Report of mission to Tunisia

 CONFIDENTIAL Rep 0 r t No. EA-95 ~-'.- . r~~~~~-Y~N'~(f:-'==~ ! ~ r~H Ii ~ r:' f '1''',''-1 ! n ." C "<' ",,;;. • i~' Ii ....... .' , i • This report is available to those memberJ I ,; I-i.i;.' 11 tI ~ j 4 .-" . ~ ':l .., ~ fJ ~.tr •..I(.J, of the staff to whose work it relates~-"' ....,,""""""'""'-_....-...- INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT OF MISSION TO TUNISIA April 14, 1959 ,J Department of Operations Europe Africa and Australasia I Prepared by: Andrew M. Karnarck Maurice F. Perkins  CURRENCY EQUIVALENTS • Unit: Dinar 1 Dinar - 1,000 former Tunisian francs - 1,176 Fr.ench franc s $ 2.38 1 U.S. $ - 0.420 dinars - 420 former Tunisian francs - 494 French francs  TABLE OF CONTENTS .., Page ~Jo • I. PURPOSE 01? ·· ··· · ..······• }~ISSION 1 II. BACKGROU1TI ··········..······· 1 Geography and People Hi:3tory . . . . . . . ······· 1 ··· 2 Government ······· 2 III. ECONONIC STRUCTURE ···· 4 Agriculture .. ···· 4 Mining ···· Nanufacturing · ··· ,!1 · ··· ···· 6 6 Basic Services ···· ~ · ·· ~ 6 ····· U.. S. .Aid · Importance of the French · ··· ···· 7 7 .······ Internal Finance 8 Debt · 8 External Accounts ······• 9 IV" FEOBT,ENS AND PROSPECTS ···· ····· 11 v. CONCLUSIOI~S AND R.ECOlvl}~NDATIONS ····· 14 ECONOMIC Iv:.t;.P - TUNISIA •  REPORT OF MISSION TO TUNISIA Ie Purpose of i·Iission 1. The Bank Was invited to send an exploratory mission to Tunisia by the Tunisian representatives at New Delhi in September 1958. A mission composed of Iviessrs. Kamarck and Perkins was in Tunisia from February 17 f to March 2. The purpose of the mission was to become acquainted with the Tunisian Government and to secure a preliminary impression of the main problems of the Tunisian economy in order to be able to advise the Bank on vlhat the next step in the Bank's relationship with Tunisia might be. The mission was not expected to make a definite creditworthiness study nor to investigate particular sectors or projects which the B~Dk might ul timately consider financing.. i'l_ significant part of the mission I s work consisted of trying to educate officials on the activities of the Bank, the I.F.C. and EaD.I. in aiding economic development. II. Background GeographY ~ People 2. Tunisia is about the size of England. The Atlas mountains divide the northern one-third of the country which receives 16 inches or more of rain a year from the southern two-thirds \Alhere rainfall is inadequate. In the north, grain, "\.Aline, citrus, garden products, cork and livestock are raised. In the central third, rainfall is ~sually deficient and cereal culture becomes a gamble but olive trees are grown along the coast and wild esparto grass is collected. In the south, cultivation is impossible except in scattered oases '.There dates are the principal crop. 3. Total population, growing at about 2% per year, is just under four million and includes about 140,000 Europeans. The French population, about 180,000 three years ago, is dm'ln to 80,000. The Ita.lian population has dropped by about 5,000 to 60,000. The European population is largely urban and provides the bulk of the managers, technicians and skilled workers, al- though there is an increasingly imp~ ,nt Tunisian element among them. There are also some 4, 000 French colon famllles. About 607~ of the Tunisian popula- tion live on their own farms. The remainder constitute the urban labor force, the workers on large estates, and the nomads of the South. 4. Tunisia is an amalgam of l..Jestern Europe and the Eiddle East \.Jith a strong infusion of Black Africa. The Tunisian people are lv.loslem vTi th the exception of about 50,000 Jews whose settlement dates back to the early Roman Empire. There has been no active hostility between the Moslems and Jews. While the original inhabitants in historical times of Tunisia were Berbers, after the successive invasions and occupations the people are as , mixed as their neighbors, the Sicilians. The people are Arabic-speaking .... with a widespread knowledge of French. Their leaders were educated in France and are strongly influenced by French culture.  - 2 - History 5. In ancient times, Tunisia was an important granary and source of olive oil for the Romans. f-fter the decline of Rome, successive invasions of Vandals, Byzantines, Arabs, Normans, Turks resulted in economic regres- sion, and nomads took over most of the country. 6. French influence in Tunisia began in the 1830 I S after the conquest of Algeria. In 1881, the country became a French protectorate under the nominal sovereignty of the Bey of Tunis as a result of trouble on the Algerian border, difficulties in Tunisian debt service, and the threat of Italian interventionft 7. Large French wheat farms were established in the North prior to World Har I and medium-sized farms, some owned by Tunisians, after World War I. 1:Jine production by French and Italians began in the north-east. Olive oil, largely produced by Tunisians, also became an important crop. Cereals, wine and oil were produced for export to France. Phosphate rock, ;iron ore and lead mining also began before ltlorld ltlar I. 8. .A~ter vJorld ~Jar II, the French poured large sums of government money into TuniSia (in part derived from Marshall Plan counterpart). The first 1948-52 plan was devoted to rehabilitation and expansion of infrastructure and Tunisia Was endowed with railways, ports and roads that, even nm.J, aI'ci more than adequate for her needs. The second plan, 1953-57, was designed to round out the projects undertaken under the first plan and to help in- crense commodity production - two large cement mills were built and the major works for irrigation of the most important agricultural area, the Medjerdah Valley, were completed. Altogether, French public funds invested in Tunisia since World v!ar II must be close to ~'300 million equivalent. 