Announcement of Tunisia Bolsters Economic and Financial Sector Reforms on December 16, 1991

tOR IMMUDIAtt REIFASE World Bank J 18 H Street, N.W., Washington, D.C. 20433, US.A. * Telephone: (202) 477.1234 BANK NEWS RELEASE NO. 92/33 Contact: Favzl Rihane (202) 473-2675 T9NISIA BOLSTERS ECNOMT AND FINANGIAL SECTOR REFORMS VASHINGTON, December 16, 1991 -- Tunisia's program of economic and financial sector reforms will benefit from a $250 million World Bank loan. The loan will support Tunisia's efforts to restore the economy quickly to adequate and sustained economic growth on the basis of macroeconomic stability, and to formulate and implement reforms to remove the major remaining obstacles to the efficient operation of market forces. The program includes measures to protect low-income groups from the adverse impact of economic adjustment. Despite modest natural resources, Tunisia has the making of a relatively advanced developing country, largely because of consistent emphasis over a long period on the development of its human resources and prudent macroeconomic policies. The government's program encompasses five main areas of reform. First, imports and prices will be further liberalized. One of the major obstacles to efficient markets is the high level of protection through import restrictions. Producer prices have been mostly freed but distribution margins are mostly controlled. Second, financial markets are mainly limited to the short term, and the reforms will remove the fiscal distortions and Treasury borrowing practices that obstruct the markets in long-term bonds and equity. The loan will also support the strengthening of the regulatory framework of banking and the gradual application of higher prudential standards. The remaining limits on lending rates will be removed. Third, Tunisia has a system of special incentives that is inefficient and costly to the budget. It will be replaced by a unified code that accords a limited set of fiscal and financial advantages for a few clearly defined cases of market failure. The fourth area of the reform program concerns the social front. The social security system in Tunisia is costly to the budget and fails to cover a substantial part of the population, which depends on targeted assistance. The reforms will broaden coverage in a financially viable manner, while providing basic cover to the needy. Tunisia's present system of consumer subsidies has been a costly way of helping the poor since all consumers benefit from it, regardless of their needs. The Government has formulated a program for reducing its cost, while developing a better targeted subsidy system to low-income groups. The fifth area of the program deals with the country's debt management system. Tunisia's unblemished debt service record will enable it to resort, in the coming years, to international financial matkets. The World Bank loan will support the country$- efforts to create the requisite skills and institutional arrangements to manage these more complex debt transactions. Until recently, Tunisia's reform program has put emphasis on removing obstacles to the private sector. The reforms supported by the World Bank loan will eLm at making the private sector more efficient and ensuring that it is supported by a sounder and more market oriented financial system. Increasing external competition will improve the efficiency of existing enterprises, and remove the excessive protection that diverted Investment to economically inefficient activities. Since Tunisia encourages direct foreign investment, the reforms will increase the attractiveness of the economy to foreign capital, especially as a base for exports to Europe. The expected outcome will be a further strengthening of the outward orientation of the economy with the private sector increasing its role and gradually moving to technologically more advanced activities. The World bank loan will be disbursed in three tranches: $100 million soon after the loan becomes effective; $70 million and $80 million after the government has carried out specific actions, including an overall review of the implementation of the macroeconomic and sectoral reform programs. The World Bank loan is for 17 years, including five years' grace, with a variable interest rate, currently 7.73 percent, linked to the cost of the Bank's borrowings. It also carries an annual commitment charge of 0.25 percent on the undisbursed balance. Note: Money figures are expressed in U.S. dollar equivalents.