Tunisia - Industrial and Trade Policy Adjustment Loan Project

Document of The World Bank FOR OFFICIAL USE ONLY Report No. 10864 PROGRAM PERFORMANCE AUDIT REPORT TUNISIA INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN (LOAN 2781-TUN) JUNE 30, 1992 Operations Evaluation Department This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENTS Currency Unit: Tunisian Dinar (TD) (Annual Averages) 1980 US$1 = 0.42 1986 US$1 = 0.79 1981 US$1 = 0.49 1987 US$1 0.83 1982 US$1 = 0.59 1988 US$1 = 0.86 1983 US$1 = 0.68 1989 US$1 = 0.95 1984 US$1 = 0.78 1990 US$1 = 0.88 1985 US$1 = 0.83 1991 US$1 = 0.92 ACRONYMS AFI Agence Fonci6re Industrielle (Agency for Industrial Land) ASAL Agricultural Sector Adjustment Loan API Agence de Promotion des Investissements (Investment Promotion Agency) BCT Banque Centrale de Tunisie CEPEX Centre de Promotion des Exportations (Center for Export Promotion) CETIME Centre Technique des Industries M6canique et Electriques CNEI Centre National des Etudes Industrielles (National Center for Industrial Studies) EMI Electrical and Mechanical Industries EPR Effective Protection Rate FPC Fonds de P6r6quation des Changes (Foreign Exchange Risk Fund) ICOR Incremental Capital Output Ratio IEQ Institut d'Economic Quantitative (Bach Hamba Institute) ITPAL Industrial and Trade Policy Adjustment Loan MITAP Medium-term Industrial and Trade Adjustment Program NPR Nominal Protection Rate OCT Office du Commerce de la Tunisie (Tunisian Trading Office) OED Operations Evaluation Department PCR Project Completion Report PERL Public Enterprise Reform Loan PPAR Program Performance Audit Report PR President's Report OR Quantitative Restrictions SAL Structural Adjustment Loan VAT Value Added Tax FISCAL YEAR January 1 - December 31 FOA OFFICIAL USE ONLY THE WORLD BANK Washington, D.C. 20433 U.S.A. Offce of Directw-Ceneral Operations Evakation June 30, 1992 MEMORANDUM TO THE EXECUTIVE DIRECTORS AND THE PRESIDENT SUBJECT: Program Performance Audit Report on Tunisia - Industrial and Trade Policy Adjustment Loan (Loan 2781-TUN) Attached, for information, is a copy of a report entitled "Program Performance Audit Report on Tunisia - Industrial and Trade Policy Adjustment Loan (Loan 2781-TUN)," prepared by the Operations Evaluation Department. Yves Rovani by H. Eberhard K8pp Attachment This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authoriation. FOR OFFICIAL USE ONLY PROGRAM PERFORMANCE AUDIT REPORT TUNISIA INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN (Loan 2781-TUN) TABLE OF CONTENTS Page No. Preface . . . . . Basic Data Sheet . . ................................ . . . . . . 1 Evaluation Summary . . . . PROGRAM PERFORMANCE AUDIT REPORT I. INTRODUCTION. ........................1 II. OBJECTIVES AND DESIGN.............. .... . . . 6 A. Objectives ..................................... ..... 6 1. Macroeconomic Policy Adjustment Program Objectives 6 2. Medium-term Industrial and Trade Adjustment Program (MITAP) Objectives . . . . . . . . . . . . . . . . . 7 B. Design of the Program . . . . . . . . . . . . . . . . . . 7 1. Macroeconomic Reform Program . . . . . . . . . . . . 8 2. Sectoral Program . . . . . . . . . . . . . . . . . . 12 III. IMPLEMENTATION EXPERIENCE . . . . . . . . . . . . . . . . . . . 16 A. Delays in Loan Effectiveness . . . . . . o. . . . . . . . 16 B. Delays in Disbursements . . . . . . . . . . . . . . ... 18 C. Implementation of the Macroeconomic Adjustment Prozram 21 (a) Strengthening of Measures taken in 1985-1986 . . . . 21 (b) The Liberalization Program.......... . . . . 25 D. Implementation of the Sectoral Program. ..... . . . . 27 (a) Investment Incentives. .... . . . . . . . . . . 27 (b) Improvements in the Institutional Framework . . . . 28 (c) Export Promotion . . . . . . . . . . . . . . . . . . 29 (d) Liberalization of Banking Activities . . . . . . . . 29 (e) Exchange Risk Guarantee . . . . . . . . . . . . . . 30 (f) Taxation . . . . . . . . . . . . . . . . . . . . . . 30 (g) Industrial Employment . . . . . . . . . . . . . . . 31 (h) Tourism Policy Study . . . . . . . . . . . . . . . . 32 (i) Bank Confirmation of Satisfactory Progress in the Macroeconomic and Sectoral Program (MITAP) . . . . . 32 This document has a restricted d".trihution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. Table of Contents (cont'd) Page No. IV. RESULTS . . . . . . . . . . . . . . . . . . . . . . . . 34 A. The Macroeconomic Adjustment Program . . . . . . . .. 34 (a) Macroeconomic Performance... . . . . 34 (b) Results Achieved by the Liberalization Program . . . 38 B. The Sectoral Program . . . . . . . . . . . . . . . . . . 41 C. Overall Results . . . . . . . . . . . . . . . . . . . . . 41 V. SUSTAINABILITY OF THE ADJUSTMENT EFFORT... .... . . . . 43 VI. LESSONS OF EXPERIENCE...................... . . . . . 45 TABLES 1. Conditions and Key Actions. .......... . . . . . . . . 9 2 1987 Budget - Revenues and Expenditures . . . . . . . . . . . 16 3. Export6 and Imports in 1986-1987 . . . . . . . . . . . . . . 19 4. Wage Bill, Inflation and GDP. ........ . . . . . . . . . 21 5. Exchange Rate........... .... . . . . . . . . . 22 6. Interest Rates on Credits to Priority Sectors . . . . . . . . 23 7. Overall Budget Targets and Realization . . . . . . . . . . . . 24 8. Growth of Output and Expendicures. ..... . . . . . . . . . 34 9. Industrial Investment Declarations - 1987-1990 . . . . . . . . 39 ANNEXES 1. Key Economic Indicators, 1980-1991. ......... . . . . . 49 2. Fixed Investment..... ..... . . . . *..............52 3. Central Government Budget: Fiscal Revenues and Transfers and Subsidies . .. . . . . .. . . . . . . . . . . . . . . 53 4. Interest Rates and Inflation........ ..... . . . . 54 5. Value Added in Manufacturing....... ..... . . . . . 55 6. Percentage Growth of Industrial Value Added. .... . . . . . 57 7. Annual Average Growth in Manufacturing Value Added and Exports 58 8. Real Growth in Manufacturing Value Added and Exports . . . . . 59 9. Industrial Investment Declarations, 1987-1990.... . . . . . 60 10. Industrial Investment Declaration (1988-1990).... . . . . . 61 11. Tariff Structure (1986-1989) . . *...... .. 62 12. Nominal and Effective Protection Rates (1980-1988).. . . . . . . 63 Table of Contents (cont1d) Page No. 13. Nominal and Effective Protection Rates (1980-1988) . . . . . . 64 14. Quantitative Restrictions on Imports. ....... . . . . . . 65 15. Price Liberalization........... ..... . . . . . 66 16. Tourism - Key Indicators.... . . . . . . *...............67 17. Monetary Policy: Money Circulation and GDP Annual Growth . . . 68 18. Consolidated Central Government Budget Revenues, Expenditures and Deficit. ................... . . . . . 69 19. Growth of Output and Expenditures . . . . . . . . . . . . . . 70 20. Balance of Payments . . . . . . . . . . . . . . . . . . . . . 71 21. Growth of Exports . . . . . . . . . . . . . . . . . . . . . . 72 22. Imports of Goods and Services . . . . . . . . . . . . . . . . 73 23. Number of Persons Employed by Sector...... ..... . . 74 24. Social Iupact of the Adjustment Program (ITPAL) - Measures Designed to Improve the Situation of the Poor. ... . . . . . 75 25. Growth in Total Wage Bill, GDP and Consumer Price Index . . . 76 PROJECT COMPLETION REPORT PART I: BANK'S ASSESSMENT OF ITPAL........ ..... . . . . 79 A. BACKGROUND .......................................... 79 B. THE MEDIUM-TERM ECONOMIC ADJUSTMENT PROGRV4 . . . . . . . 81 C. ASSESSMENT OF THE ADJUSTMENT PROGRAM..... . . . . . . 84 Accomplishments under the ITPAL - Adjustment Program . . 84 Macroeconomic Program......... .... . . . 84 Sector Program.......... ..... . . . . 85 Weaknesses and Failures of the Program.... . . . . 88 Impact of the Adjustment Program . . . . . . . . . . 90 Macroeconomic Impact . . . . . . . . . . . . . . . . 91 Sectoral Impact . . . . . . . . . . . . . . . . . . 92 D. IMPLEMENTATION AND MONITORING OF ITPAL. .... . . . . . 94 PART II: THE BORROWER'S ASSESSMENT...... ..... . . . . . . 96 PART III: STATISTICAL ANNEXES . . . . . . . . . . . . . . . . . . . . 97 1. Matrix . . . . . . . . . . . . . . . . . . . . . . . . 98 2. Loan Data . . . . . . . . . . . . . . . . . . . . . . . . 101 3. Investment Tables . . . . . . . . . . . . . . . . . . . . 103 4. Trade Reform . . . . . . . . . . . . . . . . . . . . . . 104 PROGRAM PERFORMANCE AUDIT REPORT TUNISIA INDUSTRT4L AND TRADE POLICY ADJUSTMENT LOAN (Loan 2781-TUN) 1. This is a Program Performance Audit Report (PPAR) on the Industrial and Trade Policy Adjustment Loan (ITPAL), involving Bank Loan 2781-TUN. The loan, in the amount of US$150 million, was approved on February 24, 1987 and the last disbursement was on December 19, 1989. The loan was closed on December 31, 1989, with one year d3lay. The loan was fully disbursed. 2. The PPAR consists of the Program Performance Audit prepared by the Operations Evaluation Department (OED), and the Project Completion Report (PCR) prepared by the Country Operations Division of the Country Department II of the former EMENA Region of the Bank. The PPAR is based on the attached PCR, the President's Report, sector and economic reports, the credit documents, the summary of the Board discussion, study of the project files, and discussions with Bank staff. An OED mission visited Tunisia in November 1990 and discussee the effectiveness of the Bank's assistance with Government officials and representatives of the business and finarcial community. Their kind cooperation and valuable assistance in the preparation of this report is gratefully acknowledged. 3. The PCR provides a good account and assessment of the program experience with regard to the implementation of the various action programs, achievement of the reforms, credit administration, and the Bank's role The PPAR discusses the evolution of policy-based programs in Tunisia, portrays the critical issues of concern that led to the policy package and action programs-- including their consistency and appropriateness for the problems identified-- evaluates the progress made in enacting and implementing agreed upon activities, and ascertains the key factors that determined ITPAL's outcome and the sustainability of the policy reforms. The PPAR then draws lessons from the program experience. 4. The draft PPAR was sent to the Borrower for comments but none were received. - iii - PROGRAM PERFORMANCE AUDIT RE'ORT TUNISIA N..TSTRIAL AND TRADE POLICY ADJUSTMENT LOAN (Loan 2781-TUN) BASIC DATA SHEI LOAN POSITION (Amounts in US$ Million) As of April 30 1992 Loan Original Disbursea Canceled Repaid Outstanding 2781 150.0 150.0 -- 11.52 138.48 CUMULATIVE ESTIMATED AND ACTUAL DISBURSEMENTS FY88 FY89 FY90 Appraisal Estimate (US$M) 110.0 150.0 150.0 Actual (US$M) 71.0 133.8 150.0 Actual as % of Appraisal (%) 64.5 89.2 100.0 Date of Final Disbursement: December 19, 1989 PROGRAM DATES Original Actual Initiating Memorandum 04/86 09/08/86 Letter of Development Policy n.a. 01/27/87 Negotiations 11/24/86 12/18-24/86 Board Approval 02/87 02/24/87 Loan Agreement 03/06/87 03/06/87 Effectiveness 04/87 08/05/87 Loan Closing 12/31/88 12/31/89 - iv - STAFF INPUTS (staffweeks) FY85 FY86 FY87 FY88 FY89 FY90 TOTA Preappraisal 7.3 29.8 55.3 92.4 Appraisal 35.9 35.9 Negotiations 29.4 29.4 Supervision 10.2 7.1 8.7 26.0 Completion 9.0 9.0 Total 7.3 29.8 130.8 7.1 8.7 9.0 192.7 MISSION DATA No. of No. of Staff Date of Month/Year Weeks Persons Weeks Repo t Preparation I 04/17/86-05/01/86 2 4 8 05/19/86 Preparation II 06/23/86-07/11/86 24 8 20 08/04/86 Appraisal 10/04/86-10/22/86 2& 7 17 11/05/86 Supervision 1 03/15/87-03/21/87 1 1 1 Supervision II 03/23/87-04/01/87 1 1 1 04/15/87 Supervision III 04/27/87-04/30/87 4 2 1 06/03/87 Supervision IV 12/11/87-12/18/87 1 3 3 Supervision V 02/01/87 7 1 1 03/04/88 Supervision VI 12/04/88-12/15/88 1 1 1 12/19/88 Completion 12/03/89-12/10/89 1 1 1 12/28/89 OTHER PROJECT DATA Borrower/Executing Agency: Government of Tunisia Follow-on Operations: Operation: Structural Adjustment Loan No.: 2962-TUN Amount: US$150.0 million Board Date: June 16, 1988 Operation: Public Enterprise Reforms Loan No.: 3109-TUN Amount: US$130.0 million Board Date: July 11, 1989 PROGRAM PERFORMANCE AUDIT REPORT TUNISIA INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN (Loan 2781 TUN) EVALUATION SUMMARY INTRODUCTION 1. This is an audit of the particular by restraining wage Industrial and Trade Policy Adjustment increases (paras. 24 26). Loan, approved in February 1987, for US$150 million. The circumstances 3. A medium-term Industrial and that led to the sanction of the ITPAL Trade Action Program (MITAP) are detailed in paras. 1-22. The complemented the macroeconomic program ITPAL was approved, with the ASAL I with also three objectives in mind: (Agricultural Sector Adjustment Loan), stimulate growth in manufacturing and in September 1986, the first in a increase private investment; stimulate series of adjustment operations manufactured exports; and stimulate including: Structural Adjustment Loan, manufacturing employment (para. 27). a second ASAL, and a Public Enterprise Restructuring Loan, all approved in 4. The macroeconomic reform package 1988 and 1989. consisted of cautious wage and salary policies, pursuing a flexible exchange OBJECTIVES AND DESIGN rate policy to ensure international competitiveness, free interest rates, 2. The ITPAL program attempted to reduced budget deficit, limits on the address the most troublesome issues growth of money in circulation, facing Tunisia's economy: (a) high removal of price and investment deficit of the balance of payments controls, liberalization of imports current account and the consequent and reform of the tariff system. rapid increase in the country's Measures were to be taken to mitigate foreign debt; (b) a decline in net the social imRact of the adjustment petroleum income requiring the program (paras. 30-37). development of other sources of export revenues (manufactures and tourism); 5. The MITAP reform package and (c) a high unemployment and consisted of establishing an underemployment rate. To help solve appropriate incentives framework by these problems, a macroeconomic abolishing inv.cstment controls, and adjustment program was prepared with bringing aboc improvements in the three main objectives: an export- institutions dealing with trade and driven growth strategy; an increase in industry. To encourage investment and efficiency of resource allocation stimulate production, a value added through prices decontroi, reduction in tax on production was to be introduced government spending for public and to promote industrial employment, enterprises and removal of measures were to be taken to reduce restri:tions on private sector social charges, and streamline a rigid activity; and the development of labor labor code. In addition, studies were intensive sectors by making labor less required for the formulation of expensive relative to capital, in specific policy measures such as - vi - exchange risk guarantee and the marginally. It may be difficult to tourism sector policy (paras. 38-50). achieve further liberalization progress as easily as before in the IMPLEMENTATION EXPERIENCE future. The tariff reform advanced rapidly. Import tariffs were reduced 6. Despite delays in loan to 15-41 percent in 1988-1989 (paras. effectiven,ss and in disbursements, on 92-96). the whole, progress in implementing the reform program has been 10. Investments, which request no satisfactory in a majority of areas. special incentives, do not need prior Significantly, the momentum of Government authorization anymore. The macroeconomic, trade, industrial, and new law no longer grants duty-free iinancial sector adjustments has been imports of equipment, reducing sustained by the implementation of markedly the bias against labor further reforms in 1988 and 1989 intensive projects. Distinctions through follow-on Bank operations, in between new investments, replacement particular a SAL, reflecting the and expansion have now been removed Government's commitment to the (para. 97). adjustment effort (paras. 51-71). 11. Changes in the institutional 7. Macroeconomic measures were framework to reflect the shift in taken as planned with the pursuing of emphasis from control to promotion a prudent wage policy which led to a were formally implemented but real reduction of wages in real terms, with changes are slow to come and further a continuous fall in the effective progress is needed (paras. 99-107). exchange rate, and with the introduction of free and positive V. A foreign exchange guarantee interest rates for most activities. -gstem has been put in place (with The overall Government deficit delay), which puts the burden of the declined as a percentage of GDP, but risk on the investor, while a value not as much as intended, and high added tax on production has been subsidies remained an issue. The successfully implemented (paras 110- growth of money in circulation was 113). generally kept below GDP growth (paras. 73-86). 12. Little progress was made on measures designed to stimulate 8. Price decontrol has become industrial em2loyMent, such as a effective for 70 percent of producer reduction in social security charges prices. Further decontrol is being paid by employers and a modification coordinated with import liberalization of the rigid labor code. Employment to introduce competition, and a law on h s grown at a sluggish pace (paras. competition has been enacted to 115-119). counter the risk of monopoly pricing (paras. 87-91). 14. Finally, virtually all studies were commissioned and completed, but 9. Imports not competing with their recommenc ions have, in some domestic production have liberalized cases, not been implemented or with to a sizeable extent, but the share of substantial delay (paras. 110, 115, domestic production covered by these and 120). restrictions has declined only - vii - RESULTS money circulation rose less than GDP A.in most years and wage and salaries A. Te Maroeonomc ..,4j~istent declined regularly in real terms since Progra1986, thus increasing Tunisia's competitiveness abroad (para. 130). 15. Over the period covered by the Seventh Plan (1987-1991), economic 17. The Government budget was under performance was generally better than pressure because of the decline in oil forecast at the time of ITPAL's revenues and the expenditures preparation. GDP growth was about 4 requirement of public enterprises and percent p.a. in 1987-91 against 3.4 consumer subsidies. As a result, the percent forecast by ITPAL or 3.9 net deficit was higher than forecast percent forecast by the subsequent under the ITPAL or the SAL, but SAL. Manufacturing grew rapidly, while remained lower than in 1986 (para. petroleum production fell less than 132). expected, thus, bringing additional export earnings. Exports helped by 18. The debt servict. ratio has the decline of the effective exchange improved since 1987 and stood at 25.6 rate, liberalization of needed in 1990 compared to 29.3 in 1987, imported inputs and lower labor costs, remaining below the higher levels increased rapidly. Investment, being predicted by the ITFAL and the SAL. led by exports, is becoming Imports rose sharply and since 1989 increasingly more efficient and augurs increased due to higher demand for well for long-term balance of payments imported consumer goods stimulated by viability. Debt indicators have increasing consumption. As a result, improved and are expected to continue the current account deficit, which was this trend. Private investment, which unexpectedly low in 1987 and even had been persistently sluggish until positive in 1988, has risen again and 1988, grew rapidly in 1989-90. is now much higher (5.2 percent of GDP Tunisia's macroeconomic management and in 1990) than anticipated by the ITPAL performance can thus be judged or the SAL. The high current account satisfactory over the 1987-1991 deficits in 1990 and 1991 were in period, even if in some years (e.g. great measure due to the Gulf crisis. 1988), due to external factors such as In 1990 there was stock-iling in bad weather and poor harvest, the anticipation of war and in 1991 there short-term economic situation was a big loss of earnings from deteriorated (paras. 127-129). tourism (para. 133). 16. This better-than-expected 19. Despite less positive results macroeconomic performance can be than originally expected as regards largely considered the result of the the budget and the current account, adjustment program, which began in globally the economy has performed 1986 and was implemented in 1987-91 satisfactorily. The adjustment with ITPAL, ASAL, and SAL support, program has helped Tunisia to attain ITPAL being viewed as a time slice of its objective of adjusting to the loss a larger procest. The macroeconomic of oil export earnings and its higher measures were carried out as expected external debt service (para. 134). and with generally positive results. Inflation was contained at 6.9 percent 20. Unfortunately, measures to p.a. in 1986-90, close to the 6.5 mitigate the negative social impact of percent rate projected under the the adjustment program had very ITPAL, or 6.8 percent under the SAL; limited results. It had been assumed - viii - that employment would be stimulated in rates remain relatively high and export-oriented industries, tourism variable. However, priority is now and agriculture under policies being given to the progressive removal favoring labor intensive activities. of quantitative restrictions which In fact, employment growth in 1987-91 were not sufficiently targeted by has been only half of what was ITPAL but were one of the main expected under the ITPAL which is objectives of the SAL (paras. 147- definitely a poor result (paras. 135 148). 138). C. The Sectoral Program B. Liberalization Program 25. The enactment of a value added 21. The proportion of free producer tax in 1988 as one of the ITPAL's prices has been raised to about 70 conditionalities, has certainly percent by 1990 as requested by the contributed to the improvement of a ITPAL and the SAL. Price controls tax system, which over the years had remain for a few basic staples for become economically distortional, social reasons and on those items complicated and often unfair (paras. where there is only a small number of 149-150). producers for fear of oligopolistic practices when isports have not yet 26. Progress was made in setting up been fully liberalized. Price a foreign exchange risk guarantee decontrol has not resulted in system which puts the burden of the excessive price increases as confirmed risk on the investor-borrower. by moderate inflation rates in recent However, the cost to be paid (three years. A Competition Law was adopted percentage points over the cost of in 1991 which aims at discouraging loan) is high and the time needed for anti-competition practices (paras. enterprises to acquire the know-how on 140-141). handling the foreign exchange risk so as to reduce costs may be longer than 22. The Investment Code adopted in now anticipated (paras. 110-112). 1987 removed a priori investment authorization, thus increasing the 27. Results obtained under role of market forces and stimulating institutional reforms of agencies in private investment which rapidly charge of promoting industry and increased since 1988 (paras. 