9. Independence came in Iv1arch 1956 when the French gave up their resi- dent control of the Beylical Goverl1..ment. Hm.lever, in addi tiol1 to the French making reservations to this, such as keeping control of the police for 20 years, the Tunisians found that there were large segments of governmental activities that had been and continued to be run by the FTench from outside Tunisia; for eX~Dle, the air line, the post office, telephone and telegraph system!, the centr:.~l bank, foreign exchange control, the marketing of some agricultural commodities. The result has been that the Tunisians have had to gain their de facto independence on the artichoke principle Illeaf by leaf". President Bourguiba has taken advantage of each Algerian crisis to secure another leaf. By now the 'runisians have taken over all of the governmental activities mentioned above but the French still control the naval base of Biz8rta, some of the secondary schools and subsidize almost a thousand French officials still in the administration. 10. Carried a'''ay by the political aspects of the process of taking over, the Tunisians recently have over-done ito The Tunisian franc waS maintained at a parity with the French franc. When the French devalued at the end of December 1958, the Tunisians, because they were not consulted and to emphasize  - 3 - their independence, refused to follow suit so that their new currency unit, the dinar, (l,COO old Tunisian francs) nOvI equals 1,176 French francs. This nas not hurt the French economy but is having an adverse impact on the Tuni- sian economy. 11. Since independence, Tunisia has been governed by a prOVisional govern.Tfient; a constitution is to be finished this April. The Government appears to be stable and well entrenched. However, most of the cabinet members and top civil servants are young and inexperienced, particularly in economic matters, but hard-working and intelligent. They need help and support but are Duspicious of the French at this time and not quite mature enough to realize hm.J much help they really need. 12. The President, Habib Bourguiba, is the main authority in the govern- ment, being at the same time IIFather of his Country'!, head of the Neo-Destour revolutionary party, and the popular leader reaching the mass of the popula- tion directly through his weekly radio broadcasts. His prestige and the good organization of the Neo-Destour party throughout the country make it possible for him t.o rely more on negotiations than Nationalist leaders in some other countries are able to. Bourguiba has no open opposition in Tunisia but there is re~orted to be some under-cover support for Salah ben-Youssef, an extreme Nationalist, who, under sentence of death in TuniSia, broadcasts regularly from Cairo. This, plus the natural syrr~athies of the TuniSians, makes it necessary for the 'runisian Government to be sympathetic and helpful to the Algerian rebels and, as a res~lt, periodically brings it into conflict with France. Hhat might have been the conservative opposition is for the time being silent sin'Je it is still tainted as having collaborated with the French .. There is 2.1so a legal Communist Party but it is reported to be very weak. 13. Th9 Algerian rebels have a large number of armed men in TuniSia; until recewtly they were superior in strengtb to the Tunisian Government1s forces. New, with arms being provided by' the U.8., the Tunisian army is believed to be stronger and wi.ll become even more so. 14. TUIlisia is no longer a member of the Arab :teague. The syrnpat:ties of the Neo-Destour leaders run rather v;est towards Algeria and Noroeco, with whom they have organized a potential Eaghreb federation, and north tC\"Hards France and Hestern Europe. Even during the bitterest part of the struggle for independence the Neo-Destour emphasized the need for an inde- pendent Tunisia to remain linked with France. Bourguiba has prided himself on -Tunisia I s being a bastion of the 1,tJest. The continuance of the Plgerian ~ar has begun to erode this feeling, however, and Bourguiba has recently announced that he will allow Conununist-supplied arms for the Algerian rebels to enter Tunisia . •  III. Econcmic structure 15. In per capita output Tunisia ranks somewhat below the poorest coun- tries of southern Europe. Per capita income in Tunisia averages around *,130-140 equivalent (excluding the receipt of French government salaries and pensions). Probably over the last 30 years as a whole, total real output has increased only about as fast as population, i.e. about 2% per year. Af1riculture 16. Agriculture, including pastoral activities, is still the most impor- tant economic activity. It supports 60% of the population, produces about one-third of the gross national product and provides almost 60% of total exports. 