Tunisia - Sixth Societe Nationale d'Investissement Project

CIRCULAITNG COPY TO BE RETURNED TO REPORTS DE.SK FILE oF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT Not For Public Use Report No. P-1736-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED SIXTH LOAN TO THE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA December 22, 1975 This report was prepared for official use only by the Bank Group. It ma) not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  CURRENCY EQUIVALENTS (as of September 30, 1975) Currency Unit Tunisian Dinar (D) The exchange rate of the Tunisian Dinar is floating. The rate used in the appraisal report, which approximates the current rate, is: US $ 1 - D 0.427 D 1 - US $ 2.34 D 1,000 - US $ 2,335.90 D 1,000,000 - US $ 2,335,900.00 Abbreviations BDET Banque de Developpement Economique de Tunisie COFITOUR Compagnie Financiere et Touristique API Agence de Promotion des Investissements AFI Agence Fonciere Industrielle FOPRODI Fonds pour la Promotion et la Decentralisation Industrielle ONT Office National du Tourisme  INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPtORT AND RECOMMENDATION OF THE PREsIDENT TO THE VXECUTIVE DIRECTORS ONl A PROPOSED SIXTH LOAN TO THE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF TIE REPUBLIC OF TUNISIA 1. I submit the following report and recommendation on a proposed loan to Banque de Deve3oppement Economique de Tunisie to be guaranteed by the Republic of Tunisia, for the equivalent of US$20.0 million to help finance lending for industry. Amortization would conform substantially to the aggre- gate of the amortization sChedules applicable to the specific investment proj- ects financed out of the proceeds of the loan, with a maximum period of 15 years for individual investment projects. The interest rate would be 8.5 percent per annum. PART I - THE ECONOMY 2. A report entitled "The Economic Development of Tunisia - A Basic Report" was distributed to the Executive Directors in January 1975. An up- dating economic report, "Memorandum on the Economic position of Tunisia," was circulated on 'May 23, 1975. The main conclusions of the basic economic report and the updating mission are reflected below. Country data sheets are attached (Annex I). 3. Tunisia's development has been hampered br scarcity of natural re- sources. Much of the country is arid or semi-arid, and agriculture is high- ly dependent on rainfall. Minerals are mostly of low quality and, apart from phosphates, limited in quantity. Relatively small quantities of petroleum were discovered in the mid-1960's, and have since become an increasingly valuable source of revenue and export earnings. Industrial development has been handicapped by the small size of the domestic market, as well as a lack of skills and experience. Tourism has developed rapidly and workers' remit- tances have become a significant item in the balance- of payments. Tunisia has enjoyed a large amount of external aid and used it to expand economic and social infrastructure, broaden the industrial base, make available a wide range of social and welfare services to a large parl: of the population, and increase the rate of growth. Per capita GNP increased by 4 percent annually from 1961 to 1974. Like most countries, however, Tunisia has not yet found adequate ways to cope with unemployment and poverty and to achieve a balanced distribution of consumption among income groups, bet:ween urban and rural areas, and among regions. 4. Government strategy in the 1960's relied heavily on central planning of investment and resource allocation, with the public sector playing a major role in production as well as providing infrastructure and services. Foreign exchange shortages and concern with inflation led tc. recourse to a pervasive system of price determination and controls. An unusually long series of poor  - 2 - crop years due to shortage of rainfall slowed down the growth of output. Many of the investments in public enterprises proved to be uneconomic and private initiative in most sectors except tourism and petroleum was limited. 5. The Government's present development strategy was introduced after 1969. Its princiT'al objectives are: (a) accelerating growth based on export- oriented industries, by encouraging private initiative, reducing direct Government involvement in production and relaxing administrative regulations; (b) creating jobs. primarily in the expanding industrial sector, encouraging worker emigration. reducing population growth and improving education and training; and (c) maintaining internal and external financial stability. The 1973-76 Plan set a target rate of GDP growth of 7 percent, providing for a 5.4 percent growth rate in per capita private consumption. Investment was projected to increase bv 80 percent above the level of the 1969-72 Plan. National savings vere to finance three-quarters of investment. Exports of goods and services were projected to grow at R.R percent per year at contant prices and imports at 12.2 percent. The Plan foresaw an increase in net ex- ternal capital inflows of 55 percent over 1969-1972 average levels with ex- ternal capital providing 23.5 percent of total investment: debt service was to be held to below 20 percent of exports. The original Plan targets were conservative in terms of both growth and savings potential, and have been significantly affected by the impact of the changed petroleum and phosphate prices on the Tunisian economy (paras. 9 and 10). 6. The real growth of GDP has accelerated since 1970, reaching 9.4 percent per annum during 1971-1973 and 10.5 percent in 1974, compared with 4.6 percent durinf the previous decade. The acceleration can be attributed to fortuitous factors such as good weather, leading to record cereal and olive crops, to imcortant growth in tourism up to 1973. petroleum and phos- phate revenues and workers' remittances, and to the general re-orientation of Government policy since 1970, which renewed self-confidence and initiative in the private sector. Expansion of manufacturing and phosphate production has been significaint. By 1974, per capita GNP reached $420 at 1972 prices. The investment rate, which averaged 23 percent of GDP at current prices in the 1960's, declined to 21 percent in the early 1970's, but regained its previous level in 1974. However, the increase of investment in real terms is below Plan projections. National savings, on the other hand, rose sharply, from an average of 13.5 percent of GDP at current prices during the 1960's to 18 percent in 1973 and 21 percent in 1974. Consequently, the share of ex- ternal borrowing in financing investment dropped from 44 percent in the 1960 S to 17 percent in 1973 and 9 percent in 1974. 7. The balance of payments has improved steadily since 1967, with the current account deficit declining from an average of $115 million per year in 1961-1967 to $91 million in 1973 and $30 million in 1974. The effects of improved terms of trade on the 1974 balance of payments have been significant. Commodity export prices (mainly for petroleum, olive oil and phosphates) rose on average by 67 percent over 1973, but were accompanied by a rise in import prices of about 30 percent. In addition, receipts from services were affected  by the slowdown in tourist activity and in the migration of workers to Europe, With estimated gross disbursements on external borrov ing totalling $143 mil- lion (instead of $203 million as foreseen in the Plan), net reserves stood at $360 million at the end of 1974, equivalent to 4 months of imports. 8. Because of price controls and Government subsidizatlon of basic consumer goods, and prudent fiscal and monetary policies, Tunisia has main- tained relative price stability. Domestic price increases averaged 4.2 per- cent between 1969 and 1973. In 1974 consumer Drices increased by 4 percent only; however, the official GDP deflator rose by an estimated 12 percent and average investment costs increased by about 17 percent. 9. In 1974, Tunisia was on balance a beneficiary of the change with world economic situation, but this favorable situati.on may change in later years. Petroleum and phosphate prices increased about threefold since 1973; olive oil prices also increased substantially in 1973 and 1974. As a result, export earnings rose from $680 million in 1973 to $1,090 million in 1974. On the other hand, increases in import prices, combined with higher domestic demand, caused payments on imrports to grow from $750 million in 1973 to $1,100 million in 1974. The gain from terms of trade chang?s registered by Tunisia in 1974 is expected to disappear by 1978--79. This reversal, which already became apparent in the first months of 1975, will be the result mainly of a stabilization or decrease in the prices of Ttnisia's major exports,. and fur- ther increases in the prices of impcrted indust