142 144). export trade have been limited and many deficiencies persist in those 23. Controls for protective purposes agencies. These reforms were remain considerable and for only 25 considered "key actions" but were not percent of domestic output are imports formally included as ITPAL's now liberalized. There is concern conditionalities (paras. 99-109). that many enterprises may be in difficulties when the Government 28. Results achieved regarding pursues its objective (initially industrial employment were extremely supported by the ITPAL, but mostly by limited. Employers' social security the SAL) of eliminating most import cont.ibutions were not reduced, no restrictions (including on consumer tangible progress was made in wage- goods) and reducing the maximum tariff determination practices (such as to 35 percent (para. 146). establishing a link between productivity and salary increase) and 24. Despite the lower average no timetable for changes in the Labor nominal tariff, effective protection Code was prepared (pares. 119-121). - ix - D. Overall Results financing will be critical to the presently projected medium-term GDP 29. The ITPAL has provided an annual growth rate of around 5 opportunity to the Bank for percent, slightly higher than the 4 establishing a broad dialogue on percent growth achieved during the liberalization issues and on the need Seventh Plan (1987-91) (para. 157). to make the economy more outward- looking at a time when particularly 32. However, Tunisia still faces a favorable political conditions considerable agenda of reforms and the prevailed, i.e. in 1986-87. Similarly, behavior of economic agents (including the ITPAL has been seen on the industrialists) needs to evolve Tunisian side as an instrument to further to create a competitive and obtain additional financial support efficient economy. The objective to from bilateral donors and to provide submit 75 percent of domestic the funds needed to implement the new production to free import competition adjustment program (para. 154). by 1992 will be difficult to reach indeed. A realistic timetable 30. ITPAL could only broadly sketch specifying the dates at which import a limited number of sectoral reforms. restrictions are to be removed will However, a number of these reforms have to be strictly adhered to. were taken up again and deepened under Effective protection rates will also the subsequent SAL and results have, need to be lowered. And the Tunisian thus, to be evaluated on a longer authorities will have to pursue a very period than the years (1987-1989) when close dialogue with the private sector ITPAL funds were disbursed. In the to reach agreement on specific end, ITPAL's main merit was to have bottlenecks to be removed in order to provided Tunisian authorities the reach liberalization objective (para. understanding and support they needed 159). to have their new adjustment program approved at the highest levels of the 33. Private investment may be State and endorsed by the stimulated by the removal of international community of donors. uncertainties over some Government This, by itself, was a significant policies, in particular regarding the achievement (para. 156). timing of removal of import restrictions and the need to develop a SUSTAINABILITY new industrial strategy, export- oriented, but also based on well 31. Tunisia has made good progress defined sectoral priorities (para. in addressing its main macroeconomic 160). challenges so as to enable the economy to achieve sustained long-term growth 34. There will be pressure on the while maintaining budget deficits at budget due to declining revenues from levels that can be financed in a non- oil and financing required for public inflationary manner. Provided the enterprises restructuring and consumer implementation of the reforms started subsidies. Budget deficits have risen under the ITPAL continues, Tunisia again in recent years expressed as a should be able to obtain an increasing percentage of GDP. Although still share of its external financing from manageable, they will have to be kept private sources on reasonable terms. in check. Limits to the deficit could The continuation of policies aimed at be determined by the level of debt increasing Tunisia's creditworthiness that could be safely supported by the and diversifying its sources of budget and by the need to avoid - x - crowding out the private sector difficult quantitative import through excessive capital expenditures restriction issues. for public enterprises (para. 161). 37. Concerning the design of actions LESSONS OF EXPERIENCE Vrografs: 35. The lessons of experience and 0 There are dangers associated suggestions for potential courses of with the proliferation of studies to action are detailed in paras. 163-166 bolster reforms if they exceed the and summarized below. supervising capacity of Bank and Borrower staff and are to be performed 36. Regarding the conceptualization within unrealistic, too tight of Policy reforms: schedules. * The crucial element in the * To alleviate the social success of well-designed action repercussions of measures enforced programs is the strong political will, under adjustment programs, it would be broad consensus, and unwavering expedient to identify early on in the commitment on the part of policy design process particular groups in makers, and the active involvement and need for special technical assistance, support of highly motivated and to ensure that such assistance technocrats in core economic would be forthcoming for a ministries and agencies. transitional period. * There is greater likelihood that * Conditionality is no substitute industrial and trade policy reforms for political, administrative, and will be successful, if the process of private sector support. Undertakings policy formulation is undertaken at an should be purposeful and specific and early stage jointly by the Government should strike and reinforce a and the private sector. practicable balance between trade policy and macroeconomic stabilization * ITPAL followed a "catch-all" and regulatory reforms. approach to macroeconomic adjustment and had few, well-prepared specific 38. With respect to external actions in its sectoral program, financial assistance: because of lack of time for preparation. A more narrowly focussed Aid can be helpful in promoting adjustment program and better prepared reform when it is conceived and in depth is likely to be more presented as a reinforcing agent and effectively implemented and more as a means of reducing the cost of easily supervised and monitored. reforms to which the policymakers in the recipient country are already * The effectiveness of trade committed. The ITPAL played a very reforms is strengthened when positive role in this respect. accompanied by institutional reforms in the industrial and trade-related Regarding the imports control sectors. Moreover, bold programs of regime and arrangements to promote trade liberalization probably have a exports: better chance of enduring than do tentative ones. The ITPAL was not There is a trade-off concerning bold enough in squarely addressing the speed with which quantitative restrictions and import licensing - xci- should be eliminated: the longer the slow in this implementation, as it competitive pressure is delayed, the affects deep-rooted attitudes and more time protected firms are afforded vested interests and entails far- to adjust; but, at the same time, the reaching changes in the internal adjustment process is likely to meet procedures of agencies involved. with resistance and become more difficult, potentially compromising 39. Finally, in connection with the benefits from import taati issues: liberalization. A realistic, detailed and subsector specific timetable for Taxation reform can take a long the elimination of quantitative time before it can be introduced restrictions would instill because of the opposition of vested steadfastness, credibility, and interests or the inefficiency of certainty in the reform process, and administration. Sectoral adjustment would thwart pressures from groups programs should include sufficient affected to vitiate the reform. flexibility, even at the cost of not following agreed timetables. * Reform of export procedures and documentation can be distressingly PROGRAM PERFORMANCE AUDIT REPORT TUNISIA INDUSTRIAL AND TRADE POLICY ADJUSTMENT LOAN (Loan 2781-TUN) I. INTRODUCTION 1. Two Bank loans, for US$150 million each, were made in 1986 and 1987 to the Government of Tunisia to provide financial and technical support to a program for macroeconomic reform. The first Bank loan approved in September 1986 and entitled "Agricultural Sector Adjustment Loan" (ASAL), also included sector specific policy measures. The second loan approved in February 1987 supported an adjustment program in the industrial and trade sector. These loans marked a turning point in the Bank's lending program in Tunisia which, to a large extent, shifted to adjustment lending and increased rapidly, in particular through the Structural Adjustment Loan of 1988 and the ASAL II and the Public Enterprise Reform Loans of 1989. 2. The Bank's decision to provide financing for adjustment was due to the belief that new economic policies had to be formulated and implemented in Tunisia, and that a higher level of efficiency had to be reached that would maintain an acceptable rate of economic growth despite an anticipated loss of earnings from oil exports and the increase in external debt. 3. The 1970s had been a period of marked progress in which growing State activity was assisted by substantial earnings from oil. In 1979, oil exports reached a peak of 5.5 million tons, valued at US$900 million, or 12.1 percent of GDP. With the second general oil prices increase, exports rose even higher, to US$1.3 billion in 1981 (5.3 million tons). The annual growth of the economy averaged 7.4 percent in 1970-79, investment rose to 30 percent of GDP over the decade, there was sufficient restraint to avoid high inflation and balance of payments problems and great emphasis was placed on social development- -including better education and health. 4. Emerging from the 1970s, it seemed that the economic policies pursued Lad been remarkably successful. Nonetheless, there were already indications that presaged difficulties. The most striking feature of these policies was the pervasive influence exercised by the State, both as an economic agent itself and in controlling economic activity. The State's role as an economic agent grew through the decade. Budget expenditures increased from about 26 percent of GDP at the beginning to over 34 percent towards the end. Tunisia became a high-tax economy with the State playing a large, direct role. The State also played a major indirect role through the rapidly growing, capital-intensive public enterprise sector. Over half of gross fixed capital formation of the economy in the late 1970s was accounted for by the budget or by public enterprises. Budgetary restraint was, however, by and large maintained and -eficits were kept to 3-4 percent of GDP. 5. The State's regulatory role matched this trend. Investment was directed into favored activities by a combination of widespread import controls, high tariffs, requirements for approval by the Investment Promotion Agency, and the - 2 - need for Central Bank authorization. In numerous activities entry was restricted to avoid duplication. Elaborate price controls were used to prevent monopoly rents. An extensive system of subsidies was used to provide the most commonly used foods and fertilizers at low and stable prices. Wages were determined through a bargain process between the State and the trade unions, with the public sector leading the way (cf. Country Economic Memorandum, Volume I, March 1990). 6. Despite the satisfaction over what had been achieved, some economists in the Government were aware that major problems had developed. First, it had been foreseen that oil would begin to diminish because the depletion of reserves and the growth of domestic consumption would make Tunisia a net importer around 1991 (actually, there was still a small trade surplus of about US$90 million in 1991, but oil output fell from 5.5 million tons in 1978 to 4.5 million tons in 1990). Second, it was apparent that a number of industries were economically inefficient or in financial difficulties. Some were highly protected assembly operations, such as the motorcar assembly, STIA, and the tractor assembly plants, CMT (cf. OED Audit Report on Electrical and Mechanical Industries, Loans 2113 and 2554) but there were also the phosphate mining and related chemical enterprises, major industries based on low grade ore that made losses when world prices were depressed. Third, there was the stubborn problem of unemployment, which was estimated at about 13 percent. The growth of the labor force of around 3 percent per year raised disquieting questions for the future. 7. The 1982-1986 Plan (prepared in 1980-1981) helped to respond to the situation by cutting back on public investment, restraining the growth of budgetary expenditures, increasing the emphasis on exports, and promoting more labor intensive investment. In practice, these objectives were not pursued until balance of payments difficulties became imminent in 1985-86. Short-term preoccupations (including political gains) prevailed in 1982-83, and the objective was rather to reduce capital costs and improve labor efficiency than to question the validity of the entire economic and social system in the long term. From 1980 to 1984, investment continued at around 30 percent of GDP and budgetary expenditures reached 41 percent of GnP. Although GDP growth in 1980-84 declined to an average of 4.5 percent per annum (against 7.4 percent in 1970-79), consumption continued to grow rapidly. The resource gap widened to 11.7 percent of GDP, which was reflected in a steady increase in imports while exports stagnated in volume. The deficit on the current account reached a peak of 10.9 percent of GDP in 1984 against 4.7 percent in 1980. 8. As a result, Tunisia became vulnerable to the impending world debt crisis and its debt indicators deteriorated. The cumulative total of the current account deficits in 1980-84 came to US$3.3 billion (see Annex 1), and by 1984 Tunisia began to experience the effects of the world debt crisis on the financial markets. Gross reserves at the end of 1984 were down to seven weeks' imports and were falling. With the volume of oil exports 30 percent below its peak of 1980 and world oil prices beginning to weaken, it was likely that financial markets, already concerned by the worsening debt problems of the developing countries, would revise their ratings of Tunisia's creditworthiness if the current account deficit were not quickly reduced. 9. The Government decided to depreciate the Tunisian Dinar in 1985 and 1986, including a devaluation by 10 percent in nominal terms in August 1986, reducing - 3 - the effective exchange rate by about 28 percent between mid-1985 and mid-1986. By spreading some of the devaluation over a year, the inflationary effect and the associated expectations of producers and consumers were dampened. Other measures taken in 1985 consisted of the elimination of most export licenses, partial elimination of export taxes, and a variety of measures regarding, among other things, customs formalities, extension of temporary admissions, export financing, repatriation of earnings, export credit insurance, and the establishment of export companies. Finally, most interest rates became positive, agricultural producer prices were substantially decontrolled and tough measures were taken to limit current budgeting expenditures. 10. Some effects were felt in 1986, but the drop in oil prices and depressed world demand for phosphate reduced the aggregate impact. Total exports increased at only 3.3 percent in volume terms in 1985 and 5.2 percent in 1986, while their dollar value in 1986 was still 2 percent below that of 1984. However, manufactured exports picked up substantially. 11. The drop in imports value was more striking--10 percent less in 1986 than in 1984, as the Government took direct actions to restrict imports. The fall was 40 percent for capital goods since the Government abruptly reduced investment by public enterprises (30.4 percent less in real terms in 1986 than in 1984). Private investment also declined and consumption's growth slowed down. The volume of consumer goods imports declined 12 percent in 1984-1986. The resource gap fell from 11.7 percent of GDP in 1984 to 6.1 percent in 1985 and 3.6 percent in 1986. In 1985, Tunisia maintained a GDP growth rate of 5.6 percent (compared to 5.7 percent in 1984), but 1986 was an especially hard year. Drought caused an exceptionally poor harvest and oil prices declined, leading to a further loss in oil exports. GDP fell by 1.6 percent for the first time. 12. By 1985 and even more by 1986, the awareness that the old policies were not coping with some major problems had turned into a recognition of the need for extensive policy reform. The formulation of new policies began in 1986 and evolved in 1987 and 1988 into a broad medium-term program of economic adjustment. 13. As early as the 1984 Bank/IMF annual meetings, the Tunisian Government requested Bank support for policy reforms through the financing of a number of sector adjustment operations, beginning with two loans, one in industry and the other in agriculture. In response, the Bank mounted in January 1985 a mission, headed by Professor Balassa, to review the industrial sector. This mission took place during the preparation of the Second Bank loan to the Electrical and Mechanical (EMI) subsector. The Bank had argued that the restructuring of a system of economic incentives could not be limited to a single subsector (EMI or other), and had to be integrated in the overall reform of the industrial sector, which was reviewed by the Bank's Industrial Policy mission of January 1985. 14. As seen above, at the time of preparation of the Second EMI loan (end 1984-first half 1985), economic conditions were worsening in Tunisia and there was a growing feeling among Tunisian authorities that economic reforms were necessary to make the economy and industry more outward-looking and competitive. Partly for these reasons, the Government confirmed for the first time that after the completion of the Industrial Sector Report (July 1985), it would establish jointly with the Bank the measures to increase efficiency and competitiveness in the industrial sector. 15. The report of the mission was discussed with the Government in September 1985, along with a Synopsis Paper that presented the gist of the Bank's proposals for policy changes within a consistent macroeconomic framework. The Government, as a result of those discussions, decided to pursue with the Bank a broad-based policy dialogue with the objective of establishing an adjustment program that would cover the period of the Seventh Plan (1987-1991) and that would be financed in phases starting with an agricultural sector adjustment loan (ASAL), followed by an industrial and trade policy adjustment loan (ITPAL). 16. Although initially, i.e. in 1985, the Government had chosen to take restrictive measures (i.e., import restrictions) in response to balance of payments difficulties, Bank/Government dialogue on structural adjustment progressed without interruption. Gradually, the perception of the Government and the Bank on the short- and medium-term macroeconomic strategy came closer (PCR, para. 12). 17. A team of senior civil servants and economists in the Ministry of National Economy and in the Ministry of Planning with the support of important politicians prepared a comprehensive adjustment program by mid-1986. The program reflected an outward-looking, medium-term strategy based on diversification and the rapid growth of non-oil, non-phosphate exports; sustained growth to reduce unemployment; improved current account and budget deficits; and restored creditworthiness. 18. It was certainly tempting by end-1985 to further increase protectionism and to reduce consumption and investment by decree, as had been done before. However, the view prevailed that there was a need to manage the transition to a post-oil economy through structural adjustment measures. Moreover, both the loss of oil export earnings and the higher debt service (which went up from 13.9 percent to 27.9 percent of GDP between 1980 and 1986) affected the budget. Government revenues from oil stagnated and went down from 6 percent of GDP to 5.6 percent between 1980 and 1986. External debt servicing had become a major budget expenditure, while the domestic debt of the Government had risen from 11.9 percent of GDP in 1980 to 15.7 percent in 1986. The structure of the Government budget had thus to be adjusted to declining revenues t:rough fiscal reforms and increased efficiency of public spending. 19. Two other categories of budgetary expenditures represented economic inefficiencies. One was the transfers to public enterprises (including operating subsidies and investments). In 1986, they amounted to 11.8 percent of GDP. The other was the price subsidies on consumer items (e.g. cereals, sugar, vegetable oil, fertilizers) which reached 2.9 percent of GDP in 1986. 20. The macroeconomic adjustment program presented by the Tunisian authorities to the Bank was judged appropriate for Bank financing, and the Government expressed a strong preference for long-maturity, fast-disbursing Bank financing. Given the strong commitment of the Government to carry out the program (at that time), the Bank supported these efforts with two rapidly- prepared adjustment operations: ASAL-I, focusing on agricultural policies, and . 5 - ITPAL, focusing on industrial and external trade policies. Although technically ASAL-I preceded ITPAL by a few months, they were designed and implemented virtually simultaneously (the last disbursement date was October 1989 for ASAL and December 1989 for ITPAL). 21. Since there were the first two adjustment operations in Tunisia and there was no prior IMF program in place, both loans had strong macroeconomic foci and they both supported the same medium-term macroeconomic framework in addition to sector specific measures. As regards ITPAL, conditionalities were essentially related to trade and price liberalization measures and other incentive reforms. Thus, to the extent that ITPAL chiefly included both macroeconomic and trade, price and other fiscal measures, the "Industrial" denomination would seem to have been somewhat inappropriate. 