17. The principal determinant in Tunisian agriculture is the shortage of water. Even in the north, rainfall is hardly sufficient, and its timing is erratic. Hence, Tunisia's main crops (wheat, barley, olives and grapes) are those which require a minimum of water and are tolerant to drought. A large portion of the land devoted to wheat and barley is fallowed to get the mois- ture of two years to produce one crop. 18. Two million out of the three million hectares of arable land are de- voted to cereals (wheat and barley) and cereals make up about a half of total agricultural production. Of the remaining million hectares, olive trees occupy 800,000 hectares, vegetables 100,000; fruit trees (mostly citrus) 60,000; and vineyards 40,000 hectares. 19~ About 40% of the cereal crops are produced in the north on modern (laI'gely French-ovIned) mechanized farms of fairly s::tbstantial size on some 300,000 hectares of the best land in TuniSia. These farms produce 80% of the soft wheat which is consumed within Tunisia. Tunisian small farms pro- dllce two-thirds of the hard (durum or macaroni type) wheat, a part of which is exported, and almost 90% of the barley. 20. The olive and citrus farms are to a considerable extent in Tunisian hands whereas the vineyards are European owned (the large farms being French and the small farms Italian). 22.. The arable land nOvI under cultivation is under-utilized even consid- ering the lack of rainfall. This is due to monoculture in cereals, erosion, inadequate use of fertilizers and green manure crops, and a general lack of technical agricultural skills, especially by the small Tunisian farmer. 22. vJater is available for irriga.tion of about 250,000 hectares for all- round sum~er and winter cultivation. About 150,000 is currently under ... ; irrigation and 50,000 more is to be developed in the Medjerda Valley • Consequently, only about 50,000 hectares elsewhere can be brought under full irrigation. These are generally small areas, the two largest 4,000 .... hectares each •  - 5- 23. The ~edjerda Valley project is largely completed as far as major works are concerned, and 18,000 hectares have also been completely equiped for irrigation. Only 5,000 hectares are actually being irrigated. The delays in completing the project and utilizing it are due to lack of • trained personnel and the disinclination of the French farmers in the area to invest further in view of their uncertain future. However, the water has been found to be salty and there is need to discover how to counteract this to avoid the danger of ruining the soil; so the delay may prove to have been advantageous after all. 24. Land under pasture, 3.6 million hectares or one-third of the area of Tunisia, supports 3 million sheep and 1 million goats, and is mostly Tunisian-controlled. It affords only a poor living and does not even succeed in providing all the meat needed for Tunisian consumption. There appears to be much leeway for improvement of pastures although not all technical problems have been solved on how to do this outside of the North. The rest of TuniSia, or 2.6 million hectares, is unproductive. 25. In the North and the central coastal region, land is held under pri- vate ownership; in the rest of the country it is still mostly in tribal and collective ownerstip. Further change towards private ownership may be neces- saxy to improve productivity_ 26. Over-cutting and grazing by sheep and goats have largely denuded the forest area and caused erosion. The government in cooperation with I.C.A. has a broad program of reforestation now under way covering a million hec- tares. 27. The marketing and price of cereals have been dependent on the French government's cereal marketing agency which has held the French and Tunisian price for cereals above world market prices. The impact of these higher prices falls in part on the Tunisian consumer and in part on the French. In soft \<lheat, Tunisia is an exporter in good years and an importer in bad. In 1957, she about took care of her m'ln needs; in 1958, she was a substan- tial exporter. In hard wheat, Tunisia is a net exporter to France; in 1957, 67,000 tons. This was sold at 60% (15,000 francs per ton) above the world market, thus costing the French consumer approximately 1 billion francs or (;3 million eqUivalent (at the 350 francs per dollar rate) extra on the Tunisian wheat alone. 28. In barley, Tunisia is usually a net importer from Morocco. In 1957 she imported 15,000 tons and paid 9,000 francs per ton or 55% above the world market price for it; thus giving the Moroccan producer 135 million francs or $0.4 million equivalent more than world market prices. 29. The French wine market with government price supports has periodically to cope with large surpluses and a tariff of 30-40% is imposed on all except • the North African wines. In 195610 Tunisia sold 2.7 billion francs worth of wine to France; in 1957~ 7.5 billion francs; and in 1958, 17 billion francs (t,4l million equivalent). Wines of Tunisian quality have no established export market outside of France. Practically all of Tunisian citrus fruit exports (worth 1.5 billion francs or ~4.7 million eqUivalent in 1957) go to  - 6 - France customs free while other countries have had to pay duties (35% for oranges during the season, for example). 