cement output has been stable since 1964 (around 468,ooo tons, worth D 2.7 million) after a period of increase. Tunisia has excellent sources of raw material, which at the present rate of con- sumption could last about one century. The two cement plants, CAT and CPB, work at fuLL capacity but neither is very profitable nor very com- petitive with imports. One of them will replace an obsolete kiln in the course of 1967 in an effort to lower costs. Investment will total about D 2 million of which D 660,000 to 760,000 will be disbursed in 1967. 33. A ceramic sanitary fixture factory costing D 1.6 million is expected to star-t production in March 1967. The project is sponsored by STB, and technical assistance is provided by an Italian firm long established in the business (Pozzi). This project involve the pro- duction of 3,000 tons of vitreous china sanitary fixtures. At the out- set 100 percent of the raw materials requirements will be imported,  Page 9 later perhaps 5 to 20 percent could be purchased locally if quality is satisfactory. STB and the Government would like to transfer this plant to the private sector and bring in additional equity capital. 34. A project for the production of flat glass,relying heavily on exports, was dropped at the end of 1965 as a result of negotiations on Maghrebian coordination in industry. (It was agreed at a sub-committee meeting of the permanent committee for Maghrebian coordination that Algeria was better placed to implement future Maghrebian projects for flat glass industries.) The flat glass project will be replaced by a project for fiber glass and glass ceramics. 35. Tunisiats oil refinery started production in 1964. The company which runs it (STIR) is owned 50 percent by the Tunisian Government and 50 percent by ENI. The throughput capacity of the refinery is 1 million tons; its production and sales are projected to increase at about 9.5 per- cent annually through 1970. The expectations for 1968 match the prospective growth of the Tunisian market for oil products up to 900,000 in 1968 since about 90 percent of the output is sold on the domestic market. The refinery appears to be quite profitable. Virtually the entire financing was pro- vided by suppliers' credits and by the end of 1968, i.e. five years after start up, the credits will have been completely repaid. In the meanwhile STIR has been paying dividends of 12 percent on share capital and would have paid more, had the Government allowed the repatriation of additional dividends. 36. No major investment appears to be planned for 1967. However, STIR is considering two projects of some importance to start in 1968. First expansion of the refinery; the program is an increase in through- put capacity from 1 million tons (current capacity) to 1.5 million tons, at an estimated cost of D 0.6 million. The second project is a D 0.6 million, 20,000 tons asphalt unit. 37. A purely private project is scheduled for 1967, the setting up of a lube oil plant by ESSO. The project was allocated D 260,000 in the 1967 Economic Budget. However, this estimate seems on the high side since it appears improbable that the forecast investment can be complete- ly implemented in 1967.  ANNEX I Page 10 E. Tourism 38. During the past year, the tourist sector in Tunisia has continued to grow at an impressive rate, substantially surpassing earlier expectations. Foreign exchange earnings, which increased by 58 percent per year between 1.961 and 1965, appear to have maintained this momentum and are likely to exceed D 14.4 million in 1966. On this basis, they will have doubled the 1968 goal in Tunisia's Four Year Plan and will already have nearly attained the revised 1968 estimate made by the Comissariat General a.u Tourisme et au Thermalisme (CGTT) in late 1965. Representing 1141 percent of the total, tourism was already the second or third most important foreign exchange earner in 1965. With the further growth of 1966, this sector has apparently now surpassed rock phosphate and olive oil to become the largest single source of foreign exchange earnings. In view of the low import component - about 12 percent of hotel sales and, perhaps, 25 percent of foreign exchange earnings for the sector - the net economic impact of the tourist sector is of major importance. 39. Investments have also continued to exceed expectations. The D 11.8 million. of investments estimated for 1966 a-lone are equivalent to 70 percent of the total investments expected in this sector during the Four Year Plan. Hotel capacity, which had been growing by 25 percent per year during 1961-65, jumped 66 percent in 1966 and, with nearly 16,000 beds in place by the end of the year, wa.s only 1,000 beds from the goal for the end of 1968. Although the government, through the CGTT, the Societe Hoteliere et Touristique de Tunisie, and municipalities, participated to a. large extent in this growth, the major part of these new hotels a-re in the private sector. 4o. Despite the substantial growth in hotel capacity, occupancy ratios have increased slightly because of tourist entries and bed nights increa.sing more rapidly - at more than 37 percent per year during 1961- 1965. The extent to which one can continue increasing capacity at a. rapid ra.te without decrea.sing occupancy ratios, and thus, economic and commercia.l profitability is, perhaps, the major problem that must be faced by the tourist sector in Tunisia during the coming years. This problem is not likely to be of great importance in 1967, since budgetary restrictions have forced a sharp cutback in hotel investments. Ihe 1967 estimates ca.ll for 3,666 new beds in contrast with the 6,356 bed increase in capacity in 1966. For 1968 however, 5,738 new beds are expected, and for the following years the mission has estima.ted that about 5,000 beds per year would be added. The resulting growth in hotel capacity would average about 20 percent per year for 1967-71, or less than half the 1961-66 rate. In view of the 37 percent per year growth in bed-nights over the past few years, this program is a conservative one, a.nd even assuming no increase in Tunisia's annua.l foreign exchange earnings per bed, the country's gross receipts from this sector can be expected to increase from the estimated D 14 million of 1966 to D 35 million by 1970. 41. In view of the economic priority of this sector, its growth should be pushed to the maximum. The past growth of this sector, together  ANNEX I Page 11 with other construction activity in Tunisia., has had significant back- ward linka.ges. With the development of a modern furniture factory, high quality rug procluction, the steel mill, etc., the import component of building and equipping hotels ha.s been reduced substantially, and the expected opening of a ceramic sanitaryware plant and other fa.ctories ca.n be expected to lead to further reductions. Although the import component varies substantially depending on the class of hotel involved, overall estimates of the import component for this sector ha.ve fallen from nearly 40 percent of total investment towards 20 to 30 percent of total investment. Financing for these imports is available from a variety of sources, including the recently reorganized Societe Nationale d'Invest- issement, the US AID's annual program loans, and suppliers' credits from a number of countries. Local funds may be difficult to find, but it should be possible to assure adequate local financing if the necessary rea.l resources can be made available. These resources are, on the whole, the sane a.s used in the construction of housing, public buildings, etc. Since grosso modo a private house costs about the same a.s a. hotel room, the main elements necessary to weigh economic priorities are clear. It is the missiconts opinion that the tourist sector should be expanded as rapidly a.s the market will justify. 42. The government is aware of the problems involved in trying to assess how ra.pidly this sector can be expanded. Although on the whole, it ha.s good statistics to help in these judgments, it might perhaps be possible and undoubtedly would be very helpful if the government could prepare an index of hotel profits that could be published period- ically along with its other statistics. In addition, to maintain the maximum of flexibility in the timing of hotel investments, the government should continue to encoura.ge the priva.te sector and should perhaps limit the further expansion of the governmentally-owned SHTT.