22. Although the Government consulted with the IMF prior to 1986, the IMF's financial support was not requested until after the Government agreed with the Bank on the overall adjustment strategy. After the IMF's approval of the macroeconomic stabilization measures, a standby arrangement and purchases of SDRs under the Compensatory Financing Facility were made available in February 1987, after the Bank's Board approved ASAL-I but before ITPAL was approved. Although Bank staff may have worked more closely with the Tunisian authorities on the macroeconomic program as early as 1985, there is no question that the IMF role has been important particularly, for instance, for the selection of a basket of currencies against which exchange rate adjustment were made to maintain the competitiveness of Tunisia's exports. -6- II. OBJECTIVES AND DESIGN A. Objectives 23. The purpose of the Loan was to provide the necessary financial and technical support to the Government's program for macroeconomic reform mentioned above, and to an adjustment program in the industrial and trade sector. The Government's macroeconomic and sectoral adjustment programs were transmitted to tho Bank in two letters signed by the Minister of Finance and Planning, one covering economic development (dated September 1, 1986) and the other the industrial development policy (dated January 27, 1987). The sectoral reform program, including a detailed action program that covered the period from mid- 1986 to 1988 was approved by a Bank mission in October 1986 and negotiations took place in December 1986. The Loan was approved in February 1987 and became effective in August. A distinction was made between the macroeconomic policy adjustment program objectives and the Medium-term Industrial and Trade Policy Adjustment Program (MITAP) objectives which complemented and reinforced the macroeconomic program. 1. Macroeconomic Policy Adjustment Program Obiectives 24. Three major problems faced the Tunisian economy in 1986: (a) A high deficit of the balance of payments current account and the consequent rapid increase in the country's foreign debt; (b) A decline in net petroleum exports requiring the development of other sources of export revenues (manufacturing and tourism); and (c) A high unemployment and underemployment rate. 25. To help solve these problems, the adjustment program had three main objectives: (a) Export-driven growth strategy. Given Tunisia's limited domestic market (10 percent that of Switzerland) and declining oil exports, manufacturing was to become much more export-oriented. This required an increase in incentives to export. Tourism also had to be revitalized to provide more foreign exchange resources; (b) Increase in efficiency of resource allocation. The increase in efficiency of resource allocation was, to some extent, to offset the loss in oil exports and higher debt service. This implied a reform of price incentives; ensuring that Government expenditures, especially on public enterprises, did not crowd out the private sector; and removal of a number of restrictions on private sector activity; (c) Development of labor intensive sectors in order to create more employment. This was also to be achieved by making labor less - 7 - expensive relative to capital in particular by restraining wage increases. 26. To achieve these objectives, a number of short- and medium-term measures were proposed: maintaining cautious wage and salary policies to promote more rapid employment creation, pursuing a flexible exchange rate policy to ensure international competitiveness, free interest rates, reducing the budget deficit and cutting expenditures, limiting the growth of money in circulation, removing price and investment controls, liberalizing imports and reforming the tariff system. Specific targets and time tables were set for most of the above proposed measures. 2. Medium-term Industrial and Trade Adjustment Program (MITAP) Objectives 27. The MITAP complemented the macroeconomic policy adjustment program with three objectives in mind: (a) Stimulate growth in manufacturing production through better capacity utilization in the short-term and increase private investments in the medium-term; (b) Stimulate manufacturing exports; (c) Stimulate manufacturing employment. 28. To help achieve these objectives, the MITAP aimed at establishing an appropriate incentives framework by abolishing investment controls, and limiting special incentives to enterprises' exporting part of their output, creating new jobs in high priority areas and introducing new, improved technologies. Full decontrol of investments was to require major changes in institutions dealing with the manufacturing sector to reflect the shift in emphasis from control to promotion. To encourage investment and stimulate production, a general value- added tax was to be introduced and direct taxes simplified and consolidated. To help enterprises in reducing costs and hiring employees, measures were to be taken to prevent any further increases in social security charges, to increase flexibility in hiring and firing and to develop training programs. B. Design of the Program 29. The loan was to support both the macroeconomic and the sector reform programs. These programs covered the period of the Seventh Plan (1987-1991), but the action program to be supported by the Loan focussed particularly on the first two years of this period (1987-1988). While the broad outlines of the five-year program were discussed and agreed between the Government and the Bank, it was the shorter-term, twi-year slice of this program that was developed and agreed upon in detail. However, the Letters of Economic Development Policy and of Industrial Development Policy prepared before the loan was approved stated the objectives and actions planned for the entire period 1987-1991 and not only 1987-1988. For instance, targets for the Government budget, which were to be reached under ITPAL in 1987 and 1988, also covered the year 1991. Although a fast disbursing loan such as ITPAL normally covered the years 1988/89, it did also, in fact, support -8- programs covering the entire period 1987-91, being understood that a Structural Adjustment Loan was to be approved one year later, i.e. 1988, and include conditionalities, covering the remainder of the Seventh Plan Period (the SAL closing date was June 30, 1991). When evaluating the accomplishments under ITPAL, it would thus seem appropriate to examine what actually happened during the period 1987-1991 in order to judge the sustainability of that particular operation. ITPAL was designed with the view to support economic and trade policy reforms which have to be post-evaluated over a longer period than that covered by ITPAL, which was originally conceived as the first of a series of adjustment operations. A summary of conditions and key actions is shown in Table 1. 1. Macroeconomic Reform Program 30. An understanding was reached between the Bank and the Tunisian authorities on two kinds of actions which were to be taken during 1987-1991 under ITPAL: (a) actions to maintain and strengthen the measures taken in 1985-86 (cf. para. 9 above) and (b) actions to eliminate restrictive elements, which had created a number of problems in 1985-86 such as a lack of essential imports for directly productive activities. (a) Actions to Maintain and Strengthen the Measures Taken in 1985-1986. - Government budget. The Government intended to eliminate the overall budget deficit by 1991, at the latest. This objective was to be achieved largely through limits put on civil service wage rates and hiring of civil servants, reduction of subsidies to public enterprises and reduction in recurrent expenditures. - Wage and salary policy. The two objectives were: first, limit the total wage bill to less than inflation in 1986-87 (when only the minimum wage was to be raised), and then, limit the growth of the wage bill to that of GDP during 1988-91. - 9 - Table 1 - CONDITIUNS AND KEY ACTIONS Policy Area Type of Condition 1. Macroeconomic Reform 1987 Budget. Approval of thb 1987 Budget in line with Condition of effectiveness. the targets agreed with the Bank. Overall Macro Program. Bank confirmation of satisfactory Condition of second tranche progress in implementation of the overall macroeconomic release. program, based on selected macro indicators. II. Sector Program (MITAP) 1. Incentives Framework Investment Code. Submission of the new investment code Condition of effectiveness. to the National Assembly. Adoption of the new investment code. Condition of second tranche release. 2. Institutions Investments Approvals Committee. Issuance of a decree Condition of second tranche separating the approvals committee responsible for release. implementing the new investment code from API*s Board of Directors. Restructuring. Merging of CNEI's and AFI's activities Key action. and personnel with those of API by January 2, 1988. Restructuring API to focus on promotional activities by Key action. January 2, 1988. Merging of OCT's promotional work with CEPEX by end 1987. Key action. A detailed, concrete proposal to reduce financial Key action. dependence of technical centers on the budget to 50 percent by the end of the VIIth Plan. 3. Export Promotion. Improvement of Customs and other Key action. external trade related services. 4. Liberalization of Banking activities. Deregulation of Key action. all lending and borrowing rates, excluding (i) lending rates on priority activity loans; and (ii) borrowing rates on special savings accounts and convertible dinar deposits. 5. Foreign Exchange Risk Coverage. Agreement on the terms Condition of effectiveness. of references for (i) a study to improve the system of protection against foreign exchange risk; and (ii) a study to improve the system of forward coverage of foreign exchange risk. Exchange of views on the findings of the foreign exchange Condition of second tranche risk study and the implementation of a new system of release. foreign exchange risk coverage. - 10 - Table 1 - Conditions and Key Actions (cont9d) Policy Area Type of Condition 6. Taxation VAT. Submission of a value-added tax legislation to the Condition of second tranche National Assembly for enactment. release. Direct Taxes. Standardization and simplification of Key action. direct taxes on personal and corporate income before the end of the VIIth Plan (1986-91). 7. Industrial Employment and WaReo Social Srcurity. (a) Exchange of views on measures aimed Condition of second tranche at reforming the social security system to prevent release. further increases in employers' contributions in the short-term and to gradually reduce social security charges without jeopardizing the financial integrity of the systeml (b) Agreement on a timetable for implementing these maasures. Salary Policy. Employment of consultants for the Condition of second tranche training of staff of the Ministry of Social Affairs and release. of selected enterprises in implementing selective wage adjustment policy based on improvements in p.oductivity. Labor and Employment Legislation. The Bank's review of Condition of second tranche proposed changes in labor and employment legislation to release. improve its flexibility and adaptability and agreement on a timetable for the implementation of the changes. 8. Tourism Policy. Agreement on the terms of reference for Condition of effectiveness. a comprehensive study of policies necessary to increase revenues from tourism. - 11 - - Exchange rate policy. The Government committed itself to pursuing a flexible exchange rate policy with the objective of maintaining the real effective value of the Dinar. - Interest rates. Nominal rates were expected to remain well above the expected rate of inflation of about 6.5 percent during 1987- 91. In fact, the Government deregulated in January 1987 all lending and borrowing rates, except for some priority activities (agriculture, energy conservation, etc.). - Monetary policies. The Government intended to prevent the growth of money circulation during 1986-91 from being higher than that of GDP. (b) The Liberalization Program 31. The Government was determined to complete the phasing out of controls before the end of the Seventh Plan (1991). (M) Removal of price controls 32. In addition to ongoing gradual decontrol of agricultural producer prices, price controls were to be abolished for all manufactured goods by 1991 with the exception of a small number of key staples such as bread and edible oils. 33. The existing cost-plus system was to be replaced by March 1987 by a system allowing the enterprises (for which prices were not yet decontrolled in the interim period 1987-91) to adjust prices unilaterally provided there was no justified objection on the part of the Government during a reasonable lapse of time. (ii) Import liberalization 34. The target was to phase out all quantitative restrictions on imports before the end of 1991, except for a limited number of infant industries which were allowed to receive quantitative protection not exceeding three years in exceptional circumstances. 35. After reducing tariffs in January 1987 and January 1988, a program of further gradual tariff reductions was to be prepared before the end of 1988 so as to achieve the objective of a 25 percent effective protection rate by the end of 1991. (iii) Employment 36. The Adjustment program made reference to a possible worsening of the situation of the absolutely poor through the anticipated reduction in budget subsidies and through increases in consumer prices triggered by changes in the exchange rate and increases in agricultural producer prices. However, it was felt that the subsidies profited the better off segments of the population with only less than 10 percent going to the absolute poor. It was then envisaged to study how to target and efficiently distribute consumer subsidies, so as to gradually introduce a more focussed and less expensive system of support for the - 12 - poor as overall subsidy outlays were assumed to be reduced (this issue was considered under ITPAL but more detailed conditionalitieR on subsidy reductions were introduced in the 1988 SAL). However, the poor was expected to profit from increased agricultural producer prices and from the increase in the minimum wage introduced in mid-1986. 37. The number of new jobs created in 1987-91 was expected to average 50 to 55,000 per annum against 35,000 (or less than half the expected number of job seekers) if there had not been macro and sector adjustment programs. Employment was assumed to grow faster in export-oriented and/or labor intensive industries such as textiles and electrical and mechanical industries, tourism and agriculture. 2. Sectoral Program (a) Incentives Framework 38. A new Investment Code was to be prepared and submitted to the National Assembly by May 1987. The most important change, representing a major step in liberalizing the economy, was that investment which requested no special incentives would, in the future, need no prior Government authorization. Only a limited number of investments were to be eligible to receive special tax and duty incentives (enterprises exporting part of their output- -20 percent or more- - those creating new jobs in high priority areas in the country and those introducing new, improved technologies). Approximately 90 percent of new projects were unlikely to qualify for special incentives and so did not need to apply for any kind of Government approval under the new system. 39. Another major change was that incentives were to be granted automatically (except for incentives for new technologies where a judgmental element was needed). This was made possible since many incentives were sector-neutral and available as "common law" rights as part of the general tax and customs codes. 40. The final big change was that the special incentives themselves were much less generous and not discriminating against smaller projects, replacement investments, or labor-intensive enterprises. Most importantly, the new law did no longer grant duty-free imports of equipment, reducing markedly the bias against labor-intensive projects. The only exception was for enterprises exporting all their output which continued to benefit from cuts in tariffs on capital goods imports. (b) Improvements in the Institutional Framework and Regulatory Environment of the Industrial and Trade Sector 41. Implementation of the macroeconomic adjustment program and the full decontrol in investments was to require major changes in institutions dealing with manufacturing and other subsectors to reflect the shift in emphasis from control to oromotion. The main institutional reforms were to take place in the Investment Regulatory Agency (API), the Industrial Land Agency (AFI), the Industrial Study Center (CNEI), the Export Promotion Center (CEPEX) and three technical centers assisting small-scale industries. - 13 - (c) Export Promotion 42. In an effort to further improve the import/export trade system, MITAP included measures to be taken in 1987 to (i) complete the computerization of customs services, for the about 15 percent of services not yet covered; (ii) strengthen the computerized handling of operations; (iii) decentralize customs offices; and (iv) unify working hours, regroup services in a siagle location, integrate computer treatment and in general, try to place a single Government respondent vis-A-vis the exporter (Bureau de Rattachement Unique). (d) Liberalization of Banking Activities 43. To move toward liberalizing banking activities, a decision was made to mitigate two constraints that had considerably limited the autonomy of the deposit banks: (i) the requirement to obtain prior authorization from the Central Bank for any loan in excess of a certain minimum, and (ii) the arbitrary earmarking of a large portion of their deposits to medium- and long-term lending. (e) Exchange Risk Guarantee 44. Until 1985, the Government guaranteed external borrowings of development banks and assumed the foreign exchange risk, regarding this as a normal counterpart to exchange control. Up to 1981, loans guaranteed in this way yielded gains to the Government, as the value of the Dinar appreciated in relation to the foreign exchange borrowed. In 1981, the situation was reversed as a result of the strong upswing of the US dollar, and continued in this vein with the depreciation of the Dinar in later years. 45. In 1985, the Government reactivated the Exchange Equalization Fund (FPC or Fonds de Pdrdquation des Changes) which had suffered heavy losses since 1981. It provided it with a constant source of income resulting from charges on final borrowers (such as a 1 percent commission on development bank loans and a 0.5 percent commission on overdrafts). The FPC was to use these resources to repay, by the end of 1988, losses sustained on development banks (BDET, BNDT) borrowings up to the end of 1985. These measures, therefore, remained short-term solutions dictated by the circumstances of the moment, and did not present the basis for a long-term strategy to handle the foreign exchange risks on external borrowings. FDC was not expected to have constant resources high enough to cover foreign exchange losses in the long term. 46. In the long run, the Government agreed that the exchange risks needed to be borne by the final borrowers, if because of their size or the nature of their business, they had sufficient means of protecting themselves. Hence, the existing policy to grant the banks an undifferentiated guarantee benefitting all customers was not justified. It was decided to undertake two studies. (i) A foreign exchange risk coverage system was to be established on the basis of recommendations by a detailed study. However, some principles were adopted before the completion of the study: f1rst, the benefits of the FPC system were to be limited to small and medium enterprises which did not have the means to protect themselves effectively; second, the FPC would remain self- - 14 - sufficient without need for Government subsidies. In particular, whenever there would be a drawing on a new foreign loan, the banks would pay the FPC a fee equal to the difference between their cost of borrowing abroad and a reference rate which was to be the long- term domestic rate minus an allowance for administrative costs, thus banks would no longer be tempted to choose systematically the stronger currencies; finally, since the FPC would not be supported through budgetary funds, additional measures designed to increase the revenues of the FPC would be adopted any time that there would be a foreseeable risk of a lasting deficit in FPC. (ii) Forward Exchange Risk Coverage was to be dealt with through a second study undertaken by the Central Bank and focussing on authorizing term coverage of debt service (principal and/or interest) in addition to trade transactions and improving the term coverage of exchange risks affecting foreign borrowing operations. (f) Taxation 47. In 1982 and 1985, the IMF expressed the view that the tax system was excessively complicated and the rates rather high, although they could have been reduced if evasion were less prevalent. (In 1985, the IMF estimated losses from tax evasions and avoidance at about 50 percent of potential direct tax revenues). The Government's objective was thus to simplify and consolidate the system of personal income and corporate profit taxes through standardization of direct taxes on individuals and corporations, and perhaps a further reduction in tax rates (the revenue decline being offset by more efficient tax administration) by 1991. 48. Even more importantly, the Government announced in August 1986 that it intended to introduce a general value added tax (VAT) system on January 1, 1988. A bill was to be submitted to the National As.embly in the first quarter of 1987. (g) Industrial Employment 49. Given that rising unemployment had been a major concern for the Government, MITAP suggested policies to encourage employment in addition to the measures affecting salaries and wages that were a part of the macroeconomic program supported by ITPAL. Three actions were planned: (i) To prevent further increases in social security contributions by employers without undermining the financial integrity of the existing social security system, a study was to be made of the feasibility of reallocating total employers contributions among the six separate social security programs so as to maintain the long-term equilibrium. If a balance between resources and expenditures was not possible, the Government agreed to realign benefits with expected revenues instead of increasing the burden of social security charges on employers. (ii) To train Tunisian staff of the Ministry of Social Affairs and of selected enterprises, in the area of selective-wage adjustments - 15 - based on changes in productivity and on the financial condition of each enterprise, eaperts were to be recruited and financed for an initial phase at a cost of US$200,000 financed by the Bank. (iii) Labor and employment legislation was to be reviewed with the aim to increase flexibility, promote employment and incite entrepreneurs to hire more staff. A timetable for action was to be agreed upon between the Government and the Bank after a joint discussion of the results of the review. (h) Tourism Policy Study 50. In 1980-85, despite increases in the number of hotels and beds, value added and foreign exchange receipts had little risen in real terms (see Annex 16). It was felt that an in-depth assessment of the sector's problems and of the various obstacles preventing a more rapid and controllable growth was needed. It was thus decided to undertake a comprehensive study on future policies necessary to increase domestic resources from tourism. The study was to focus particularly on an analysis of the economic justification of the incentive structure as it affected tourism and of prices in Tunisia compared to those of major mediterranean competitors. As a result of the study, changes were to be introduced in the tax and labor code and in import regulations, if deemed necessary. - 16 - III. IMPLEMENTATION EPERIENCE A. Delays in Loan Effectiveness 51. ITPAL was declared effective in August 1987, four months after the planned date of effectiveness (April 1987, according to SAR on ITPAL, Annex III). 