30. Of the important agricultural exports only oJ.ive oil and esparto grass, which are normally about one-third of total agricultu~al exports, stand on their own feet in world markets. Nining 31. Mining is an important export activity. Phosphates, iron ore, lead and zinc made up over a third of total exports in 1958, over half of all the railway tonnage and three-fourths of the port tonnage. The whole in- dustry is owned by French companies. The two million tons of phosphate produced is sold through a French cartel which also handles Algerian and Moroccan phosphate. As the Tunisian phosphate is less rich than the Moroccan there is some question whether it would be able to compete in a free market. Tunisia also produces super-phosphate and this is said to be competitive. 32. The iron ore, about 1 million tons a year, is sold mostly outside of France. The lead and zinc are sold in France and benefit from French protection. Iv!anufacturing 33. Nanufacturing is still in its initial stages in Tunisia. The most important activities are the manufacture of cement, processing of agricul- tural products, and production of consumer goods. In the last few years a number of small plants have been set up with government encouragement and sometimes government help in finance. These include several textile Heaving plants which are to come into production soon, and plants making shoes, auto batteries, margarine, sugar-cubes and furniture. There al- ready exists a small but energetic Tunisian entrepreneurial class and a rich seed-bed of potential entrepreneurs in the large artisan group. In the artisan sections of the large cities, master artisans are acquiring power machines and setting up serial production, so that shops are begin- ning to develop into small factories. Basic Services 34. French postwar large-scale investment in the basic services of the country - railways, roads, ports, electric power - has made them adequate or even in excess of needs for several years to come. While there are minor investments here and there that might need to be made to round off some of the French investment, there does not seem to be economic justifi- cation for any significant investment in infrastructure for several years. The American I.C.A. mission is finding it increasingly difficult to find any projects to finance in this field even with a very generous interpretation of economic criteria.  - 7 - Irrportp.nce of the French 35. Despite a large repatriation of French people and capital, France and the French are still very important in the Tunisian economy. In 1958, over 60% of exports went to France under the shelter of French protective tariffs and over 70% of imports came from France. All financing of foreign trade is handled through France. 1tJhile most of the basic services have now been taken over f'rom the French government, a French company still 01tlnS one of the two rail\.Jay systems, and the air line is partly owned by Air France. Some four-fifths of the banking services are provided by French banks. 36. Practically all the minerals are produced in French-m.Jned mines. The new oil pipeline being built from the Sahara through Tunisia and the company drilling for oil in Tunisia are both majority-owned by a French government agency. In manufacturing, the large cement mills which were set up to supply a large part of ft~geria's as well as Tunisia's needs are French-owned. Firms manufacturing for the home market are, however, largely Tunisian-owned. 37. French technicians are still the indispensable cadre for most organi- zations that require appreciable technical knowledge. 1·;hile Tunisians are taking over with some success in many parts of the economy, it will be many years before the process is comp18te. 38. Prior to 1957, the French government financed all public investment by Erant or loan. Since then, further aid has been suspended as a result of the J:Igerian w&r. But French government expenditures in Tunisia for support of the French forces in Bizerte, for education and other technical aSSistance, pensions, etc., still amounted to around 30 million dinars (~71 million equi"valent) in 1958, i.e. half the size of total Tunisian exports and of total Tunisian gov9rp~ent expenditures. What proportion of this money is renitted to France by the recipient is not known. The remainder help9d to fi.nance Tunisia I s paYTnents deficit with France and in t.he last three years, has made possible the stream of repatriation of French capital. In some cases, the Fre~ch goverp~ent's expenditures are directly related to the repatriation as when it paid 6 billion francs to purchase some French- owned farms which were turned over to the Tunisian government. U.S. Aid 39. As the French government suspe~ded its economic aid, the U.S. govern- ment stepped into the breech, as follows: fiscal year 1956-57, t16 million; 1957-58, ~23 million; 1958-59, ~33 million. Continuation of the program at around the present level is expected to be supported by the UoS. administra- tion • .About half of the U.S. aid is used to finance a wide gamut of invest- ment projects: drilling wells, school buildings, roads, drainage, irrigation, railway rolling stock, loans to industries. A large program, mostly financed by the distribution of U.S. surplus wheat, is used to employ agricultural workers in the off-season t.o terrace the land and plant trees. This may employ as many as 200,000 workers over the year (i.e. about one-sixth of the total labor force) and is already making a great impression on the • Tunisian countryside. Altogether at least half of public investment in Tunisia is financed by U.S. aid. The U.S. mission expects this proportion  - 8 - may become nearer 100% as the Tunisian army is built up. The remainder of the U.S e aid finances technical assistance in many forms, child feeding programs, relief of Algerian refugees, etc. Internal Finance .. 