52. As indicated above, there were four special conditions of effectiveness: (i) A 1987 budget in line with the targets under ITPAL; (ii) Preparation of the new Industrial Investment Code; (iii) Terms of reference of the study on the protection against risks of foreign borrowings by development banks and terms of reference of the study on forward coverage of foreign exchange rates; and (iv) Terms of reference of the tourism policy study. 53. As regards the first condition, the 1987 budget was approved by the National Assembly and found satisfactory by Bank staff. It provided for a net deficit equivalent to 2.3 percent of GDP (slightly higher than the 2 percent deficit agreed under ITPAL), against an estimated 3.2 percent deficit in 1986. The actual deficit was 3 percent in 1987, larger than anticipated by the 1987 Budget. On expenditures, the only substantial difference between the Budget and the actual results was bigger capital expenditures than originally planned. 54. Table 2 compares the Budget, ITPAL target for 1987 and actual results (as % of GDP). Table 2 - 1987 BUDGET - REVENUES AND EXPENDITURES (Z of GDP) 1987 ITPAL 1987 Budget Target Actual Revenues 28.9 30.0 29.6 Recurrent Expenditures 23.5 24.0 23.5 Capital Expenditures _.7 . _1 Subtotal 31.2 32.0 32.6 Overall Deficit 2.3 2.0 3.0 Source: Ministry of Finance (cf. Annex 18) - 17 - 55. The authorities were confident that, as in previous years, actual expenditures would turn out to be lower than allowed in the budget, thus bringing the deficit in line with the ITPAL agreement. Both recurrent and capital expenditures were well within the target ranges. The main reason for the slightly higher expected deficit shown in the budget compared to ITPAL target for 1987 was that revenues were expected to reach only 28.9 percent of GDP rather than 30 percent as agreed under ITPAL due to lower direct taxes anticipated in the context of the tax reform. 56. Concerning expenditures, ITPAL specified that the growth in the number of civil servants was not to exceed 2 percent in 1987, and that the average civil service wage rate was not to grow by more than the inflation rate. The 1987 Budget called for the creation of 5,000 new jobs in the Administration, or an about 2 percent growth over the estimated number of civil servants employed in 1986. In fact, it seems that the increase was 4,500 only, or less. As regards the wage bill, the Budget provided for an overall increase of about 7 percent in nominal terms and an average wage rate increase of about 4.9 percent which was expected to be below the anticipated inflation rate. The actual total wage bill rose 5 percent only, while the average wage rate was up by 4.2 percent against an 8.2 percent increase in consumer prices. ITPAL taryets were thus substantially met in 1987. 57. According to ITPAL, the aggregate amount of total subsidies included in the Government budget was to decline by, at least, 5 percent p.a. in nominal terms in 1986-91. Although subsidies to consumers were to be reduced by about 8 percent in 1987, the average reduction in total subsidies was to be only 3 percent in nominal terms because of continuing subsidies to public enterprises. Thus, formally, the Government did not fulfill this condition under ITPAL in the 1987 Budget. However, this was an area in which the authorities expected actual expenditures to be lower than the Budget permitted because of price increases of subsidized goods and services, the latest of which had already taken place in February 1986. It seems that transfers and subsidies actually declined by about 3 percent only in 1987 (see Annex 3). 58. With respect to development outlays, ITPAL agreements specified that these expenditures (net of debt amortization) were not to exceed 8 percent of GDP in 1987. The 1987 Budget called for a freeze in total development outlays at the 1986 level, equivalent to 7.7 percent of GDP and well within the ITPAL target. However, actual capital expenditures amounted to 9.1 percent of GDP, ubstantially more than anticipated by the 1987 Budget. 59. As regards the second conditionality, the Government submitted to the National Assembly a new investment code as requested under ITPAL. The code did not reveal any substantive changes from an earlier draft which had been analyzed in detail by Bank staff and considered acceptable. 60. On the third condition, the Bach Hamba (or Institute of Quantitative Economy) was requested by Government to undertake the study on the proteetion against foreign exchange risks of foreign borrowings by development banks. The draft terms of reference were found acceptable. However, as regards the study, which was to be undertaken by the Central Bank on the forward coverage of exchange risks as a means to improve the management of the foreign exchange risk - 18 - resulting from Tunisia's foreign debt, it was found that the Central Bank was reluctant to undertake this study. Two reasons were given: (i) possibilities were limited to expand the forward coverage of the exchange risks beyond the 6-8 morths newly introduced in February 1987 for trade operations and to introduce forward coverage for foreign debt payments, which was the main issue the Bank wanted the authorities to address in this study; and (ii) the overall management of the public foreign debt was thought to be the responsibility of the Ministry of Finance, not the Central Bank. As a result, the Government proposed to combine the two studies to be done by the Bach Hamba Institute and to have joint terms of reference prepared for that study. This was found acceptable by Bank staff who approved those terms of reference, which were partly based on a draft prepared by Bank staff itself. 61. The fourth condition was an agreement on the terms of reference of a tourism policy study. These terms of reference were first prepared by Bank staff then revised by the Tunisians and finally accepted by the Bank with some delay. The completion date of the study was to be end-1988 rather than mid-1988. This had been requested by the Tunisian authorities. 62. The four-month delay in loan effectiveness was mainly due to the fact that the Investment Code was submitted to the "Conseil Economique et Social" for advice, which took some time; secondly, the Central Bank did not prepare terms of reference of the study on forward coverage of exchange risks as agreed, and subsequently, as indicated above, both the Bank staff and the Bach Hamba Institute had to prepare draft terms of reference for a larger study; and thirdly, a new Tourism Investment Code has been promulgated recently (September 1986) and the Government was reluctant to introduce in the term of reference of the study a reference to a possible revision of that Code. When the Bank insisted on a revision, discussions with the Tunisian authorities delayed the final Bank's approval until a compromise was reached. B. Delays in Disbursements 63. Disbursement was slow mainly because of the general slowdown in investment at the same time that exports had done well, so that consumption and intermediate goods demand was largely met out of export earnings, while demand for capital goods was low. A Special Account (revolving Fund) of US$35 million corresponding to four months' payments expected to be made through the revolving Funid, was established at the Central Bank to facilitate and accelerate disbursements. Replenishments were to be made either once a month or when half of the Account had been utilized. However, in addition to the US$35 million from the Special Account, only US$2.28 million was disbursed by end-March 1988 instead of the US$85 million originally planned. The full amount of the US$150 million loan was to be disbursed by December 31, 1988, but at that date, the cumulative total was US$90.63 million, i.e. 60.4 percent only. 64. By March 31, 1989 disbursements reached US$103 million, i.e. about 69 percent of the ITPAL amount, but at that time, a new SAL for US$150 million became effective and available for disbursements. It is only on December 31, 1989 that ITPAL was totally disbursed, i.e. with one full year delay, resulting in the extension of the closing date from December 1988 to December 1989. - 19 - 65. There seems to have been an overevaluation of Tunisia's foreign exchange requirements in 1987 based on too pessimistic a forecast of imports and exports during that year. In October 1986, the Tunisian authorities requested sizable Bank lending in the early years of the Seventh Plan (1987-91) when Tunisia most needed it, both as financial support and, most importantly, as a positive signal to other donors. They expected that the situation would have eased after calendar year 1988. For 1987, they, thus, asked that the Bank financed ITPAL for US$150 million instead of US$100 million previously agreed. Bank management was reluctant to agree (although it finally did in January 1987) because it excessively increased Bank's exposure (40 percent of total estimated net disbursements in 1985) an,: -ecause there would have been a very abrupt rise in net disbursement in 1987 (taking all Bank lending to Tunisia together) and a very sharp decline in 1988, while the program of reforms was to take several years to implement. 66. At appraisal, Bank staff had endorsed Tunisian trade projections for 1987 which quickly proved unfounded, as shown below: Table 3 - EXPORTS AND IMPORTS IN 1986-1987 ITPAL Actual 1986 1987 1986 1987 (estimated) (forecast) Exports Goods and Services 2956.0 3262.0 2722.0 3374.1 Total Goods 1809.0 1845.0 1768.0 2136.7 Oil Exports 686.0 624.0 428.0 504.8 Non-oil Exports 1123.0 1221.0 1340.0 1631.9 Manufacturing Exports 983.0 1070.5 1175.0 1441.7 Imports Goods and Services 3779.0 3968.0 3392.6 3473.4 Total Goods 2705.0 2770.0 2750.5 2868.7 Oil Imports 355.0 370.0 251.8 318.2 Food Imports 399.0 405.0 361.5 312.4 Capital Goods 482.0 485.0 635.8 639.2 Consumer Goods 500.0 505.0 622.2 777.2 Net Current Transfers 11.7 12.5 7.1 4.2 Current Account Deficit 811.3 693.5 733.5 81.6 Sources: President's Report ITPAL and Country Economic Memorandum, March 1990. - 20 - 67. ITPAL trade projections for 1987 were supposed to take into account the effects of the Government's adjustment program, including measures taken in 1985- 1986: (a) Food imports were assumed to increase slowly because policy measures prepared by the Government were expected to substantially stimulate import substitution of agricultural products. (b) Imports of consumer goods were to grow little due to the impact of short-term stabilization measures. (c) Capital goods imports would also grow little because of cutbacks in public capital expenditures. (d) Manufacturing exports were to become an "engine of growth." (e) Tourism receipts were to increase faster than exports of goods, although resumption of growth was to be slower than in the late 1970s. 68. These projections proved largely erroneous: (a) Capital and consumer goods imports actually fell because consumption and investment were much lower than anticipated. (b) Food imports goods declined, although this could not be anticipated due to a bumper crop. (c) Manufacturing exports rose significantly faster than predicted and they were boosted by increased competitiveness due to the Dinar rapid depreciation. (d) Tourism receipts rose also much more than anticipated. 69. All this indicates that the effect of the policy measures in 1985/86 such as the sharp decrease in the effective exchange rate, improved export incentives and demand restraint actions had a much more pronounced effect in 1987 than anticipated at appraisal. The impact of the reforms was underestimated as regards both imports and exports of goods and services. The result was a current account deficit reduced to US$98 million in 1987, while it had been assumed, a few months earlier, that the deficit would be US$693 million. The net current account deficit had been US$705 million in 1986, a crisis year, and planners were perhaps inclined to believe that the situation would somewhat improve in 1987, but rather slowly, and that reforms would have a full effect over several years only. They were thus inclined to project a high deficit and insist on larger Bank loans than really needed. In fact, the impact was felt much faster than foreseen. 70. ITPAL did not include projections for 1988, although detailed forecasts were made available for 1991 providing annual growth projections for the 1987-91 period. The general assumption was that the current account deficit would decline between 1987 and 1991, from 7.9 percent of GDP in 1987 to 3.4 percent in - 21 - 1991. In 1988, there was actually a 1 percent current account surplu (due to very high tourist receipts and better workers remittances) and in 1991 the deficit is expected to be more than 5 percent of GDP. This shows, of course, how difficult it is to make accurate short- and medium-term economic forecasts, but to the extent that under ITPAL economic performance had to be particularly monitored in 1987 and 1988, it is, somewhat, unfortunate that no projection was made available for 1988 (even if the experience with 1987 projections had proved disappointing). 71. There is little doubt that the slow disbursement problem was linked to better than anticipated foreign exchange receipts, as a result of improved trade and services performance. The availability of other funds from ASAL I, SAL (in 1989) and other operations also contributed to slow disbursements. Finally, in the poor investment climate prevailing in 1987/88 in Tunisia, there was an overabundance of long-term funds available. C. Implementation of the Macroeconomic Adjustment Program 72. The Government's letter on Development Policy and its attachments, dated September 1, 1986, stated its intention to curb the budget and balance of payment deficits and to keep external debt within Tunisia's capacity to repay. To achieve these objectives, the macroeconomic adjustment program included two kinds of measures: (a) measures to maintain and strengthen the measures already taken in 1985-1986 to introduce structural changes and to improve the deteriorating economic situation; and (b) liberalization measures to eliminate restrictive elements hampering economic development. The following paragraphs examine to what extent the proposed measures have been undertaken and effectively implemented. (a) Strengthening of Measures taken in 1985-1986 (i) Wages and Salaries 73. As intended, the total wage bill grew less than inflation in 1987, and less than GDP in 1988 and in 1990. However, in 1989 and in 1991, the wage bill rose faster than GDP. On average, the total wage bill rose by 10.7 percent p.a. in 1988-91 versus 11.4 percent for GDP (at current prices), i.e. slightly less (cf. Annex 25). Table 4 - WAGE BILL, INFLATION AND GDP (annual percentage growth) 1987 1988 1989 1990 1991 (est) Wage Bill 5.1 5.8 12.1 8.8 11.5 Inflation (CPI) 8.2 7.2 7.7 6.5 n.a. GDP 13.9 7.8 11.0 13.7 9.2 - 22 74. As indicated in the adjustment program, the nominal minimum wage was allowed to increase in 1987 (4.5 percent in industry and 5 percent in agriculture). However, in real terms, this meant a 4 percent decline which continued in 1988-1990. Overall, nominal minimum wages in industry rose by 12.5 percent from 1986 to 1990, but declined by more than 20 percent in real terms during the same period. This clearly shows that the cautious wage and salary policy introduced in 1983, in order to increase the competitiveness of the Tunisian economy, was maintained thereafter. (ii) Exchange Rate Policy 75. The nominal average exchange rate rose by 5 percent in 1987, by 7.5 percent in 1988 and by 10.5 percent in 1989. This rise in the exchange rate was due to the decline in the US dollar value. In 1986-1991, the dinar nominally appreciated 16.5 percent against the dollar. 76. However, the objective was to maintain the real effective value of the dinar and such an objective was more than achieved, since the real effective exchange rate of the dinar against the US dollar fell by about 27 percent during 1986-1990: Table 5 - EXCHANGE RATES (Tunisian dinar/US dollar) 1985 1986 1987 1988 1989 1990 1991 (est) Average Exchange Rate 0.83 0.79 0.83 0.86 0.95 0.88 0.92 (nominal) Real Effective Exchange Rate 96.74 88.90 71.23 68.75 67.19 65.25 n.a. (CPI, Consumer Price Index) (1980- 100) Source: International Financial Statistics, IMF. 77. The continuous decline in the effective exchange rate in 1986-90 meant that competitiveness was increased, favoring exports, tourism and workers remittances. (iii) Interest Rates 78. In January 1987, interest rates were freed (i.e. before ITPAL was approved in February). However, low interest rates were kept for short-term credits to certain priority sectors (guaranteed agricultural credits, export financing, seasonal agricultural advances and advances for cereals, olive oil and - 23 - wine). Similarly, low interest rates were kept on medium-term credits (crafts, energy, agriculture, exports and small and medium enterprises). 79. Rates for short-term priority credits remained at 6-7 percent in 1987-89, i.e. somewhat below inflation (cf. Annex 4), but rose to 8-9 percent in 1990, compared to a 6.50 percent inflation rate. The 1988 SAL included a provision that by January 1, 1989, the effective cost of preferential credits be at least 7 percent. As regards medium-term credits to priority sectors, interest rates rose above inflation. Table 6 - INTEREST RATES ON CREDITS TO PRIORITY SECTORS 1985-1986 1987 1988 1989 1990 Lending Rates Short-term Credits (%) 6 - 10 6 - 7 6 - 7 6 - 7 8 - 8.25 Medium-term Credits (%) 5.5 - 8.5 6.5 - 8 6.25 - 8 7 - 8 8 - 9 Consumer Prices 7.35 8.20 7.20 7.70 6.50 Increase (% p.a.) Source: Central Bank. 80. Lending rates became progressively positive despite the fact that inflation was somewhat higher in 1987-1990 (on average 7.2 percent p.a.), while a 6.5 percent inflation rate had been assumed in the Seventh Plan (1987-91). As shown in Table 6, lending rates on short-term credits to priority sectors remained below the inflation rate in 1987-89 (i.e. under ITPAL), but became positive in 1990, as requested by the SAL (there was no specific provision under ITPAL). Lending rates on medium-term credits were largely negative (except the upper bracket) in 1987-89, but became positive in 1990. Overall, what had been agreed in 1986 in the macroeconomic plan was achieved and most lending rates were freed and kept positive while some priority sectors would continue to benefit from lower rates. By 1990, even credits to priority sectors involved positive interest rates. (iv) Government Budget 81. The targets set under ITPAL were not achieved as expected (cf. Annex 18). - 24- Table 7 - OVERALL BUDGET TARGETS AND REALIZATION (in percentage of GDP, net of debt amortization) 1986 1987 1988 1989 1990 1991 (est) A. ITPAL Targets Revenues 30.9 30.0 29.0 n.a. n.a. 27.0 Recurrent Expenditures 25.0 24.0 23.0 n.a. n.a. 21.0 Capital Expenditures .A -.0 _1, n.a. n.a. .0 Subtotal Expenditures 34.4 32.0 30.5 n.a. n.a. 27.0 Net Deficit 3.5 2.0 1.5 n.a. n.a. -- B. Realization Revenues 31.8 29.6 30.0 29.3 27.3 27.4 Recurrent Expenditures 25.3 23.5 23.3 25.8 23.7 24.1 Capital Expenditures 12.1 9_1 1.3 .3 7.4 6_.9 Subtotal Expenditures 37.4 32.6 33.6 33.1 31.1 31.0 Net Deficit 5.6 3.0 3.6 3.8 3.8 3.6 82. Revenues decreased as a percentage of GDP in 1987-1991, but not as much as was anticipated under ITPAL, which was pessimistic regarding future oil income and receipts from taxes on imports. In 1987-1989, oil revenues fell as a percentage of GDP (5.6 percent in 1986, 5.1 percent in 1987 and in 1988, and 4.7 percent in 1989) as expected. However, trade taxes on imports did not decrease as percentage of GDP (except in 1987) and even rose above the 1986 percentage in 1988-89. This was explained by the sharp rise in imports after 1987 which more than compensated the decrease in imports tariffs levels during that period (see Annex 3). In addition, other non-fiscal revenues, including revenues from public enterprises and Title I and II revenues, increased with the result that in 1988 total revenues were higher by 1 percent of GDP than originally projected and in 1991 were probably higher by 0.4 percent than anticipated. 83. Total Expenditures were also higher than predicted; showing an increasing trend, while under ITPAL the percentage of expenditures was assumed to decline by 5 points from 1987-1991. This discrepancy was mainly due to the fact that capital expenditures were higher than anticipated, particularly in 1988. However, they fell significantly in 1989-1991. On the expenditure side, the main item among those that exceeded the ITPAL (and SAL) program levels was consumer subsidies because of higher prices for imports of cereals, the crop most damaged by the 1988 drought. The 1988 and 1989 harvests were ruined by droughts, just - 25 - when world cereal prices were high. This is the reason consumer subsidies and budget deficits exceeded the targets. 84. The ITPAL program for 1988 had indicated limits of 23 percent and 7.5 percent of GDP on recurrent and development expenditures respectively. These were replaced in the SAL program by a limit on their m, i.e., total expenditures (net of debt amortization) of 33.2 percent instead of 30.5 percent under ITPAL. The outturn was 33.6 percent (capital expenditures were at a high 10.3 percent of GDP). 85. The overall Government deficit declined from 5.6 percent of GDP in 1986 to 3 percent in 1987 (one point higher than the ITPAL objective for 1987 due to higher capital expenditures than anticipated). A further decline to 1.5 percent in 1988 had been assumed under the ITPAL program (see Annex 18), but the figure was revised upwards to 3.9 percent under the SAL to take account of the difficulties arising from the agricultural sector and to allow salaries to increase modestly in real terms after declines over previous years. The outturn was a net deficit of 3.6 percent of GDP, only slightly below the 3.9 percent SAL objective but, of course, much higher than projected under the ITPAL program. The improving trend of 1986-1987 was not pursued, and the estimated net deficit of 3.6 percent in 1991 was way above both the ITPAL and SAL objectives for 1991. Despite decreases in subsidies and transfers to public enterprises in 1989-1991, expenditures continued to run high as a share of GDP in the last several years. The aggregate amount of all subsidies included in the b?tdget certainly did not decline by 5 percent p.a. in nominal terms in 1987-1991 as planned in the ITPAL program. Unsatisfactory results were also registered as regards the growth in the number of civil servants employed, which rose by 2.7 percent p.a. in 1986-91 as compared with the 2 percent ITPAL target. In contrast, the civil service wage rate grew less than inflation in 1986-87 as promised, and more slowly than private sector wages during the period 1988-91 (4.2 percent p.a. on average against 8.1 percent p.a. in the private sector). (v) Monetary Policy 86. The Government objective to prevent the growth of money circulation (M2) of being higher than GDP growth in 1987-1991 was nearly achieved. Only in 1988 did (M2) grow much faster than GDP (see Annex 17). In 1987, 1989, and 1990, (HA) rose more slowly or at the same speed. This took place despite a smaller decline in the overall budget deficit than expected. In 1989-1990, monetary policy was very tight due to agreements with the IMF. (b) The Liberalization Program (i) Price Decontrol 87. Under ITPAL, the Government's medium-term objecti-ve regarding price controls was that by 1991 all producer prices in agriculture and manufacturing, except basic items of consumption whose prices were subsidized (such as bread, semolina and oil), i.e., at least 90 percent of production, be free. In an interim period, i.e. from September 1986 to July 1988, price controls in well- established industries, were to be phased out. - 26 - 88. In 1986, only 5 percent of the locally produced goods were not subject to price controls. The ratio of output with decontrolled prices increased to 50 percent in 1987, 60 percent in 1988, and 67 percent in 1989. It rose further to 70 percent by end-1990 and may have reached 75 percent in 1991. This is lower than the 90 percent ITPAL target (which only excluded subsidized staples from decontrol) for 1991, but in line with the revised 75 percent target agreed under the SAL which was lower but more realistic than the earlier ITPAL target. 89. The ITPAL target of 60 percent (see Annex 15) for producer prices to be freed in 1988 was reached. However, prices for most products whose imports were to be liberalized over the same period 1986-1988 (raw materials, spare parts, capital goods and most semi-manufacturing) were not freed because imports of such products could not be liberalized in time. The Tunisian authorities were reluctant to allow producers to free prices without introducing some competition, in particular through import liberalization. As a result, it was decided to keep controls when producers were few and competition practically inexistent. 90. ITPAL, unfortunately, left out the decontrol of distribution margins. Such decontrol was, however, part of the program supported by the SAL. Under the latter, 20 percent of distribution margins were to be liberalized before June 1989 and 50 percent by 1991. It appears that 22 percent were freed with some delay, i.e. by 1990. 91. For those products for which price controls were to remain, a new more flexible price control system was to be introduced in 1987. The new system was to allow the enterprises to adjust prices unilaterally, provided there was no justified objection from the Government later on. However, in practice this was not done because the Tunisian authorities felt it too difficult to Lmplement this control a poste,iori. Instead, it was agreed with the Bank (under the SAL in 1988) to link further decontrol with import liberalization and the preparation of a new Law on Competition so as to meet the Government's concern over the risk of monopoly pricing and scarcity premia given to producers were to be met. A dratt law prohibiting anticompetitive pricing activities was presented to the Chamber of Deputies in November 1990. (ii) Liberalization of Imports 1. Ouantitative Restrictions 92. The percentage of imports not subject to quantitative restrictions (QRs) rose from 23.6 percent in 1986 to 36.4 percent in 1987 and 53 percent in 1988 (Annex 14). The ITPAL target was 75 percent for 1988. Subsequently, further liberalization took place with 63 percent of imports freed in 1989 and 70 percent in 1990. It is likely that the percentage might have been 75 percent in 1991, somewhat lower than the ITPAL objective for 1991 of 100 percent. (The SAL target was 100 percent for 1992, i.e. one year later). The pace of import liberalization has, thus, been slower than anticipated. 93. Imports liberalized in 1986-87 consisted of raw materials, intermediate capital goods and spare parts essential for domestic producers whose imports had become restricted in 1985. A large group of capital goods and a few c, nsumer - 27 - goods not produced domestically were added to the free imports list in 1988 (PCR, para. 23). 94. The share of domestic production covered by QRs declined only marginally. In 1986, the QRs covered 98.9 percent of total manufacturing and this ratio only declined to 91.2 percent in 1988 (see Annex 14). In 1989, there was a further reduction to 82.6 percent, slightly behind the SAL target of 79.4 percent (i.e., 15 percentage points lower than the 94.4 percent level reached on June 30, 1988). In 1990, the share of domestic output whose imports was not free was still a high 74.1 percent, particularly taking into account the fact that the SAL target for 1992 was as low as 25 percent. 95. It is to be noted that ITPAL did not include any specific, detailed target regarding the reduction of the percentage of protected domestic output (mostly consumer goods). It was just stated that, during 1989-90, all quantitative restrictions, essentially on consumer goods, were to be phased out. It appears that in 1986-87 the Tunisian authorities were mostly preoccupied by the need to quickly revive industrial production through increased, free imports of inputs and capital goods (thanks to newly found foreign exchange resources) and the removal of price controls. They were also eager to protect "infant" industries: enterprises in new activities were to be classified as infant industries and be given protection for a maximum of three years through higher tariffs than the maximum of 41 percent or, in exceptional cases, through quantitative restrictions (QRs) on imports. The Bank accepted this approach which implied, however, that most Tunisian industries remained protected until 1991, or later through QRs. The Bank's position was understandable to the extent that, overall, the new, liberal approach taken by the Tunisian authorities represented a major step in the direction advocated by Bank staff for years, and that, consequently, the Bank was prepared to compromise on a number of issues. However, it is rather surprising that Bank staff (in contradiction with the usual Bank approach to trade liberalization in other countries) requested deep cuts in tariff levels Drior to the gradual removal of QRs on domestic industries since the latter remained the largest stumbling block to increased competition in the Tunisian industrial sector. 2. Tariff Reform 96. Tariff reform advanced more rapidly than the elimination of QRs. The 1987 budget indicated the new tariff rates exactly as specified under ITPAL and those rates were effectively applied. The range of import tariffs and duties was compressed from 5-235 percent to 15-50 percent in 1987, and to 15-41 percent in 1988 and 1989 (see Annex 11). All other import taxes were eliminated or incorporated in tariffs (PCR, para. 24). D. Implementation of the Sectoral Progran (a) Investment Incentives 97. An Industry Investment Code was submitted to the National Assembly in May 1987 (this was a condition of effectiveness) and adopted in October 1987 after being sent to the Bank and to donor countries in January 1987 for comments. Under that Code, tax holidays ranging from 3 to 7 years, exemption from import - 28 - duties on capital goods and financing at preferential rates were obtainable almost automatically for investments in exports or disadvantaged areas. Distinctions between new investments, replacements, and expansion, which were important before and all of which required prior authorization, were removed. An Agricultural Code was adopted in 1988 to provide analogous benefits and a new Code for services, especially tourism, was adopted in May 1990. By and large, the MITAP program was thus implemented as expected. 98. One condition of the Second Tranche Release was the issuance of a decree separating the Approvals Committee responsible for implementing the new Investment Code from API's Board of Directors. Howe-er, this Committee was abolished in July 1988 and the condition was thus nullified. (b) Improvements in the Institutional Framework 99. A number of decisions were taken under MITAP which were considered "key actions" to be supported by ITPAL. Perhaps because of the lack of formal conditionalities, Bank staff did not become fully involved in the reforms which were enacted in 1987-88. Only in 1990, a Bank report (Industrial Sector Note, Report No. 8277-TUN, February 1990) briefly surveyed the institutions involved and underlined persistent major deficiencies and the lack of results obtained by reforms undertaken. (i) API 100. CNEI and AFI were merged with API on January 2, 1988, but the functions and organization of API show that the merger caused little integration of the tasks of the three former agencies and does not seem to have resulted in an improved use of resources. API has now five directorates for Identification and Sector Studies, that essentially took over the tasks of the former CNEI. There is also a department attached to the office of the API president in charge of Industrial Estates and performing the tasks of the former AFI, i.e. carrying actions needed for the development zones. 101. The number of studies produced is, in fact, lower than what the former CNEI used to produce. Development banks do see API contributing little to their appraisal work. Staff morale is low, with many feeling unhappy about the loss of status of their work units within the new API, and with a lack of sense of direction. 102. The Industrial Estates Department in charge of zoning problems has little in common with other API's activities such as studies and promotional work. Serious thought is now being given to separate again this department from API and come back to the pre-1987 situation when AFI was in charge. 103. The preparation of feasibility studies for specific projects and the development and sales of industrial estates could easily be performed independently by API. 104. Although the merger of CNEI and AFI with API was supposed to help the latter play its promotional role, in fact, little seems to have been done to make - 29 - it effective and to provide useful assistance in solving problems faced by investors in the implementation of their investment plans. (ii) CEPEX and OCT 105. In 1987-88, CEPEX was reorganized and OCT promotional activities were merged with CEPEX with a view to increase its efficiency. This decision was justified since OCT promotional activities consisted mainly in organizing fairs and exhibitions like CEPEX. However, OCT continues to pay CEPEX (D 1.5 million a year) for salaries of its personnel transferred earlier, as well as various expenditures for fairs and representations abroad, which seems to be an anomaly. (iii) Technical Assistance Centers 106. Both objectives to increase technical assistance from these centers to small-scale industries and to reduce the Centers' dependence on the Government budget have been partially met. 107. On the basis of information available for CETIME (see OED's report on EMI, Loans 2113-TUN and 2554-TUN), the latter has provided some assistance to small and medium industries with modest resources, which could benefit from CETIME more than large enterprises can. But CETIME has been more preoccupied as a manufacturer of components and tools sold to industries than by technical assistance. On the financial front, CETIME has made efforts to cover its costs and its own resources rose from 40 percent of operations costs in 1984 to 60 percent in 1990. As regards the Footwear and Leather Center (CNCC), about half of its income comes from a 1.5 percent tax on retail sales of shoes in Tunisia and increasing Government grants, which indicates that the Center continues to be dependent on the Government resources. (c) Export Promotion 108. MITAP supported additional improvements to remove the remaining administrative obstacles facing businesses which would reinforce the export promotion measures taken in 1985-86 (para. 30). A number of additional steps were taken in 1987-90 such as the Customs purchasing their own control computer in 1988, leading to generalized computerization of Customs offices (except a few at the Algerian border) since 1990, improvements in temporary admission procedures in 1989 through a new EXIM system, and further simplification of customs formalities. Customs efficiency measures were part of a well-proposed, medium-term program, independent of ITPAL (no conditionality was attached). But to the extent that ITPAL generally supported efforts to simplify procedures in order to promote exports, it may be said that the results achieved were positive. (d) Liberalization of Banking Activities 109. Short-term lending up to TD 5 million and all medium-term lending to the private sector became free of authorizations as of January 1987, i.e. just after the December 1986 ITPAL negotiations were completed and before Doard's approval. - 30 - (e) Exchange Risk Guarantee 110. The Institute of Quantitative Economy (IEQ) completed the study requested by the Bank by end-1988. As provided under ITPAL, there were exchange of views between IEQ, the Ministry of Finance, BCT and the Bank on the findings of the Study and measures to be adopted in an improved system of exchange risk guarantee. 111. Prior to the Second Tranche release, agreement was reached on the principle that end-users, other than small or medium enterprises, had to bear the foreign exchange risk and various measures were proposed. However, particularly in view of BCT's hesitations, due to the fact that BCT wanted to know what the effective cost of the new system would be, a comprehensive system could not be put in place in time under ITPAL. It was thus decided to take up the subject again in the context of the SAL with a view to establish schemes providing borrowers' options or forward purchases of foreign exchange for local currencies. 112. The original proposal for the Central Bank to assume the foreign exchange risk on long-term loans was that the borrowing bank pay it the difference between the interest rate of the loan and the money market rate. Since the money market rate is on one-week rate and can vary considerably, it did not work. The FRC that had proved unsuitable and which ceased to take on new obligations after August 15, 1988 was replaced by the following mechanisms: * Forward Sales: They apply to commercial transactions and were extended from 8 to 12 months. They are used regularly but initially caused BCT losses because of their pricing and the expectation that the dinar would continue to depreciate slowly, as it has done, led to a bias between exporters and importers in its use. The pricing formula was corrected and the bias largely removed. * Options: They are available for financial and commercial transactions up to 12 months. Initially, they were priced too high and had no takers. After the pricing was corrected sales began. * Borrowing by Banks: At issue are loans contracted abroad by development banks. The proposal mechanism was for the State to assume the risk for a fee that would make funds cost the Bank the same as its other resources of similar maturity. But, since there was no market- determined, long-term interest rate, the fee has been temporarily put at 3 percentage points added to the cost of the loan. A long-term market based interest rate is developing through the issue of bonds by certain banks and the authorities consider that it may become an appropriate reference rate for the cost of funds. However, the time needed for enterprises (and not only banks) to acquire the know-how on handling of the foreign exchange risk may be longer than now anticipated. (f) Taxation 113. Legislation for a VAT applicable to all non-agricultural production was enacted with effect from July 1, 1988, i.e. before Second Tranche release in - 31 - January 1989. The VAT was originally supposed to be submitted to the Chamber of Deputies before the end of 1987. The Government had prepared a law for submission to the Chamber in November 1987, but, since Bank staff judged that it could be further improved without jeopardizing the date of introduction of the tax (July 1, 1988), it agreed to collaborate with the Bank SAL mission in making the improvements. A satisfactory VAT law was thus submitted to the Chamber in April 1988. In 1988, the VAT on production replaced the existing indirect taxes with the exception of a consumption tax on a limited group of products which is to be gradually narrowed to a few luxuries. In the context of the SAL, the VAT was extended to wholesale trade, excluding foodstuffs, in August 1989 (PCR, para. 30). 114. MITAP also focussed on the need to standardize direct taxes and reduce tax rates by 1991. This objective mentioned in ITPAL discussions (SAR ITPAL, para. 131) was confirmed under the SAL. A new law on direct taxation was adopted in 1990. The new tax system is much simpler than the one it replaces, and applies lower maximum rates with a broader incidence. The new system may be considered as satisfactory. (g) Industrial Employment (i) Social Security Charges 115. An actuarial study of the social security system by experts from the ILO with terms of reference approved by the Bank was started with the view to assess the possibility of reducing employers' social security contributions without hurting the financial integrity of the system. The Government had originally intended to finance the study through other sources, but later ran into difficulties in financing it. Eventually, it was financed under the ITPAL after an amendment of the loan agreement allowed for this. This process took a longer time than originally expected (PCR, para. 34). The first part of the study was only recently completed by ILO and no agreement on a timetable for implementing recommended measures has been reached with the Bank, although this was a condition of second tranche release. 116. The ILO Study assumed (on the basis of 1987 data) that, in the future, entrepreneurs would remain reluctant to pay social security contributions (amounting to 23 percent of wages and salaries), that the recovery rate of contributions would remain low and that CNSS (Social Security National Center) would remain overcentralized and continue to suffer from heavy administrative costs. The ILO Study recommended a reduction in the level of contributions and a decrease in the reimbursement of medical expenses. It could have never been a basis for discussing reforms. The problems were deeper than adjustments of rates. 117. However, since 1989, CNSS seems to have succeeded in considerably increasing the recovery rate which is said to have reached 90 percent in 1990, in raising the number of contributing members (particularly in non-agricultural subsectors), in reducing costs through decentralized operations and in increasing controls on employers. As a result, CNSS became profitable in 1989-91. It also seems to have rejected the ILO Study recommendations. Despite the fact that CNSS improved financial situation should increase the prospects for reducing - 32 - employers' social security contributions, so far no decision has been made in this respect. (ii) Training of Staff to Evaluate Enterprises' Productivity and Financial Conditions 118. Government hired experts from the ILO and financed by the Bank, under terms of reference satisfactory to the Bank. They were to be employed to train staff in the Ministry of Social Affairs and in selected enterprises in determining wage adjustments on the basis of productivity and the financial condition of the enterprises. However, consultants devoted an excessive amount of time to theoretical work and there has been no tangible progress in wage- determination practices. (iii) Changes in Labor and Employment Legislation 119. Despite continuous exchange of views between the Bank and the Tunisian authorities, the labor code has not been revised and no timetable for changes has been prepared. A few measures proposed by the Government (such as a reduction in certain taxes that increased the cost of labor) were used as an excuse by the Bank for saying that this ITPAL condition of Second Tranche release had been met. However, the fact remains that there is a lack in flexibility to hire workers temporarily and lay-off poor performers or superfluous staff. The "rights" of those already employed are emphasized, perhaps at the expense of the needs of the growing unemployed population. Tunisia's labor rigidities pose a real, continuing constraint. (h) Tourism Policy Study 120. The Bank agreed with the Tunisian Tourism Office (ONTT) and the Ministry of Planning on the terms of reference of a tourism policy study. The study could have been financed by the Bank, but the Ministry of Planning thought that it had to be financed by the Government on a grant basis and executed by local consultants. The budget for the study was, however, severely curtailed and ONTT decided to limit the study to two aspects: future demand and investments up to 2010 and evaluation of Government's assistance to Tourism. Completion of the study was delayed up to 19M0, i.e. beyond the closing date of the Loan, and by then, the Bank had lost interest. Consequently, the Study's conclusions and recommendations could not be discussed before end-1987 as planned under ITPAL. Interest in tourism studies evaporated with the strong performance of the sector. (i) Bank Confirmation of Satisfactory Progress in the Macroeconomic and Sectoral Program (MITAP) 121. This confirmation came on December 30, 1988, at the time of ITPAL second tranche release. As explained above, the first tranche (US$100 million) was not fully utilized until March 1989 because of slow disbursements. This contributed to the slippage of the release of the second tranche until January 1989, although delays in meeting ITPAL conditionalities or taking key actions were also responsible for delaying the second tranche release. - 33 - 122. As regards the macroeconomic program, it was felt that Tunisia had been globally successful at its objectives of curbing Government budget and balance of payments deficits, at least in 1987 and 1988. Although there had been sizeable fluctuations in the 1988 deficits because of exogenous factors, price decontrol had taken place, although at a slower pace than anticipated. Quantitative restrictions had been implemented at a slower pace than forecast, but tariffs had been substantially lowered. The real effective exchange rate had declined and investment liberalization implemented. As a result, the Bank took the view that the adjustment program was being satisfactorily implemented. 