40. The internal financial structure is still in process of separation from that of the French. A Tunisian central bank, the Bnnque Centrale de Tunisie, began operations only last Novembero A Tunisian cow~ercial bacl(, the Societe Tunisienne de Banque (STB), which took over the commercial bank- ing business of the old French-owned central bank, Banque dtAlgerie et de Tunisie, holds about one-fifth of total deposits. Just over 50% of its shares are held by the government and the remainder by private Tunisians. The S. T .B. also administers a $:3 million I. C.A. counterpart fund in making development-bank ty?e loans. The rest of the commercial banks are French. A Tunisian savings bank has been set up but has not yet taken over all the Tunisian s&vings deposits or assets from the French savings bank. A com- pletely new Tunisian rural credit system is supposed to be set up in the next month or tHO. There is no local stock market. The government has announced that it is going to establish an investment company through which private savings will be mobilized to invest in industrial shares. There appears to be a difference of opinion as to whether this company or the S.T.B. is ultimately to function as a development bank. 41. The TuniSian government1s current budget is balanced at around 60 million dinars (~.140 million equivalent). As mentioned above, hO\-Jever, the French government's expenditures in Tunisia in addition are about half this amount and include some items such as expenditures on pensions, educa- tion and agricultural subsidies which else'.Jhere would be regarded as :'he responsibility of the government on the spot. Some of the U.S. government aid also helps finance what might otherwise, in part or whole, have been current expenditures of the Tunisian government. 42. Since independence there has been no development plan. The "Direction of the Plan l1 , charged with preparing and coordinating development plans, has been working on economic development models and preparing some useful basic economic data. The Ministries are now supposed to be preparing concrete projects and programs, including an agricultural "Program for the Develop- ment of the Center and South ll , to be ready for coordination and decision some tine in the autumn. Essentially any current coordination of public investment is a by-product of the I.C.A. mission's decisions as to what it can find to financeo Of the total expenditure on public investment this fiscal year of about 10 million dinars ($24 million equivalent) the I.C.A. mission finances half and the remainder mostly comes from a diversion of the debt service payments due to the French. This latter is further dis- cussed below. L~3. At the end of 1958, the debt of the Tunisian government payable in foreign exchange amounted to 98 billion francs (~l·200 million equivalent) and was all to French governmental agencies. Eight percent of the govern- ment's current expenditures, or an amount of 5 rr.illion dinars (~12 million  - 9 - equivalent), is allotted for service on this debt. (In 1958, the service waS equivalent to 7i% of Tunisi~'s export earnings.) The service has not been paid since the suspension 01' French aid in 1957 and has been used instead to help finance Tunisia's public i~vestment. It is thi~ amolli~t that the I.C.A. mission expects will be absorbed by the expenditures on the new army • .. 44. While the French government has taken no official position on the Tunisian debt, French officials confidentially informed us that they expected that at some point this debt would be re-negotiated and that it would be prolonged or cancelled in whole or in part as economic aid to Tunisia. 45. There are also some direct loans from FreL~h governffient agencies to French-owned companies operating in Tunisia that '-lere guaranteed by the Tunisian state. We heard of no instance where this guarantee had been invoked and it is impossible to forecast to what extent the French govern- ment would regard the Tunisian guarantee as a real commitment. 46. Of the remainder of the public debt, 10.7 million dinars (Z:25t mil- lion equivalent), consists of public issues denominated in Tunisian currency and being serviced. The bulk of this is short-term and is held in Tunisia. There are four small long-term bond issues held by the public (totaling ~li' million equivalent) and unquestionably a large part of these are held in France. There are also two U.S. government I.C.A. loans totaling t3.5 mil- lion, incurred in 1957 and 1958 which are payable in Tunisian currency or U.S. dollars at Tunisia's option. (The Development Loan Fund has approved two loans to the government totaling ~~:5. 5 million repayable in local currency.) External A~counts 47. Tunisia T s major exports in 1958 are estj.mated as follows: Destination Commodity France Other Countries '.rotal World (In millions of dollars equivalent) Wine 41 41 Olive oil 9 11 20 Wheat 14 14 Citrus fruit 5 5 Espa.rto grass 1 1 Phosphate rock 10 14 24 Iron ore 1 9 10 Lead and zinc 6 1 7 .. Super phosphate 4 3 7 Other --2 19 24- Total 95 58 153  - 10 - 48. Imports in 1958 are estimated as follows: Source Commoditv France Other Countries World (In millions of dollars equivalent) • Food 11 15 26 Consumer manufactures 41 10 51 Fuel 11 3 14 Other raw materials 29 10 39 Agricultural equipment 1 1 2 Other equipment _17 ...2 22 Total 110 44 154 49. In the last few years Tunisia has had good luck in her agricultural exports - good crops of wine in Tunisia ha.ve coincided with bad crops in France and the olive and wheat crops have also been very good. As a result, from 1956 to 1958 the value of exports in~eased from ~87 million equivalent to $:153 million equivalent while imports remained fairly constant around $156 million equivalent. 50. Prior to independence, Tunisia ran a current account surplus averaging around ~~10 million a year with the \.Jorld outside of the franc zone. Since then (except for very good crop years as in 1958), she has tended to run a deficit - as ,",ould be expected as a consequence of the inflow of U.S. aid. With the franc zone, Tunisia used to run a large current account deficit representing the large inflow of French government capital. Now, her ac- counts about balance out with large private transfers to France balanced by French governmental current expenditures in Tunisia. 51. Tunisia is a member of the franc zone: all her foreign exchange transactions are handled through Paris and her foreign exchange reserves are held in French francs. At the end of 1958 (near the seasonal low) franc holdings were 13 billion francs (t27 million equivalent); in the middle of 1J1arch they were 23 billion francs (~48 million equivalent) • •  - 11 - IV. Problems and Prospects 52. The one consistent theme in almost every phase of the Tunisian economy is the continued importance of the French and France. Unfor- tunately, it is impossible to make a reasonably secure forecast as to what this relationship will be. As the Algerian war goes on, more and more parts of the relationship are disrupted, destroyed or threatened with destruction. Every attempt to negotiate a new basis of cooperation is interrupted by a new incident and claims and counter-claims grow. longer and longer. In the last three months the French devaluation, the discovery of a French espionage network in the telephone system, and another French aerial attack on Tunisian territory have been only the latest of a series of incidents that have damaged cooperation between Tunisia and France. 53. The Tunisian refusal, so far, to follctv the French devaluation is hurting the market for Tunisian products in France and is no help in selling to other countries. It has necessitated the insertion of Tunisian exchange control on transactions with France to try to prevent the movement of capital to France. This has contributed materially to the feeling of insecurity felt by the French still remaining in Tunisia. 54. As one of its measures of reprisal against France, Tunisia has also denounced her customs union with France. She has announced that she does not want to be associated with the European common market through her rela- tionship with France as provided in the treaty but vlants to negotiate a separate direct relationship with the common market.- > As a working basis the customs union continues from day to day. But producers and traders live with no sense of assurance as to the future and this inhibits trade, investment ';.nd growth. 55. The lack of a firm basis of working with the franc area and the periodic political crises have resulted in stopping expansion of most French-owned enterprises in Tunisia. In addition, the repatriation of French capital is causing a run-down in physical assets in Tunisia. The repatriation of French technicians and entrepreneurs is already affecting the efficient operation of some of the economy_ (Because of the Algerian war, the connection of the Tunisian power grid to that of eastern Algeria has been broken thus eliminating the possibility of interchange of power; the cement mills have to find markets as far afield as Madagascar to replace the market of Algeria.) 56. Should Tunisia lose France as a market, she would have serious adjust- ments to make in agriculture and in most of her mineral output. The French zone is a highly protected area with high agricultural prices as compared with world markets. Entry into world markets, therefore, could only be accomplished with considerably lower prices. In wheat ~~d wine, further difficulties would be likely. The international wheat market is in surplus. For Wine, no large established market for wines of Tunisian quality exists outside France.  - 12 - 57. There are a whole series of other unanswered Franco-Tunisian questions of lesser iffiportance that also affect the economy: what is the Tunisi~~ debt to France tha.t must be serviced; are Tunisiafs French franc holdings to suffer exchange loss from the last devaluation; will Paris convert Tunisia's foreign exchange earnings freely; what is the tax status of French forces in Tunisia; when and how are the French farmers in Tunisia to be dispossessed, etc. 58. On the part of the French government, the mission found that there is still a willingness to try to help the Tunisian economy. For example, the Tunisian government has announced that the land held by the French settlers is to be redistributed to Tunisian farmers. The French government officials informed the mission confidentially that they recognized that this WaS a political necessity for the Tunisian government and that the French govern- ment would have to aid in paying compensation (estimated at around ~160 million equivalent). 59. If the Algerian war ended tomorrow the position vlOuld still remain good enough that reasonably adequate cooperation with the French could prob- ably be worked out. If the war should drag on, this will become less and less likely; the disruption in relations vIi th France \vill become ,"vider and deeper and normal economic growth will become more and more difficult. 60. Aside from the political aspect, the problem of economic development in Tunisia is not dissimilar to that in Southern Italy. The problem is one of lifting the general level of skill and competence among the population - including in this the skill of the entrepreneur - to learn how to make the most of a rather poor natural environment and hm\T to take advantage of the existing infrastructure. This is inevitably a slow process at first. 61. In agriculture, improved techniques could increase productivity generally. This would require additional capital investment but the major gain would come from research into improved methods, the development of a strong extension system and an improvement in education in r1..U'al area.s. Improvement and expansion of government services are required. 62~ Apart from improvements in technique, the main problem in increasing output is the development of water resources, since crops other than those now produced require more viater. Hm,rever, the area that could be irrigated is relatively small, outside of the ~edjerdah Valley, and some answer to the salt problem must still be found. If this answer is found, the Medjerdah Valley could become a tremendous asset. 63~ In minerals, while Tunisia is not especially well-endowed, there are still a fe','T known deposits of iron ore, and possibly phosphate rock vlhich could be considered for exploitation. A search for oil in the Center and South has been initiated by three companies; two are owned by American independent oil companies and one is o\.Jned as to two-thirds by the French govern..rner.!t 1 s Bureau I,anier and the rest b;}T the Tunisian government. This last co:r.P~1.i~:f he.s alrea.dy begun to drill wells. Tunisia has advanced a cl9.im that she should have a share of the Sahara in vlhich oil has been fotJ.nd, or that the Sahara be exploited in common. A settlement of the t  - 13 - Algerian war might result in her being cut in on the benefits from the Sahara oil. Agreeruent has been reached and "..Jork has been started on an oil pipeline - majority-owned by the ~£ench government - to carry the Sahara oil north to a Tunisian port. This pipeline, if fully utilized at its annual capacity of 14 million tons, will provide a revenue of several million dollars equivalent a year to the Tunisian government and provide a possible opportunity in the future for siting a refinery or oil-using industries. Aid in financing a natural gas pipeline from the Algerian gas field to Tunis is under preliminary consideration by the I.C.A. mission. With Tunisia already possessing a good supply of salt, the availability of oil and natural gas would provide a good basis for a chemical industry. 64. There is scope for the creation of industries producing consumer goods to replace imports and industries transforming some raw material exports to the semi-finished stage. A start has been made in creating these with vary- ing degrees of government and I.C.A. help. A much greater field would be opened up for industry if Tunisia could count on remainin.g within the protec- tion of the French or European Common Karkets. The Tunisian environment impressed the mission as being quite favorable for the growth of industry. There appears to be considerable entrepreneurial talent that could be devel- oped; Tunisian labor is hard-working, easily trained and cooperative with Tunisian enterprise; and the government eagerly grants all sorts of privi- leges to help new TuniSian industry. 65. Tunisia also possesses considerable attraction as a totITist center for its climate, historical remains and colorful present. But this is dependent on a major invest~ent in hotels and other facilities. At the moment, these are deteriorating as a result of the withdrawal of the French. 66. The rate of exploitation of most of the foregoing possibilities for some years to come will depend on the extent to which foreign capital, entre- preneurs and technicians are willing to enter and remain in Tunisia. The official policy is to encourage this. But, as long as the French are on their way out, it is not likely that any appreciable new foreign private investment \-Jill be forthcoming. 