123. Progress on a number of measures included in IT]AP was also judged satisfactory. However, as noted above, conditionalities were not fully met or delayed or key actions not undertaken on several points, in particular industrial employment, foreign exchange risk and institutional reforms. - 34 - IV. RESULTS 124. Results of the ITPAL have to be evaluated both as regards the macroeconomic program and the sectoral program. The latter included two main elements, i.e. enactment of the Investment Code and of the Value Added Tax and results achieved have to be reviewed in this regard. But the main objective of the ITPAL was certainly to support the comprehensive macroeconomic measures undertaken by the Government. The Tunisian authorities saw the usefulness of the Bank's intervention through the provision of funds to broadly support their adjustment program but also as a way to incite donor countries to assist Tunisia in undertaking major structural reforms. In addition, the Structural Adjustment Loan approved in June 1988, continued the macroeconomic program and most of sectoral actions included under ITPAL were carried over into the SAL. It would, thus, appear necessary to examine results achieved by ITPAL, not only in 1987- 1988 but also beyond (ITPAL was fully disbursed in December 1989). A. The Macroeconomic Adjustment Program 125. It is necessary to evaluate, (a) the results achieved by ITPAL (and SAL) as regards the overall progress of the economy, and (b) the results of the liberalization program supported by ITPAL. (a) Macroeconomic Performance 126. Actual growth of output and expenditures can be compared with ITPAL and SAL targets (cf. Annex 19). Table 8 - GROWTH OF OUTPUT AND EXPENDITURES (annual growth rates in %) ITPAL SAL ACTUAL -------------------- ---------------------------------------- Target Target Target 1987 1986-91 1987-91 1987 1988 1986-911' GDP (at market prices) 4.0 3.4 3.9 5.9 1.1 4.0 Agriculture 9.5 4.3 4.1 17.5 -23.7 5.2 Industry 1.9 5.8 n.a. 4.1 6.9 5.3 Petroleum -9.0 -5.9 -4.4 -5.5 -1.4 -2.0 Consumption 3.3 2.7 3.2 1.4 1.3 2.9 Fixed Investment 4.3 4.0 1.5 -10.1 -4.0 4.8 Exports 3.9 2.8 5.8 14.5 23.5 6.9 Imports 2.6 1.6 2.8 -3.2 15.7 5.2 1t 1991 is estimated. Source: Ministry of Planning and Staff Appraisal Reports (ITPAL and SAL). - 35 - 127. Macroeconomic performance in the first year of the L . (1987) was, in many respects, better than expected (PCR, para. 19). GDP and agriculture grew faster than predicted under ITPAL, industry grew more slowly, but manufacturing (excluding oil) grew faster.11 Exports of goods and services increased faster than projected under ITPAL, while imports fell instead of increasing as anticipated by ITPAL, since devaluation and demand restraint measures had a more dampening effect on imports (in particular capital goods) than originally expected. 128. The year 1988 was a bad year (1.1 percent GDP growth) because of a drastic reduction of agricultural output due to a severe drought and a rapid fall in investment reflecting not only cuts in public investment but also a continuing decline in private investment. Imports rose sharply due to exceptionally high food imports (linked to the poor crop) and to rising intermediate imports to feed inputs used by fast developing export industries, helped by the depreciation of the exchange rate. 129. Over the entire period covered by ITPAL projections (corresponding the Seventh Plan period 1987-1991), it would appear that the economic performance was generally better than forecast under the ITPAL. (i) GDP growth was 4 percent p.a. in 1986-91 against 3.4 percent under ITPAL; it was about the same as provided under the SAL (3.9 percent). (ii) Agriculture and fishing grew rapidly after 1988 (particularly fishing) with the result that average annual growth (5.2 percent) was higher than projected under ITPAL (4.3 percent) and SAL (4.1 percent). (iii) Industry grew slightly more slowly than forecast under ITPAL, but this was due to a sluggish growth of the construction industry (3.8 percent), while manufacturing developed by 6.2 percent fueled by exports. The latter grew by 19.5 percent in 1986-91 (excluding chemicals/fertilizers) against 9.3 percent forecast under ITPAL. (iv) Petroleum production fell less than originally feared. It amounted to 4.5 million tons in 1990, whereas a 3.6 million tons level has been expected under ITPAL. (v) Consumption developed at a rapid pace in 1989-90 (4.0 percent and 5.3 percent respectively), the highest growth rates since the early 1980s. This compensated for a sluggish growth in 1987-88, with the result that on average consumption grew slightly faster than predicted under iTPAL (and slightly more slowly than provided under the SAL). Private consumption developed faster than Government consumption as a result of the policy to contain 1 In 1986, there was great skepticism in Tunisia that exports would perform well, and the sustained performance since then has been a major triumph for the reformers. * 36 - recurrent expenditures (they averaged 25 percent of GDP in 1987- 1990 against a projected 23 percent under ITPAL). (vi) After a fall in 1987-88, fixed investment picked up J,, 1989 (+124 percent) and 1990 (12.4 percent), although it probably fell again in 1991. Over the five-year (1986-91) period, investment growth was 4.8 percent p.a. against projection of 4 percent under ITPAL, and 1.5 percent under the SAL. Quite satisfactorily, private investment rose from a low 22.4 percent of fixed investment in 1986 to 31.4 percent in 1989, while the public sector investment share fell from 56.1 percent to 48.8 percent (see Annex 2). (vii) Exports helped by the continued decline of the effective exchange rate, liberalization of needed imported inputs and lower labor costs, increased rapidly--manufactured exports grew by 19.5 percent p.a. in 1986-91, as indicated above. The only slowly developing exports were petroleum (exports were lower in 1991 than in 1986 due to declining output and growing domestic demand) and phosphate and chemicals/fertilizers (due to low prices and international demand). Tourism revenues, which were extremely high in 1988 due to a large influx of Libyan tourists, declined in 1990 and 1991, affected by the Gulf crisis (see Annex 16). Overall exports of goods and services rose by 6.9 percent p.a. in 1986-91, more than twice faster than anticipated under ITPAL and also faster than projected under the SAL. Imports also grew rapidly: capital goods imports rose sharply in 1989-90 linked to growing investments, intermediate goods imports increased to feed fast developing export processing industries and consumer goods imports benefitted from relatively high consumption growth in 1989-90. 130. This better than expected macroeconomic performance during 1986-91 can be largely considered the result of the adjustment program which began in 1986 and was implemented in the following years with ITPAL, ASAL, and SAL support, ITPAL being viewed as supporting a time-slice of a longer process. Other positive indicators were inflation (prices rose an average by 6.9 percent annually in 1986-90, close to the rates projected under ITPAL [6.5 percent] or the SAL [6.8 percent]); money circulation, which rose less than GDP in 1987-1991 (with the exception of 1988); and wages and salaries which continuously declined in real terms since 1986, thus increasing Tunisia's competitiveness abroad. 131. An indication of Tunisia's success in adjusting to the loss of oil export earnings and higher debt service through an improvement in the efficiency of the economy was a decline in the Incremental Capital Output Ratio (ICOR), which the reform program and the measures to increase its effectiveness were designed to bring about (see Annex 1). 132. The Government budget was under pressure because of the decline in oil revenues, the expenditure requirements of public enterprises and consumer subsidies. The net deficit has been higher than forecast under ITPAL and SAL. It reached 3.8 percent of GDP in 1989 and 1990, and there is little sign that it will rapidly decline (3.6 percent estimated for 1991). Despite the danger that - 37 - domestic borrowing may have to increase too fast to finance this deficit (it rose from 2.1 percent of GDP in 1987 to 3. percent in 1990), the fact remains that, compared to many countries, a 3.8 percent of GDP deficit appears still reasonable, particularly when compared with the levels reached in the mid-1980s (7.6 percent in 1983 and 5.5 percent in 1986). 133. The reduction in external borrowing consequent on the improvement in the balance of payments has begun an improvement of debt indicators, at least until 1989 (see Annex 20). The debt service ratio declined in 1988 and 1989. It rose again in 1990 but remained substantially below the 1986-87 levels. Moreover, the 1990 ratio of 25.6 percent is still below the levels predicted by ITPAL and the SAL. However, the faster growth of imports of goods and services in 1989-90 resulted in a rise of the current account deficit to 3.2 percent of GDP in 1989, and 5.2 percent in 1990 (ITPAL forecast was 3.4 percent and the SAL forecast 3.7 percent). Imports rose sharply because of the input requirements of the burgeoning export industries and higher demand for imported consumer goods stimulated by increasing consumption. 134. In summary, there are indications that the adiustment program has helped Tunisia to attain its objectives of adjusting to the loss of oil export earnings and its higher external debt service. GDP has grown by about 4 percent p.a. in 1986-91, exports have substantially risen (substituting for lower oil exports), assisted by the decrease in the cost of wages and the devaluation of the dinar, the debt service ratio has declined and the Government budget net deficit has been contained in manageable proportions. Private investment, which had decreased up to 1988, rose again in 1989-90 (see Annex 2), which may have been helped by the implementation of a substantial liberalization program. Its share of GDP rose from 4.4 percent in 1987 to 6.6 percent in 1989, and was probably above 7 percent in 1990 as indicated by the increase in capital goods imports in that year. Public sector investment decreased as a share of total fixed investment. 135. Measures to mitigate the social impact of the adjustment program had, however, very limited results. Admittedly inflation has been contained and there have been nominal increases in minimum wages, but in real terms there have been significant declines in the purchasing power of the population. It had been hoped, under ITPAL (SAR, para. 70), that the rural poor would profit from increased agricultural producer prices, but the increase in real terms of such products was uneven (see Annex 24). They actually decreased for wheat bread, tomatoes and sugar beet, and they rose more slowly in 1986-90 than in 1981-86 for barley and dates. 136. It had also been assumed that new policies would stimulate employment in textiles, in electrical and mechanical industries, and tourism, which are export- oriented. In 1986-90, employment increased faster than in 1981-86 in textiles, but less rapidly in the other sectors. Employment in agriculture and fishing stagnated, whereas it had grown by 3.5 percent annually in 1981-86. 137. ITPAL (see below comments on MITAP results) had included conditionalities to further reduce the cost of labor to employers and facilitate lay-offs. Given the already difficult employment situation, it is not surprising that few results were achieved. - 38 - 138. The number of jobs expected to be created in 1987-1991 averaged between 50,000 and 55,000 per annum. The average actual increase is estimated at 26,400 per annum in 1987-1991, closer to the 35,000 jobs expected annually under the Seventh Plan (1987-1991), if there had been a continuation of past macro policies (PR, para. 50). This clearly shows that the adoption of new measures aiming at stimulating production employment in labor intensive, export-oriented activities did not succeed as expected. (b) Results Achieved by the Liberalization Program 139. Direct controls over economic activities took a wide variety of forms, of which the most important were price controls, authorization requirements for investments, the deregulation of the financial sector and the removal of restrictions on imports. (i) Price Liberalization 140. Since 1985, the proportion of producer prices which has been freed has been raised to about 70 percent, as requested by ITPAL and the SAL. Distribution margin-s corresponding to 20 percent of production have also been freed as requested by the SAL. Price liberalization has reached 98 percent for textiles and leather, 90 percent for chemicals, but only 35 percent for electrical and mechanical products. The authorities were, however, concerned that there was not enough competition between domestic enterprises. One cause was the policy in the past of discouraging new entrants into non-export activities in which the number of participants was considered adequate, while import restrictions limited foreign competition in the case of tradeables. Thus, in numerous activities there were few participants and the authorities resorted to price controls on a cost-plus basis to prevent monopolistic pricing. As a result, consumers were thought to be protected from overt exploitation, while suppliers were assured their profits without great risk of being displaced by less costly or more innovative suppliers. The drawbacks were that the incentive from competition to be efficient and innovative was lost and Tunisia's international competitiveness was neglected. 141. To date, price controls only remain on those items produced by a limited number of producers. To increase competition, a competition law was adopted in 1991, which aims at disc'-uraging anti-competition practices and price transparency. More competition should facilitate further price decontrol. Such decontrol is said to have resulted in the past in price increases by industries protected by quantitative restrictions (e.g. textiles, television sets, refrigerators, etc.) and there was no clear harmonization between the timetable of import liberalization and price decontrol. Government officials have been said to intervene to limit excessive price increases made possible by monopolistic or oligopolistic practices in some industries. They may have obtained some results (e.g. consumer prices rose by 5.1 percent in the first ten months of 1990, while prices on products which have not been subject to price controls rose by 4.9 percent only). More generally, the moe rate inflation rates in recent years indicate that large price increases due to decontrol have been contained. What is needed is antitrust legislation and consumer representation together with further removal of barriers to imports for creating competition and thus introduce more balance between price decontrol and industrial efficiency. - 39 - (ii) Investment Authorization 142. Under ITPAL, the Government did not lay out clearly the specific steps of the liberalization program and the sequence in which particular sectors would be liberalized over the medium-term (PCR, para. 45). Some private investors have argued that they were not fully informed on the adjustment program and the possible consequences of the 1986-87 reforms on their protected industries and markets. Conversely, a number of Tunisian officials believe that they knew about it but only absorbed those reforms which were of direct interest to them: price decontrol, import liberalization for raw materials, spares and capital goods and elimination of investment authorization. 143. At any rate, the Investment Code adopted in 1987 removed a priori investment authorization, thus increasing the role of market forces and stimulating private investment. Investment declarations submitted (which are only intentions) to API indicate an increasing trend in the number and the value of investments. Table 9 - INDUSTRIAL INVESTMENT DECLARATIONS - 1987-1990 1987 1988 1989 1990 Number Value Number Value Number Value Number Value (TD million) (TD million) (TD million) (TD million) Total q95 341 2189 470 3416 777 3755 878 By off-shore firms 225 58 515 118 1000 304 1318 319 (export) % off-shore/total 22.6 17.0 23.5 25.1 34.2 39.1 35.1 36.3 Source: Agence pour la Promotion de 1'industrie (cf. Annexes 9 and 10). 144. A growing number of exporting industrial ficms was registered: their stated value of investment rose from 17 percent of the total in 1987 to 36.3 percent in 1990. All this confirms what is known from data on fixed investment in the manufacturing sector, which rose 21 percent on average in 1989-90. Although it is difficult to isolate it from other factors, it appears that the new Investment Code, because it removed investment controls, may have helped in accelerating private investment in recent years. (iii) Deregulation of the Financial Sector 145. Reform of the financial sector, which had been especially tightly regulated, began in early 1987 to create, over the last few years, a banking - 40 - system in which competition increasingly stimulates innovation and diversification of the financial instruments available. Progress has been rapid in this sector, and what has been achieved so far lays the basis for attaining the objective, though constraints that remain (and were not addressed by ITPAL), including the segmentation of the banking system still limit the scope of the market. For instance, the preferential credits the deposit banks must provide to some activities, force the development banks to forego this business or compete for it at unremunerative rates. On the other hand, the deposit banks may not lend longer than seven years except in special circumstances of little significance. (iv) Import Liberalization 146. Controls for protective purposes remain considerable and present a difficult challenge. There is concern in Tunisia that many enterprises will be in difficulties when the Government attainL its objective (supported by the SAL) of eliminating most import restrictions (including on consumer goods) and reducing the maximum tariff to 35 percent. This concern is well founded and its basic cause is that, under ITPAL, tariff reduccions preceded rather than followed the removal of quantitative import restrictions, and this has proved detrimental to the success of the liberalization program. As a result, any industrial enterprise now faces an abru2t transition from almost complete quantitative protection to a low proposed duty protection rate. 147. Effective protection rates remain high (not taking into account the impact of quantitative restrictions). Calculations by IEQ (see Annexes 12 and 13) show that effective protection on domestic manufacturing averaged 124 percent in 1986 and despite some decline, remained at 78 percent in 1988. In contrast, effective protection on manufacturing exports, which was still negative :nr 1986- 87 with -4 percent, was reduced to -1 percent in 1988, indicating that tariff obstacles to exports have been practically eliminated. 148. The liberalization measures of 1986-87 were relatively easy to take because they allowed free imports of raw materials and spare parts to industries which had previously suffered from import licensing due to lack of foreign exchange. ITPAL (and SAL) and various donors did come at the right time to provide much needed foreign exchange. However, what was not done under ITPAL was to request that consumer goods imports (the bulk of Tunisian industry produces consumer goods) be also freed from quantitative restrictions, at least in part and at an early stage. It would have been feasible to take a microeconomic approach and to prepare detailed lists of consumer products which could have been freed in 1987-88. There was an opportunity (exchanging freedom of needed inputs against freedom of imports of consumer goods) which was thus missed. The main reason was perhaps that the Tunisian authorities were in a hurry to quickly implement their macroeconomic adjustment program in a crisis atmosphere and to rapidly obtain foreign exchange, in particular from the Bank through ITPAL and ASAL. The Bank itself hurried to support the Tunisian liberal reforms, but had no time to prepare a detailed, well structured program of measures, including for example harmonization of price and import decontrol measures, as well as a consistent timetable. As a result, ITPAL did not address the real problem of elimination of quantitative restrictions, which was taken up by the 1988 SAL but with limited results so far. The SAL assumed that by 1992, for 75 percent of - 41 - domestic production, imports would be freed. But by end-1990, this percentage was less than 25 percent. B. The Sectoral Program 149. The main elements were the enactment of the Investment Code (see paras. 97-98) and the introduction of the Value Added Tax. Legislation for a value added tax applicable to all non-agricultural production was enacted with effect from July 6, 1988. There was a danger that the reform would cause a loss of revenues, so, instead of abolishing the excise tax altogether, it was replaced by a simpler consumption tax which will gradually be restricted to luxuries. In October 1989, the value added tax was extended to all wholesale, excepting foodstuffs. The Government is still studying the question of extending the value added tax to retailers, at least big retailers, such as supermarkets, since small retailers are mostly opposed (lack of proper accounting, fear of controls, etc.). 150. The introduction of the value added tax has so far been a success, though progress to a full value added tax will not be simple. Instead of the shortfall of revenues that had been feared, the yield has been higher than it would have been without the reform. The removal of some of the consumption taxes thus became easier. The tax has been well-accepted by the public, chiefly thanks to the authorities' measures to publicize and explain it well (Country Economic Memorandum, March 1990). The enactment of the value added tax, as one of ITPAL's conditionalities, has certainly contributed to the improvement of a tax system which over the years had become economically distortionary, complicated, and often unfair. C. Overall Results 151. ITPAL substantially contributed to the success of the Tunisian adjustment program. It has supported reforms primarily aiming at making the economy more outward-oriented and at expanding the role of the private sector. The reforms allow greater scope to price signals, notably through the decontrol of domestic prices and the lowering of tariffs, although quantitative restrictions remain a major obstacle. As a necessary accompaniment, the direct and indirect tax systems have been undergoing reform as well. Administrative controls had been especially tight in the financial sector, but the pace of reform has been such that only a few controls remain. Administrative controls which restricted competition have been removed: the need for prior authorization of investment has been eliminated, as well as the prior Central Bank authorization for most loans. Anti-trust legislation has been prepared. 152. The Tunisian economy has expanded in 1987-1990, and GDP grew even faster than predicted under ITPAL and the SAL. Exports have jumped, the debt/service ratio is lower, as well as the Government deficit. 153. ITPAL was really a SAL supporting macroeconomic policy measures and sectoral measures aiming at removing administrative obstacles and stimulating trade. It included a few actions aiming at increasing institutional efficiency of those institutions (API, CEPEX, CETIME, etc.) responsible for promoting industrial production and exports, but the reforms were not very successful. Although ITPAL was not supposed to deal in depth with industrial restructuring - 42 - and productivity problems, it contributed to the faster growth of manufacturing value added and exports within the general macroeconomic framework it supported. 154. Thus ITPAL should be mainly seen as having provided an opportunity to discuss liberalization issues with the Tunisian authorities at the time of a favorable political climate (i.e. in 1986-87). ITPAL was used by the Bank as a mean to help the Tunisian authorities understand the urgent need to make the economy outward-looking through a broad, general dialogue. At the same time, ITPAL was seen on the Tunisian side as an instrument to obtain additional financial support from bilateral donors in order to provide the substantial funds needed to implement the no-, adjustment program. 155. ITPAL's results have been positive in this respect, even if ITPAL had to be continued as early as 1988 through a SAL. However, to the extent that ITPAL's resources had to be approved rapidly (there were only four months between the Initiating Memorandum and negotiations), a detailed, specific sectoral program could hardly be prepared. Few important sectoral measures could thus be included under ITPAL and a number of them has to be pursued and/or further analyzed and reshaped under the SAL. Because of this lack of time and preparation (even macroeconomic projections had to be revised a few months later at the time of the SAL preparation), mistakes were made. They included, for instance: the liberalization of imported inputs and prices for industries without corresponding liberalization of, at least, some of highly protected consumer goods industries; the private sector was probably not enough informed on the detailed implications of the adjustment program which resulted in entrepreneurs' hesitations- -affecting the level of investment in 1987-88; the Bank agreed to lowering the tariffs before dismantling quantitative import restrictions; the Bank did not provide as much technical assistance as it may have (for instance on the reform of several institutions dealing with the industrial sector or, even more importantly, on the determination of sectoral industrial priorities); industrial employment issues were not dealt with sufficiently in depth with a detailed and consistent program, etc. 156. As a result of this hasty technical preparation, ITPAL had to be promptly taken over by the SAL which further supported, and sometimes enlarged, a number of specific reforms only broadly sketched under ITPAL. ITPAL's impact was thus not, on the whole, very strong because a comprehensive, detailed action program was largely lacking. However, in the end, ITPAL's merit is to have provided the Tunisian authorities the assistance and the understanding they badly needed to have their adjustment program approved at the highest levels of the State and endorsed by the international community of donors. This was probably the most important result of ITPAL - 43 - V. SUSTAINABILITY OF THE ADJUSTMENT EFFORT 157. Tunisia has made good progress in addressing its main macroeconomic challenges so as to enable the economy to achieve sustained long-term growth while maintaining budget deficits at levels that can be financed in a non- inflationary manner. Export growth has been strong. Investment, being led by exports, is becoming increasingly more efficient and augurs well for long-term balance of payments viability. Debt indicators have improved. Private investment, which had been persistently sluggish until 1988, has grown rapidly in 1989-90. Provided that implementation of the reforms continues, Tunisia should be able to obtain an increasing share of its external financing from private sources on reasonable terms. The continuation of polices aimed at increasing Tunisia's creditworthiness and diversifying its sources of financing will be critical to a presently projected medium-term GDP annual growth rate of around 5 percent, following the GDP growth rate of around 4 percent achieved during the Seventh Plan (1987-1991). 158. Together with ASAL I, ITPAL, accompanied by stabilization measures supported by IMF, was instrumental in assisting from the start Tunisia's adjustment program. ITPAL was then continued through a SAL in 1988, ASAL II and a PERL in 1989. 159. However, Tunisia still faces a considerable agenda of reforms and the behavior of economic agents needs to evolve further to create a competitive and efficient economy. The price and tax reforms need to be accompanied by measures to ensure that economic agents are free to respond to market signals and to do so in a competitive manner. Import competition would be a crucial element in this and the Government's program for removing quantitative restrictions on imports is of high economic priority. The objective to submit 75 percent of domestic production to import competition by 1992 will be difficult to reach indeed, but there is a need for a timetable specifying the dates at which restrictions on the import of specific goods would be removed. Customs tariffs have been reduced but effective protection rates still remain high at around 40 percent (and 80 percent for manufacturing) and ought to be further reduced for the economy to become really competitive. Tunisian authorities will have to engage in a very close cooperation with the private sector to bring about mutual understanding and knowledge of actual conditions in industry and other sectors in order to reduce considerable levels of protection still prevailing in the economy. 160. The overall level of investment needs to increase relative to GDP, though, not to levels approaching those of the past. The increase should come entirely from private enterprises, since the share of public sector investment in GDP is expected to (and has already) declined gradually. Private investment has been growing in 1989-1990, but prospects for 1991 were uncertain, due to the general slacking of the economy in a poor external context. Private investment may be stimulated by the removal of uncertainties over some of the Government's policies, in particular regarding the timing of the removal of import restrictions and the need to develop a new industrial strategy, aiming at export diversification (imported input-based clothing industries supply one-third of manufacturing exports), and based on well-defined sectoral priorities. - 44 161. There will be pressures on the budget due to declining revenues from oil on the one hand, and financing required for public enterprise restructuring and consumer subsidies on the other hand (the present subsidy systems has not functioned satisfactorily). Since the money base is small in Tunisia, the financing of the budget would be performed through borrowing. Hence, limits to the deficit could be determined by the level of debt that could be safely supported by the budget and by the need to avoid crowding out the private sector. Budget deficits would, thus, need to be kept around 3.5 percent to 4 percent of GDP. But they have already reached 3.8 percent in 1989-90 and particular attention should be paid to the need to prevent further major increases in such deficits. - 45 - VI. LESSONS OF EXPERIENCE 162. The review of the experience with ITPAL, including the circumstances that led to its sanction, offers instructive lessons and suggestions that may provide a better-defined framework for shaping the Bank's posture and approach to country macroeconomic and sectoral issues. 163. The experience with the conceptualization of policy reforms suggests the following conclusions: (i) Policy based, sector-specific (in this case trade and, to some extent, industry) lending can be a convenient vehicle for pursuing an open dialogue with the Government on broader and more complex policy issues which may be less conveniently addressed in the more narrow confines and time span of project lending. ITPAL was designed in part because of the Tunisian authorities' reluctance to discuss trade and industrial policy issues in the framework of sectoral loans to electrical and mechanical industries through BDET. However, the crucial element in the successful implementation of a well-designed action program is the strong political will, broad consensus, and unwavering commitment on the part of policy makers, and the active involvement and support of highly motivated technocrats in core economic ministries and agencies. (ii) There is greater likelihood that industrial and trade policy reforms will be successful and sustained if the process of policy formulation is undertaken jointly, at an early stage, with the private sector. Initially, ITPAL was not sufficiently discussed with representatives of the private sector and lack of understanding and information slowed progress, in particular as regards import liberalization and private investment. (iii) Although there might be advantages in endorsing an omnibus program, involvement should be limited to a more select subset of sector-specific measures for which Bank policy support would be most important and needed, and where the Bank's technical inputs are most likely to make a critical difference. ITPAL followed a "catch-all" approach to macroeconomic adjustment and had few, well-prepared specific actions in its sectoral program, because of lack of time for preparation. A more narrowly focussed adjustment program and better prepared in depth is likely to be more effectively implemented and more easily supervised and monitored. (iv) The effectiveness of trade reforms is strengthened when accompanied by institutional reforms in the industrial and trade related sectors. This was not the case under ITPAL where most administrative reforms of industrial and trade agencies were not very effective. This may have hampered export and investment promotions. Moreover, bold programs of trade liberalization probably have a better chance of enduring than do weak or - 46 - tentative programs. The ITPAL which supported liberalization programs has suffered from being too timid regarding quantitative restrictions and several years later powerful lobbies are now at work trying to slow down further movement. 164. The experience with the design of action programs yields some interesting insights: (i) There are dangers associated with the proliferation of studies to bolster reforms if they exceed the supervising capacity of Bank and Borrower staff and are to be performed within too tight a schedule. ITPAL included a number of studies (tourism policy, exchange risk coverage, forward exchange risk coverAge, actuarial study on social security, etc.). In such cases, involvement should be restricted to areas where the Bank has a comparative advantage. A clear linkage should be maintained between such studies and the subsequent timely application of their findings and recommendations. (ii) To alleviate the socio-economic repercussions of certain measures enforced under adjustment programs, it would be expedient to identify early on in the design process particular Rroups in need for special technical assistance, and to ensure that such assistance would be forthcoming for a transitional period. Two clear examples under ITPAL were, first, the poor design of the measures to mitigate the social impact of adjustment and, second, the lack of coordination between the administration and the private sector on removal of price control and import liberalization measures. A clear timetable based on sectoral priorities for liberalization would have been helpful, if prepared at the design stage. (iii) Conditions should strike and reinforce a practicable balance between trade policy and macroeconomic stabilization and regulatory reforms. ITPAL's mistake was to put too much stress on macroeconomic measures implying, for instance, that foreign exchange had to be quickly provided to import needed inputs and spares for starved industries. In the process, liberalization of trade was encouraged through lower tariffs without addressing more important quantitative restrictions which proved a wrong and costly approach later on. (iv) Conditionalities are no substitute for political, administrative and private sector support of the Proposed reforms. Consensus building should begin with operationally oriented economic and sector work and reinforced through a close policy dialogue. At the time of ITPAL preparation and design, economic and sector work was of uneven volume and quality. An Employment Study had been conducted in 1983, but not internalized in Tunisia. As a result, industrial employment conditionalities were not met largely because of lack of support of the proposed reforms and fear of social unrest. - 47 - 165. The experience with the effectiveness of external financial assistance leads to the observation that aid can be helpful in promoting reforms when it is conceived and presented as a r..inforcing agent and as a means of reducing the cost of reforms to which the policy makers in the recipient country are already committed. ITPAL played a very positive role in this respect. 166. Attempts to streamline the import control regime and to devise arrangements to promote exports yield some useful lessons: (i) The speed with which QRs and import licensing should be eliminated depends on those sectors likely to be subjected to increased competition pressure to adjust. Nevertheless, there is a trade off: the longer the competitive pressure is delayed, the more time highly-protected firms are afforded to adjust. But, at the same time, the adjustment is likely to meet with resistance and become more difficult, potentially compromising the benefit from liberalization. A thoughtfully spaced-out timetable for the elimination of QRs, would send a strong signal and ensure that the trade reform commences with credibility and enlist the support of new vested interests, such as new exporters. Conversely, protracted delays would enable existing vested interests to lobby for abandoning che reform. (ii) Reform of export procedures and documentation can be distressingly slow in their implementation, as it affects deep-rooted attitudes and vested interests and entails for reaching charges in the internal procedures of agencies involved. The progress made in streamlining customs procedures since 1986 has to be commended as it has greatly benefitted Tunisian exports. In contrast, the relatively slowness of some export trade agencies in restructuring efficiently is typical of how detrimental and costly poorly managed procedural reforms can be. (iii) The experience with actions that addressed specific issues on taxation also provides useful insights. There was an urgent need to reform the Tunisian indirect taxation system which had become inefficient. The ITPAL rightly supported the enactment of the Value Added Tax. However, in order to improve the draft Law, Bank staff did not hesitate to ask the Tunisian authorities to delay the submission of the draft to the National Assembly beyond the agreed deadline. A satisfactory text was approved in the following months, and the VAT system has been functioning satisfactorily since then. This shows that in order to implement efficient reforms, adjustment programs must be revised when needed, even at the cost of not meeting previously agreed timetables. Adjustment programs are often very rapidly prepared and flexibility is required in implementing specifics components of such programs. · 49 - &―나―,:; 1960 QT~h GT~ 010040*1 &Vor*&* Rac~ * Ute (DIumrJOS0 0.41 0.59 0.70 OM 0.79 0.83 0.86 0." 0.86 0.92 a~ ugeettve Rischange affitjøq~100) 100.0 99.06 98.45 97.59 97.28 9534 82.90 73.23 68.75 67.19 43.23 A»r%ø C~ r trice Inerrago (91 8.0 9.3 34.1 9.3 8.4 7.8 6.2 5.2 7.2 IJ 6.3 u~ agat %64 (R aramtø 2.3 9.0 17.4 2.2 -8.4 -1.8 4.8 -4.0 -7.2 -3.4 -1.9 Grouth le Avere" Køntnal VaRøj 19.6 17.2 21.2 17.4 3.2 4.9 -1.4 2.8 3.6 6.3 4.t ormth le &~~ Real %92 0) 2.6 7.9 7.A 7.9 -5.1 -2.9 -7.5 -5.3 -1.3 -1.2 -1.7 Grømth le &Vwrav Gørt. era..9 (t? 8.1 16.1 IM 19.3 3.6 7.6 1.5 4.2 6J 2.0 3.3 Grøm,th la avore" Gort. %øj m 0.[ 4.8 3.1 9.8 -4.1 -0.2 -4.6 -4.1 -0.3 -3.7 -1.2 Ratio 09 8~ O~ Privet* usage 1.59 9.3? 1.32 1.34 3.35 1.38 1.43 l." 1.46 1.40 1.41 Total &ø G~ h M 3.0 4.3 2.4 2.4 2.3 2.6 1.6 2.3 t.3 2.4 2.4 2.6 zepl~ (z> th. a. W3 15.7 16.2 16.6 16.2 16.8 17.8 18.1 le.4 19.0 19.5 tacromantal Capital~t "Li" 4~r 1= total 1cm OM-reol 4.6å 6.00 4.51 6.73 7.16 20.81 6.96 7.65 7.72 6.15 3.00 1= am-tugl ud 4.40 3.09 5.16 4.09. $.96 6.21 9.32 6.Jo 6.34 6.63 3.24 4.» 3.90 4.54 5.10 5.23 5.71 6.38 8.36 6.62 5.39 3.40 4.49 4.44 vi C> v~ servico psymmj - å tos$ otti&~ 344.3 3".2 "M 633.1 699.7 739.7 849.3 1093.1 1133.4 123%.Q 1330.0 Exporto *t Goods. O~f*etor s*rvicoo øni 3491.1 3884.6 3411.2 325*.Q 3060.0 2991.1 3099.0 3879.5 401$.6 5060.8 3930.3 F04t« 6b9w1c69 ~1. wotkørø rømtet~00 - & D"& s*rvi" Ratio - ais 14.0 15.4 16.4 99.5 22.9 24.7 24.9 WZ 23.5 24.4 22.5 Gabt oast~196 aud Pløbur"d 3540.9 3614.6 MI.S 4049.6 4106.4 4892.5 5917.9 6746.3 602.3 00 slut~ ?-**l Dbtimr (2) 67.1 70.3 66.3 CØ~r Frie* ~X.b8816. Fort"tøt hauge~ la tod~ry. Avørgaa 881.rleo la 611 ~tor*. tocluding Omst~ service*. 0~ml ~808. Real %&a*$. ICM caleølated mor tive yeare. Pubile and public gø*rønt@*d dbto <privat* &ad official focludtag M), private døbe, &ad *bort-tøer dbt. ~ i KEY WCC INDlcaffl. 1980-1993 3 o90 1981 1942 1963 1954 1985 1964 1987 196 1989 1990 1991 (et.> orktera k~ate.6 ~roceit*) 303.2 363.1 373.8 359.2 316.6 270.6 361.4 464.3 544.0 493.1 569.3 319.4 (In$ a1131lp Tort* and Trvel roceitpe > 642.7 597.8 751.6 573.4 440.2 498.1 485.9 686.5 266.2 923.0 948.4 703.4 (Us t1se,el morr Resiste.e <2 of Elport., 7.7 9.1 10.4 10.8 10.1 9.0 11.6 12.5 11.2 9.8 9.5 9.2 f8 wn4 1etr acelpta) Tourlom ead Tcaffl (1 of Espor.. 87.4 1.1 13.6 17.2 84.7 16.5 15.4 17.7 26.1 18.1 15.9 12.5 oS nd fector Receipt.~ f Mte~try of rl=-ng. vi1 k-* 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est.) 1. Fland Try&@ t <at 1980 pricco) 1002.0 1144.4 1238.0 1180.0 1236.0 1134.0 932.3 838.2 804.3 904.0 1077.0 1068.0 nl. lip~ In.atnentI0DP (2> 28.3 31.0 34.0 31.8 30.8 26.8 24.1 20.4 19.5 20.1 23.1 22.5 III. (Ivö) by ~6 ) "VRAv "c 30.2 33.6 30.5 27.2 26.4 26.8 22.4 21.3 28.9 33.4 c.a. U.a. Pablic ector - Cowerment 19.2 16.6 15.0 17.7 17.1 20.4 20.3 20.3 22.2 23.6 n.9. n.9. - Public Enterprise 33.8 35.8 39.7 37.7 38.6 35.8 35.8 35.3 28.4 27.2 n.&. r 4. ubtotal 53.0 52.4 54.7 55.4 55.7 56.2 56.1 35.6 49.6 48.8 n.4. a.&. bouebolde 16.8 14.0 14.8 17.4 17.9 19.0 21.5 23.3 21.5 19.8 U.&. a.9. M0ÅL. 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 IV. p~xd InvStfant in N acturing atio äfg.ITotal f1Ud lnve*ta. 13.4 16.7 17.7 20.7 19.0 34.8 17.2 15.4 15.8 17.1 17.4 16.4 aelo, Privata luvecmsmeI 53.8 41.9 40.6 42.9 44.7 47.1 34.1 33.9 56.2 73.0 im.a. f.a. Irotal ~DeaUturl% lfim. Leal Grotb of etg. lvestanut 4.a. 43.4 14.4 11.5 -9.1 -28.3 -5.2 -18.0 -5.0 24.5 21.0 -6.1 Uft. Fixed Invest~malDP ta) 3.8 5.2 6.0 6.6 5.8 4.0 4.1 3.1 3.1 6.7 n.a. o.a. tJ iurce i@try of Pl~auia. CENTRAL GOVERNENT BUDGET: Fiscal Revenues and Transfers and Subsidies 3 (million Dinars in current prices) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est.) A. FISCAL REVENUES 903.4 1085.6 1299.5 1465.3 1569.8 1621.8 1639.5 1760.6 1908.8 2129.1 2360.0 - Trade and Other Indirect Taxes On Imports 254.2 356.7 472.0 523.2 529.0 563.9 591.6 719.1 836.6 904.4 800.5 On Exports 12.8 10.7 10.3 13.3 10.6 6.5 6.0 6.1 9.0 8.9 10.0 As I of Impqrts (CIF) 13.6 17.8 22.4 20.8 23.1 14.9 23.6 22.7 20.2 18.6 18.8 - Indirect Taxes on Production 244.2 258.0 299.5 353.5 392.2 586.8 625.3 621.9 595.7 698.7 889.5 1 - Other Fiscal Revenues 392.2 460.2 517.7 575.3 638.0 454.6 414.6 413.5 467.5 517.1 560.0 La 2 Fiscal Revenues In Total 74.5 71.4 75.7 73.0 72.6 74.1 72.1 71.8 73.6 75.1 73.8 I Cutrent Revenues B. TRANSFERS AND SUBSIDIES Govermsent Transfers to Social 20.7 21.0 23.8 27.7 32.3 32.5 39.8 41.3 69.8 80.8 93.0 Security Government Transfers to Local 30.1 37.0 44.5 54.9 63.9 61.7 60.5 62.7 66.2 69.0 75.0 Collectivities Assistance to Health Sector 36.5 51.0 48.7 60.3 64.8 69.0 75.6 91.1 105.1 100.3 108.3 Transferp and Subsidies to 232.0 303.6 360.4 436.2 388.9 364.1 337.1 358.0 538.1 478.6 477.9 Enterprises TOTAL 319.3 412.6 477.4 579.1 549.9 527.3 513.0 553.1 779.2 728.7 754.2 SESce Ministry of Planning. INTEREST RATES AND INFLATION (in percentage) Ap. 22. 1985 1987 1988 1989 1990 Dec. 31, 1986 qp dtnisths) 1.00 - 2.00 2.00 max. 2.00 max. 2.00 max. 2.00 max. S an te 6.75 - 9.75 6.625 8.3125 8.375 TeO sits 4.50 - 10.00 free free free free di Rates 'Rt 12.625 11.625 13.3125 13.375 Short-teo. - rority 6.00 -10.00 6.00 - 7.00 6.00 - 7.00 6.00 - 7.00 8.00 - 8.25 S on-priorlty 10.00 - 10.50 free free free free Medium-term - rority 5.50 - 8.50 6.25 - 8.00 6.25 - 8.00 7.00 - 8.00 8.00 - 9.00 - Won-priority 11.50 - 12.00 free free free free LM-term Priority 12.00 : 12.50 free free free free -WOn-priority --- Consumer Prices 7.35 8.20 7.20 7.70 6.50 Source. Central Bank - Statiatiques Pinanciares. Priority interest rates are granted since 1987 to certain guaranteed agricultural credits, export financing, seasonal agricultural advancee and advances for cereals, olive oil and wine (short-term credits). Priority interest ratee for mediur-.term credits include crafts, energy. agriculture and exports, small and sedium enterprises. ANNEX 5 Page 1 of 2 VALUE ADDED IN MANUFACTURING 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est.) I. VALUE ADDED (1980 - Million Diners) Agro-Induetry 101.3 115.2 106.7 110.7 131.3 130.8 137.1 138.7 144.1 138.5 156.2 166.0 Construction 62.3 70.3 71.2 82.3 84.0 92.2 93.0 97.5 104.8 112.2 121.1 124.6 Materiale Machinery 54.3 63.1 68.7 74.8 80.4 84.8 85.1 85.0 88.1 95.8 105.3 111.4 Chemicals 49.5 53.1 56.3 63.2 63.0 67.2 77.2 81.6 93.5 96.5 95.1 99.4 Textiles 99.0 100.8 115.2 120.1 120.6 125.5 132.9 143.0 154.4 175.3 201.6 211.3 Other 50.9 56.4 63.9 70.7 77.4 83.8 87.3 _91.7 96.5 104.0 110.3 115.6 TOTAL 417.3 468.9 482.0 521.8 556.7 584.3 612.6 637.5 681.4 722.3 789.6 828.3 II. CROTH B! INDUSTRY (2 p.O.) vi Agro-Industry 10.8 13.7 -7.4 3.7 18.6 -0.4 4.8 1.2 3.9 -3.9 12.8 6.3 Construction 26.9 12.8 1.3 15.6 2.1 9.8 0.9 4.8 7.5 7.1 7.9 2.9 aterials Machinery 13.8 16.2 8.9 d.9 7.5 5.5 0.4 -0.1 3.6 8.7 9.9 5.8 Chemicale 33.8 7.3 6.0 12.3 -0. 6.7 14.9 5.7 14.6 3.2 -1.5 4.5 Textiles 8.4 11.9 4.0 4.3 0.4 4.1 5.9 7.6 8.0 13.5 15.0 4.8 Other 11.6 10.8 13.3 10.6 9.5 8.3 4.2 5.0 5.2 2_8 6.1 4.8 TOTAL 15.2 12.4 2.8 8.3 6.7 5.0 4.8 4.1 6.9 6.0 9.3 4.9 ANNEX 5 Page 2 of 2 VALUE ADDED IN HANUFACTURING 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est.) III. DISTRIBUTION BY INDUSTRY (1) Agro-Industry 24.3 24.6 22.1 21.2 23.6 22.4 22.4 21.8 21.1 19.2 19.8 20.0 Construction 14.9 15.0 14.8 15.8 15.1 15.8 15.2 15.3 15.4 15.5 15.3 15.0 Materials Machinery 13.0 13.5 14.3 14.3 14.4 14.5 13.9 13.3 12.9 13.3 13.3 13.4 Chemicale 11.9 11.3 11.7 12.1 11.3 11.5 12.6 12.8 13.7 13.4 12.0 12.0 Textiles 23.7 23.6 23.9 23.0 21.7 21.5 21.7 22.4 22.7 24.3 25.5 25.5 Others 12.2 12.0 13.2 13.6 13.9 14.3 14.2 14.4 14.2 14.3 14.1 14.1 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 100.0 IV. SHARE OF11.8 11.9 11.1 11.2 11.8 11.8 13.1 13.1 13.9 14.4 15.0 15.5 L MANUFACTURING IN or OEF (in Z) Source: Ministry of Planning. - 57 - ANNEX6 PERCENTAGE GROWTH OF INDUSTRIAL VALUE ADDED TOTAL GROWTH ANNUAL GROWTH ------------** ------------ --------------------------- 1980-90 1980-86 1986-90 1980-90 1980-86 1986-90 MANUFACTURING Agro-Industry 54.2 35.3 13.9 4.4 5.2 3.3 Construction Materials 94.4 49.3 30.2 6.9 6.9 6.8 Machinery 93.9 56.7 23.7 6.8 7.8 5.5 Chemicals 92.1 56.0 23.2 6.7 7.7 5.4 Textiles 103.6 34.2 51.7 7.3 5.0 11.0 Others 11. 