67. Like Southern Italy, an important reason for the government to encourage economic deyelopment is the rate of growth of population - a rate whit...h is likely to increase rather than decrease - and the existence already of a large maSs of under-employed. The political necessity at least to appear to be making some progress is also a growing problem. So far the government has had considerable luck with exceptionally favor- able crops as mentioned above and with being able to show political successes in taking over from the French. One can scarcrly expect a run of good crops indefinitely_  - 14 - v. Conclusions and Recommendations p8. It is impossible to reach any firm conclusions as to Tunisia's pros- pects in the present state of uncertainty as to her future relationships with the French. If the Algerian war continues, and President Bourguiba is now openly pessimistic as to the possibility of any early end, Frenco- Tunisian relations will continue to worsen and at some point the damage done may be irreparable. 69. On the assumptions (1) that the burden of service on the debt owing to France will be sharply reduced, and (2) that the U.S. will provide the bulk of the necessary support to the economy pending agreement with France or will help finance the ~~jor adjustments in the economy that would be necessary if no satisfactory firm relationship with France is achieved, then, one might conceive that a creditworthiness study might conclude that Tunisia could bear some Bank debt beyond a token amount. 70. However, it is difficult to see where Bank funds could be useful at the present time. The economic infrastructure of Tunisia reqLures no new substantial investment; in agriculture, at this time the most pressing need is for research and improvement of methods; in industry, the I.C.A. money made available for lending to Tunisian entrepreneurs through the Societe Tunisienne de Banque is sufficient to meet the demand now. The main develop- ment need of Tunisia is not securing adQitional investment funds but improv- ing her general level of competence and technical skill so as to be able to take advantage of t~e fixed capital already in place. This requires current expenditure on schools, training and gUiding farmers, research, etc. and the encouragement of direct investment from abroad which 'viII bring with it the necessary technical and entrepreneurial skills. (The I.F.C. could playa useful role if Tunisia were a member, and the mission attempted to do some education on this score.) 71. In brief, the irr~ediate need of Tunisia is not for loans, but techni- cal assistance - some small part of which the Bank might be able to provide. 72. Some interest was shown in the E.D.I. and the trainee program of the Bank. However, only one concrete request waS made to the mission: the President of the Societe Tunisienne de Banque which administers the medium- term development loans made out of I.C.A. counterpart, made a direct request that the Bank consider giving the S.T.B. technical assistance in setting up properly the S.T.B.ls development bank activities. He made it clear that the S.T.B. does not need any money now but only wants this help. 73. It is not certain that the S.T.B. is necessarily the appropriate place for a development bank. Therefore, for us to be most helpful in this regard it would be necessary for the govermnent to agree to our having terms of ref- erence broad enough to include advice on whether, where and how a Tunisian development bank should be organized. As mentioned in the preceding section, there appears to be a favorable environment for the development of some in- dustry so that tnis might turn out to be a promising field in which the Bank might be able to help. Consequently, if the government were willing to make such a request the mission believes that this would be a good way to begin our working relationship with Tunisia.  - 15 - R~coltmendatibn 74. The missi.on accordingly recommends that: The Tunisian government be informed that the Bank believes that aid . by the Bank in the field of development bank technical assistance would be an appropriate way in which to begin Bank-Tunisian cooperation and that the Bank would be willing, if requested, to try to work out an arrangement for this purpose.  Mediterranean Sea .. II!IWADI KEBIR Gulf of Hammamef ALGERIA FAX ~<) <:'""-.V";E RKEN N A H ........" ISLANDS Gabec; CHorT CJEH!{) {Sail lake} ..... \ 'tIt ") l. 'tJo.c::ol '.'!'l< t· d \"-.'""-\ ", "\ .I, \ ~f 1 " I \ I I "j 1 ","/ I ./ 1 <''''7" ECONOMIC MAP I f ,... <"~J'} 1 " OF TUNISIA 'CD o I .1 Co -----Roads 'Z "/" .,.".. IBYA - 10 I I I I I I I I I I I I I Railways "l> / I t ":xl -<.. Dams II o Dam in prospect I \ • Mineral deposits 'Z 10 /1 \ 1 s Salt deposits ~ I Main mining areas "'T\ I \ 'Z I c::~?;' Dry lakes and salt flats """ ~ j I ~-=:]::~~ Drained area /1 /" Irrigated areas I' /" o I 20 I 40 I 60 I eo I 100 Miles I ~-..j-- Approximate route of oil pipeline under con- ;l Fort ,0,1" struction i/ V·,···, Soint ."..-. MARCH 1959 IBRD-564R  Mediterranean Sea ALGERIA \ ') ..... :.( (. -..~ \ \ \ \ ECONOMIC MAP Of TUNISIA ----Roads - - - Railways _ Dams o Dam In prospect Mineral deposits t CJ 1 Salt deposits o .::::~> Main mining areas Dry lakes and s:l!.t fiats '" ,:$.~¥i.-;- Drained area t. ," irrigated areas Approximate route or all pipeline under con- struction MARCH 1959 IBflO-564R .'