2.1 2.1 8 0 9 4 6 0 TOTAL 89.2 46.8 28.9 6.6 6.6 6.5 NON-MANUFACTURING 4.9 3.0 1.9 0.5 0.5 0.5 (Energy, Mining, Water, Construction) III. NDUS (I + II) 36.9 39.5 14.4 3.2 5.7 3.4 Surc: Ministry of Planning. Annex 7 ANNUAL AVERAGE GROWTH IN MANUFACTURING VALUE ADDED AND EXPORTS (in %) % VALUE EXPORTS/VALUE ADDED 1980 - 1986 1986 - 1991 1980 1986 1991 Value Exports Value Exports (est.) Added Added Agro-Industry 5.2 4.1 3.9 6.3 32.7 30.6 35.9 Construction 6.9 - 5.0 - - - - Materials Machinery 7.8 12.6 5.5 16.0 56.5 73.4 117.9 Chemicals 7.7 9.3 5.2 1.0 241.8 264.3 215.9 1 Textiles 6.1 4.7 8.0 13.7 172.1 168.9 201.8 0c Others 9.4 16.4 5.8 53.0 24.8 36.0 225.0 1 TOTAL 6.6 7.5 6.2 14.1 87.8 92.1 131.9 TOTAL (excl. 6.4 6.5 6.4 19.5 67.1 67.3 120.4 Chemicals/ Fertilizers) Source: Ministry of Planning. 一59- 1．〕！]”〕］ I妝I他仕化I ―一―&“一― ―發―9彎祝― ―〔―”〕― ,―藝―：召疋― i-:-:;:- !-.-&,l 【〕’i’召“- ―〕〕〕：！〕〕 &-&-&&&] ■口閑■，&, -!-“疋〕〔 l取I化囈彎I -&-&“一i, 〕〕；！〕〔 Agat (t e~be) 1"0 te 9~he> »~t volm 11h~r Tal= IZ Val- 61» 11h~ Talm da Mla~ ta-SC, (TD 941114201 tM-W C7D DAM (TD 81111CO 1110w) M om vmj ~larattoff "s 349.4 343 Ral* 44#3 als 3416 777.0 227 2330 449.6 210 3129 731.9 134 Nåth q~sch ~ Mr9 all 42.7 383 224 14.3 33& 349 207.4 333 a.#. 0.9. 294 D.*. liv Off- - - plan an 34.3 2311 313 337.6 M 1000 394.0 304 437 193.4 2N am M.I 243 mhelm~ hm eka. 8.4. 723 n.3 104 9213 8.0. 9.4. 8.8. p.a. 1037 364.3 135 ~com 4~ r~ 16 ft~ue de V:m~* tåns IUTAE tME~EEt ~ZC AI(M<0 (Ømbr., tnveotmat wnd Job Creaton) (1968.1990) Off-~bo. irm. Prolcte bith no Inw*acive. FIrm Grated Incemtive Total D«clmatloæq 1988 1989 1989 1990 1968 1989 19689 19990 98 1969 l99 990 198 1989 989 1980 <9 o.) (9 mos.> (9 .o.) <0 mo*.) <9 mo.> (9 o.> <9 mo.> (9 mo..) gbe 31i 000 637 1096 1381 2102 1076 1600 287 314 217 239 2169 3416 2330 399 Auvege tabuøt*.nt (t teow>dl 228 304 298 242 118 136 201 76 658 432 414 642 235 228 210 234 Averag* Job Creotou 46 43 42 43 12 11 14 12 20 96 18 22 29 21 20 32 Aveg Cot per uff Job (TD) 4730 7070 6900 3700 9533 14363 14m0 14670 32800 23300 300 29200 10230 t100 0700 90 sæoes åte ~ p1r l ~toon 4 lIduo&trao (API) - 62 - ANNEX 11 TARIFF STRUCTRE (1986-1989) TH TARIFF DISTRIBUFIGN FOR ALL IMORTS FOR THE WHICLE ECMONY (1966-1989) BEFORE LIBERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF BRACKET IMT TARIFF BRACKET 1986 1987 1989 .0-25 43.09 5f.63 45.97 45.97 .0-5 0.49 0.02 1.42 1.42 25.1-50 34.41 42.37 54.03 54.03 5.1-10 0.02 0.02 0.38 0.38 50.1-75 17.63 10.1-15 22.52 22.58 1.61 1.61 75.1-100 1.06 15.1-20 2.94 3.09 22.22 22.22 100.1-125 2.26 20.1-25 17.12 31.92 20.34 20.34 125.1-150 0.59 25.1-30 10.43 3.51 22.22 22.22 150.1-175 0.70 30.1-35 4.95 4.34 4.13 4.13 175.1-200 0.13 35.1-40 7.30 7.30 6.33 6.33 200.1-225 0.11 40.1-45 7.87 5.02 21.35 21.35 225.1-250 0.02 45.1-50 3.85 22.20 0.00 0.00 >-3,250 0.00 )>50 22.50 0.00 0.00 0.00 TARIFF DISTRIBUTION FOR IWORT GCS WITHOUT QUANTITATIVE RESTRICTIONS C1986-1989) BEFORE LIBERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF BRACKET J98 1987 19 i TARIFF BRACKET 1986 1987 198 1989 .0-25 41.86 87.28 69.88 46.33 .0-5 1.29 0.65 0.65 1.17 25.1-50 45.29 12.72 30.12 53.66 5.1-10 0.00 0.60 0.60 0.35 50.1-75 10.32 10.1-15 26.32 33.76 1.19 1.08 75.1-100 0.49 15.1-20 2.94 6.51 36.01 23.00 100.1-125 0.37 20.1-25 11.32 47.01 31.43 20.73 125.1-150 0.61 25.1-30 18.12 1.44 20.48 21.95 150.1-175 0.61 30.1-35 4.35 1.97 3.21 3.29 175.1-200 0.12 35.1-40 11.08 1.82 2.86 4.78 200.1-225 0.3' 40.1-45 9.49 4.84 3.57 23.64 225.1-250 0.06 45.1-50 2.26 2.65 0.00 0.00 3>250 0.00 2>50 12.85 0.00 0.00 0.00 TARIFF DISTRIBUTION FOR GOODS IIDER oUANTITATIVE RESTRICTIONS (1986-1989) BEFORE LIBERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF BRACKET 1986 IMM 1988 TARIFF BRACKET 198 1987 1!8 1989 .0-25 43.67 19.97 18.44 22.47 .0-5 0.06 0.03 1.71 1.79 25.1-50 28.70 45.11 50.35 51.17 5.1-10 0.03 0.03 0.26 0.42 50.1-75 21.54 34.91 31.21 26.36 10.1-15 20.41 18.15 1.84 2.57 75.1-100 1.36 15.1-20 2.95 1.76 14.63 17.69 100.1-125 3.27 20.1-25 20.21 26.09 14.24 16.14 125.1-150 0.58 25.1-30 6.38 4.32 23.22 20.92 150.1-175 0.75 30.1-35 5.28 5.26 4.64 5.02 175.1-200 0.13 35.1*40 5.31 9.44 8.25 9.09 200.1-225 0.00 40.1-45 7.03 5.09 31.21 26.36 225.1-250 0.00 45.1-SO 4.70 29.82 0.00 0.00 0>250 0.00 >P50 27.63 0.00 0.00 0.00 ta The Smalm namal tartt was brnought down from 236 In 1 to 415 in 1988. The sama was raied from 5 to 15z (in Jamary . In 1988. the stams fOsalit*a tan (TMD). which was a uniform St. has been tacorporated into the new tarif t. ALU esating s to beteN 25 and 3i ware r-daced to 23 at all tariffs between S1 and 552 wre redueed by 6 rrcentage pointe tom Janaza 1967. Cae Yer Later (I.e. In Jamaruy 198). all tariff. between 25 and 353 were reduced to 253 and tarifs between 35 and 802 were reduced by 9 polts, ths bringias the masime rate to 4Al. ANNUI 12 NOMINAL AND EFFECTIVE PROTECTION RATES (1980-1988) (Local Market - in percentage) Value Added 1980 1983 1984 1985 1986 1987 1988 Output (2) NPR EPR RRP EPR NPR EPR NPR EPR NPR EPR NPR EPR NPR EPR I. Airiculture and Fisheries 73 17 zz 22 33 31 46 34 49 41 46 39 43 25 25 II. Industry 29 39 j9 A 12 42151 fZ 204 A 123 36 81 34 of which Manufacturing 29 39 242 2Z 178 42 153 48 207 48 124 36 -A 1 Agro-Industry 19 30 258 30 191 55 404 62 553 63 421 38 120 35 134 Construction Materiale 38 24 198 24 185 20 197 24 232 23 40 20 36 28 66 Electrical, Mechanical 24 26 96 25 67 132 92 36 104 37 88 32 73 29 63 Chemicals 28 26 111 33 161 33 92 36 100 37 88 32 67 31 62 Textiles 34 67 277 58 175 46 98 66 203 67 194 46 107 40 82 Others 30 53 224 45 190 45 122 51 134 51 101 40 88 36 74 Non-manufacturina 62 3 10 1 4 12 j3 13 20 13 9 is ]A 17 6i Minee 62 3 10 11 24 12 23 13 20 13 9 15 14 17 16 III. Services 50 0 2 0 2 0 0 09 8 a Transport 50 0 2 2 0 0 0 -7 0 -7 0 -7 0 -8 TOTAL 40 28 20 29 67 35 74 39 84 41 70 33 52 29 42 NPRs Nominal Protection Rate EPR: Effective Protection Rate Sources Institut d'Economie Quantitative, Tunis. AXNEI 13 NOMINAL AND EFFECTIVE PROTECTION RATES (1980-1988) (Exports - in percentage) Value Added 1980 1983 1984 1985 1986 1987 1988 Output (2) NPR EPR NRP EPR NPR CPR NPR BPR NPR BPR UPR EPR NPR BPR I* Apricultural and fisheries 81 = 3 -4 -2 -4 -4 -3 -4 a .4 -3 -4 -2 2 II. IndustrT 33 -L 11 -1 -21 -L ,Z1 - ZA 1 = -1 -4 0 -1 of which Hanufacturina 33 -1 -25 =1 -25 1 Z.L9 _I -4 -1 A -1 -4 0 1 Agro-Industry 29 -2 -10 -2 -11 -3 -25 -2 -8 -2 -8 -2 -8 -2 -5 Electrical, Mechanical 69 0 -12 0 -12 0 -11 0 0 0 0 0 0 0 0 Chemicals 27 -2 -2 -2 -5 -2 -26 -2 -7 -2 -7 -2 -7 0 0 Textiles 29 0 -43 0 -42 0 -42 0 -1 0 -1 0 -1 0 0 Others 29 -2 60 -2 60 2 -10 -2 -6 -2 -7 -2 -7 -1 -3 Non-Manufacturin 42 =1 13 -2 10 -2 8 -1 ZA -2 =A -2 -4 -1 -3 mining 42 -2 13 -2 10 -2 8 -2 -4 -2 -4 -2 -4 -1 -3 I Tourlis 46 -8 -17 -8 -17 -9 -34 -10 -16 -11 -18 -13 -20 -13 -20 4- TOTAL 44 -4 -14 -3 -15 -4 -23 -3 -7 -4 -8 -4 -8 -4 -7 NPR: Nominal Protection Rate EPRs Effective Protection Rate Sourcet Institut d'Economie Quantitative. - 65 - ANNEX 14 QUANTITATIVE RESTRICTIONS ON IMPORTS Percentage of Free Imports Percentage of Domestic Output Whose (CIF Value) Imports Are Not Free ACTUAL ITPAL SAL ACTUAL ITPAL SAL (end of year) (target) (target) (end of year) (target) (target) 1986 23.61' 98.9 1987 36.41' 96.4 1988 53.0 75.01' 91.21' 1989 63.0 83.0 79.41' 1990 70.0 92.0 74.1 1991 75.0(est) 100.01' 1992 100.0 100.01' 25.0 Source: Ministry of Economy and Finance. 1 In October-November 1984, restrictions on imports of raw materials and semi- finished products for companies exporting at least 25% of their turnover, as well as spare parts for use in industry, farms, hotels, hospitals and other services, were abolished. Also abolished were all restrictions on imports for newly-approved investment projects and for raw materials used in the manufacture of pharmaceutical products. In February 1987, capital goods used in projects approved by API and APIA (for agriculture projects) as well as semi-finished products used in the manufacturing of pharmaceutical products. Furthermore, industrial enterprises exporting 15% of their turnover can import their raw materials and semi-products free of restrictions. i Not including imports of raw materials and spare parts produced by newly- established Tunisian enterprises which would receive quantitative protection not exceeding three years. ' 94.4% in June 1988. * Fifteen percentage points decrease from the level in effect as of June 30, 1988 (94.4%). Target of 79.4% to be achieved before June 1989. ' All restrictions would be removed, except for a few subsidized consumption goods, a few luxuries, and, when justified, products competing with infant industries. In any case, they would not protect more than 25% of domestic production. - 66 - ANNEX 15 PRICE LIBERALIZATION % of Goods ITPAL SAL Not subject to Price Controls (Actual) (Target) (Target) Producer Prices 1986 5 1987 50 1988 60' 60!AIi 1989 671 1990 70 1991 75 (est) 904' 751i Distribution Margins 1988 10 10 1989 n.a. 201' 1990 221i 1991 n.a. 50 Source: Ministry of Economy and Finance. I Fifty-five percent for industrial prices. The 60% figure refers to the value fo agricultural, fishery and manufacturing production whose producer prices were not subject to control. The figure for 1989 refers to industrial prices. i Excluding products whose imports were to be liberalized by September 1986- July 1988, i.e. raw materials, spare parts, capital goods and most semi- manufactures. This was to account for an estimated 12-15% of total manufacturing output. i The 60% target covered "well-established" industries where the number of domestic producers was sufficiently large to ensure appropriate competition. i A few staples (such as bread, semolina and oil) were excluded from price liberalization; the price had to remain regulated for social reasons. They represented about 10% of total manufacturing output. ! Before June 1989. Percentage excludes chemicals (e.g. phosphoric and sulfuric acids) which are produced by State enterprise monopolies. ANNEU 16 TOURISM - KEY INDICATORS 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est) Number of Beds (in thousands) 71.5 75.8 80.2 82.2 84.3 93.3 98.7 100.5 104.9 109.8 116.5 n.a. Number of Hotels 319 336 364 364 372 420 434 443 465 476 508 n.a. Investments (TD million, current prices) 25.5 33.0 44.9 74.3 95.0 105.0 81.0 65.0 83.0 105.0 121.0 120.0 Value Added (TD million, current prices) 138.9 160.6 184.6 212.8 196.8 225.5 210.0 304.2 374.0 407.0 432.0 307.0 Value Added (1980 TD million) 138.9 143.8 130.1 121.2 121.0 148.0 147.0 201.6 225.2 218.8 217.7 144.5 Employment (in thousands) 23.1 28.6 30.2 30.9 31.6 34.5 36.0 38.5 41.2 42.7 44.5 46.0 Number of Tourists (non-residents, 1.60 2.15 1.36 1.44 1.58 2.00 1.50 1.87 3.47 3.22 3.20 n.a. (in millions) (of which Libyans) (-) (0.01) (0.09) (0.17) (0.09) (0.04) (-) (-) (1.24) (0.96) (0.80) u.a. Occupancy Rate (2) (monthly average) 60.0 59.4 51.0 46.4 45.2 50.0 46.2 58.8 62.3 57.6 54.0 n.a. Foreign Exchange Receipts 276.5 268.9 239.1 221.3 220.5 272.5 257.9 359.2 660.5 491.7 445.2 327.8 (1980 TD million) Foreign Exchange Receipts per Bed 3871 3547 2981 2692 2616 2921 2613 3574 6296 4478 3821 n.a. (1980 TD) 2 Foreign Exchange Receipts in 17.4 15.1 16.6 17.2 14.7 16.5 15.6 17.7 26.1 18.2 15.9 12.5 Total Exports 2 of Trade Deficit Covered 64.5 52.8 46.5 53.8 36.3 60.2 49.5 99.8 120.9 80.4 57.9 n.a. by Tourist Receipts Sources: National Tourism Office and Ministry of Planning. ANNEX 17 MONETARY POLICY: Money Circulation and GDP Annual Growth (1) Annual Growth F 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1981185 1986190 Increase in Money Circulation 19.5 19.0 18.6 11.6 13.9 5.7 13.7 19.0 11.2 6.3 15.7 12.5 (money and quasi money H2) GDP Growth 17.6 15.4 14.4 13.5 10.7 1.6 13.9 8.6 11.2 13.7 13.5 11.8 Notes: 1. Average growth in NZ for 1986-90 was 11.22 against 9.82 for GDP growth (i.e. total annual percentage growth rate divided by five years). 2. ITPAL assumed that NZ growth would be below GDP growth in 1986-91 (this was realized in 1986-90 on average). 3. SAL Introduced targets for the ratio maximum total liquidity/GDP which was to be increased from 52.72 in 1989 to 56.6% in 1991. Sourcess Ministry of Planning and Central Bank. 0% GD COSrOLED CETI~. 00VM DOET REEMES, EPNITURES M= D DEMICIT (as percentaga of GDP. nwt of debt aortination) 1985 1986 1987 1988 1989 1990 1991 1987 1988 1991 198S lom 1991 (est 181*9 evenueg 31.9 31.8 29.6 30.0 29.3 27.3 27.4 30.0 29.0 27.0 29.1 29.3 26.3 mecurrent: Z~n tureo 24.7 25.3 23.5 23.3 23.8 23.7 24.1 24.3 23.0 21.0 24.0 u.. 21.0 C&pltu ~ ~9 12.2 12.1 9.1 10.3 7.3 7.4 6.9 8.0 7.5 6.0 8.5 6.8 Subtotal 36.9 37.4 32.6 33.6 33.1 31.1 31.0 32.0 30.5 27.0 32.5 33.2 27.8 Oerall Dt Deficit S.0 5.6 3.0 3.6 3.8 3.8 3.6 2.0 1.5 - 3.4 3.9 1.5 sudgatary Sa~ g* 66.9 58.7 70.1 74.8 26.1 32.1 40.2 ----- 0------ f.a. ..i. l.a.. Z of CapItal L~pndtu uv (averaga 87-91) mudgetary 8~9 as 54.2 49.1 53.5 47.7 14.4 28.5 37.5 z of Capital Euenitu»E. Sourcgas ~nistry of Pinance and Staff Appraisal Reporte (ITPAL ad SAL). 1 Capital espxnditures include central goverument mnvesn, subeidies for *quipnent of public nterpra.e, nst loans to and participation in public enterpriseas. .' Capital e~ptnditures include items ag indicated in footnotm 1 plus transfers and not lon to householde and other capital us*s. ANNEX 19 GROWTH OF OUTPUT AND EXPENblTURES (Annual Growth Rates in Percentages) 1976-81 1981-86 1986-90 1986-91 1986-91 1987-91 1987-91 ITPAL SAL (Actual) (Actual) (Actual) (Preliminary) (Projections) (Preliminary) (Projections) GDP (market prices) 6.1 2.8 4.4 4.0 3.4 3.4 3.9 Agriculture and Fishing 1.6 1.4 4.7 5.21' 4.3' 2.3 4.1 Industry 8.9 2.2 2.7 3.6 3.1 3.6 n.a - Hydrocarbon (8.3) (-0.5) (-3.3) (-2.0) (-5.9) (-0.7) (-4.4) - Ron-hydrocarbon (9.2) (3.4) (5.7) (5.3) (5.8) (6.1) (n.a) Services 6.5 3.5 5.2 3.9 3.4 3.3 n.a Consumption 7.4 3.7 3.0 2.9 2.7 3.3 3.2 - Private (7.8) (3.4) (3.1) (3.0) (2.9) (3.2) (n.a) - Public (5.8) (4.8) (2.6) (2.6) (2.0) (3.0) (n.a) Gross Investment 6.6 (-4.6) 6.4 4.8 4.0 3.1 1.5 Imports- GNFS 10.8 2.2 8.9 5.2 1.6' 7.4 2.8 Exports - GNFS 8.5 1.0 10.9 6-9 2.8 5.4 5.8 Sourcess Ministry of Planning and Staff Appraisal Reports (ITPAL and SAL). ' Growth rate was exceptionally high because bad weather conditions in 1986 provided a low base. I Due to reduction in oil imports on account of new refinery. In fact, oil imports continued to grow in 1986-91. ANNEX 20 BALANCE OF PAYMENTS (millions of US$ at current prices) ITPAL Projection SAL Proiection 1985 1986 1987 1988 1989 1990 1991 1987 1991 1987 1990 1991 (eat) (eat) Exports of goods and NFS 2699.9 2721.9 3377.0 4243.0 4488.8 5290.5 5010.9 2920.0 3894.0 3324.0 4040.3 4369.6 mports and goods and NFS 3207.1 3364.0 3472.8 4205.9 4906.4 6130.0 5782.6 3529.0 4242.0 3440.8 4450.4 4759.7 Net Factor Services and transfers -81.4 -62.8 -2.6 37.1 88.4 189.5 64.9 -84.0 -50.0 -27.7 60.5 -65.0 Current Account Deficit -588.6 -704.9 -98.4 97.2 -329.2 -650.0 -706.8 -693.0 -398.0 -144.5 -450.6 -455.1 Net Foreign Invwstment 139.5 155.0 92.3 110.2 136.9 176.4 n.a 118.0 195.0 95.8 170.0 200.0 Gross Disbursements on Medium & long tearm (MLT) Loans 725.3 949.9 734.4 904.8 779.3 1165.3 n.a 1301.0 1018.0 961.9 1151.2 1166.5 Amortization on ULT Debt 435.1 498.4 663.2 673.1 629.4 924.9 U.a 588.0 821.0 619.8 838.6 884.8 Net ILT Loans 290.2 451.5 71.2 231.7 149.9 240.4 n.a. 713.0 197.0 342.1 312.6 281.7 Selected Financial Indicators Debt Service Ratic1 ( of exports of goods & services) 24.7 28.8 29.3 25.0 22.5 25.6 n.a. 28.0 27.9 27.8 28.0 27.5 Current Account Deficit (2 of GDP) -7.1 -7.9 -1.0 1.0 -3.2 -5.2 -5.4 -7.9 -3.4 -1.5 -3.9 -3.7 Sources: Ministry of Planning and Staff Appraisal Reports (ITPAL and SAL). if Amortisation of H & L Debt and Interest payments (excl. private non guaranteed debt and short t,rm debt). - 72 - ANNEX 21 GROWTH OF EXPORTS (Average annual growth rates, constant 1980 prices) 1976-81 1981-86 1986-91V 1986 91 (ITPAL Projections) Agricultural Products 2.4 2.4 7.3 4.0 Crude Petroleum and Products 7.4 -2.9 -2.1 -20.2 Phosphate and Chemicals 2.7 6.7 0.8 7.5 Processed Food -3.4 -5.2 7.3 5.5 Textiles 23.7 4.9 13.7 7.8 Electrical/Mechanicals 23.9 11.9 16.1 12.5 Other goods ..,.& ...7 Subtotal (Exports of Goods) 8.1 1.0 8.1 0.1 Non Factor Services& 2. .2 A.2 1.1 Total Exports, GNFS 8.5 1.0 6.9 2.8 Total, Excluding Petroleum 9.0 2.9 13.3 7.3 Sources: Ministry of Planning and Staff Appraisal Reports (ITPAL, SAL) ffgr: Exports of crude and petroleum products rose from 3.79 million tons in 1976 to 5.26 million tons in 1986. They fell to 3.87 million tons in 1990, i.e. by 1.3 million tons. It had been assumed under ITPAL that exports would fall by 1.5 million tons in 1986-91. However, unit price in Dinars/tons rose by 73% in 1986-90 while ITPAL had assumed that unit prices (in US $/barrel) would increase by 41% only in 1986-91. * Data for 1991 is estimazed. Tourism, freight, insurance and others. - 73 - ANNEX 22 IMPORTS OF GOODS AND SERVICES (Annual growth rates in percentage) (1980 prices) 1981-86 1986-91 1986-91 (ITPAL Projections) Food 1.8 -3.31' 0.711 Fuel -6.1 6.0 -5.9 Consumer Goods 0.1 12.5 Intermediate goods 1.6 4.6 1.3 Capital goods -.7 L . Subtotal (Import of goods) -2.4 5.8 1.6 Non Factor Services 0. 9.1 Total Imports - GNFS 2.2 5.2 1.6 Sgunre: Ministry of Planning and Staff Appraisal Reports (ITPAL, SAL) -' -0.4% p.a. in 1986-90. ' Assuming policy measures to stimulate import substitution of agricultural products. It Assuming energy consumption efforts and local refinery extension in 1986-91. Imports of petroleum and products declined from 2.25 mIlion tons in 1981 to 1.91 million tons in 1986 but rose to 2.4 million tons in 1993. At the same time national gas imports rose from nil in 1981 to 0.39 million tons in 1986 and 1 million Lns in 1990. BIMER OF PERSONS EMPLOYED BY SECTOR (in thousands) 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 (est) Agriculture and Fishing 138.2 140.6 142.3 142.4 142.8 143.0 143.2 143.0 142.6 143.0 144.0 Manufacturing 160.4 169.0 179.1 168.1 198.1 215.5 212.9 221.5 230.8 245.0 257.0 Mining, fuel, construction 35.0 35.0 36.1 37.6 37.0 36.0 35.6 35.1 34.8 33.5 33.0 Services (excl. govern.) 253.3 259.7 265.6 297.5 302.6 308.0 329.0 342.0 352.2 359.5 369.8 Government Services 183.3 201.2 233.0 247.0 249.3 264.0 268.0 275.0 284.0 293.0 302.0 Subtotal 839.7 874.4 923.8 983.2 1000.5 1035.0 1056.3 1084.4 1114.0 1144.0 1176.3 Adjustment 210.3 200.6 179.2 146.8 158.5 143.0 142.7 142.6 143.0 143.0 147.3 Total Persons Employed 1050.0 1075.0 1103.0 1130.0 1159.0 1178.0 1199.0 1227.0 1257.0 1287.0 1320.0 Annual Increase 25.0 28.0 27.0 29.0 19.0 21.0 28.0 30.0 30.0 23.0 Source: MInistry of Planning Notes: (a) The VIt plan anticipated an average annual increase in employment of about 35,000 per year in 1986-91 against 25,200 actually achieved. (b) ITPAL expected the number of new jobs available in 1986-91 to average 50,000 to 55,000 annually. (c) Annual growth in Goverment services employment averaged 2.6: in 86-91 whereas ITPAL assumed a 2Z growth rate. - 75 - -ANNEX 24 SOCIAL IMPACT OF THE ADJUSTMENT PROGRAM (ITPAL) Measures Designed to IDroV the Situation of tha Poor Product 1981-86 1986-90 (% increase) (% increase) Increase agriculture 2rices Durum wheat 66.7 (13.4)1' 53.1 (20.0)1' Bread wheat 18.4 (-34.9) 30.6 (-2.5) Barley 59.4 (6.1) 36.4 (3.3) Olive oil 66.7 (13.4) 81.3 (48.2) Tomatoes 65.7 (12.4) 20.7 (-12.4) Sugar beet 144.4 (91.1) 8.2 (-24.9) Dates 85.6 (32.2) 44.4 (11.3) Increase in minimum wage (mid-1986) will benefit urban poor. §= (40 hours/week) 67.4 (14.1)' 12.50 (20.6)1' 1' Employment increase in textile industry 16.3% 39.4% Emnlovment increase in electrical and mechanical industries 25.9% 23.6% Efmloyment increase in tourism 38.9% 25.9% Employment increase in agriculture and fishing 3.5% 0% ores: Ministry of Planning and Staff Appraisal Repovt (ITPAL). Nominal Price increases deflated by Consumer Price Index are in parentheses. e SAL (1988) assumed a small decline of the SMIG in real terms in 1987-91. 1987-90 the SNIG (40 hours/week) declined by 15.4% in real terms. ANNEX 25 GRO0H IN TOTAL WAGE DILL, GDP and CONSIIER PRICE INDEX (1986-1991) Growth Rate (2 P.A.) 1986 1987 1988 1989 1990 1991 1986-87 1986-91 9MS-J91 Total Wage Bill (million current Disars) 2647.0 2783.0 2944.0 3299.0 3588.0 3999.0 5.1 8.6 10.7 GDP at market prices (million current Diners) 7021.0 7997.0 8684.0 9660.0 10987.0 12002.0 13.9 11.3 11.4 Consumer Price Index (CPI) (1983-100) 124.0 134.2 143.8 154.9 165.0 a.a 8.2 7.411 5.611 Total wage bill Deflated by CPI (1986-100) 2647.0 2554.0 2473.0 2478.0 2402.0 U.a. -1.5 -2.31 1.4 -I Sourcess Ministry of Planning and Central Bank. Notes: (a) ITPAL asaumed that the total wage bill would not be higher than the growth of GDP in 1988-91. (b) ITPAL assumed that the total wage bill increase would be less than the CPI increase in 1986-87. (c) SAL assumed that Government salaries (earnings per employee) would be kept below inflation ( this was achieved in 1987-90 since average earnings rose by 151 while Inflation rose by 232) while ITPAL assumed that Goverament wage rates would on average not grow faster than inflation In 1986-87 (this was achieved) and would not increase faster than private wages In 1986-91 (this was also achieved). 1 1986 - 90. 1988 - 90. - 77 - PROJECT COMPLETION REPORT REPUBLIC OF TUNISIA INDUSTRIAL AND TRADE PLICY LOAN (LOAN 2781-TUN) June 1990 Country Operations Division Country Department II Europe, Middle East and North Africa Regional Office - 79 - PART I: BANK'S ASSESSMENT OF ITPAL 1. Project Identity Name Industrial and Trade Policy Loan Loan Number 2781-TUN RVP Unit EEMNA Region Country Republic of Tunisia Sector Industrial and Trade Policy A. BACKGROUND 2. The 1970s. For the Tunisian economy, the 1970s were marked by strong economic performance in an environment of growing state activity and substantial oil export earnings. Over this period, GDP growth averaged 7.4% p.a. and was quite evenly distributed among the sectors. High investment levels, with a large public component, which rose from 20% to about 30% of GDP over the decade and a high consumption growth averaging around 8% p.a. were largely responsible for this rapid GDP growth. Thanks to increasing oil export revenues throughout the period, high levels of investment and consumption could be sustained with only modest levels of external financing. Aided by the Government's promotion of exports through generous incentives for fully export-oriented firms in the early 1970s and an uninterrupted depreciation of the Tunisian dinar in real effective terms between 1970 and 1979, non-oil exports also performed well, growing on average 10% p.a.. The current account deficit averaged 5%-6% of GDP, and external indebtedness increased slightly from 38% to 42% of GDP from 1970 to 1979 and the debt service ratio was only about 10% in 1979. Oil revenues also helped stabilize the budget deficit around 5%-6% of GDP despite the Governr -it's expansionary investment and wage policies, and inflation was maintained below world levels, averaging 5.7% p.a.. 3. Industrial policy put more emphasis on export-oriented industries during the 1970s. Export industries, notably textiles, flourished rapidly under special incentives, but lacked any significant integration with domestic industries. Consequently, their influence on the efficiency and competitiveness of the domestic industry has been negligible. The latter remained highly protected and closed to foreign competition. The role of public industry expanded rapidly in sectors where the private sector did not take the initiative despite existing incentives and protection measures, i.e., construction materials and electro-mechanical industries. 4. Deterioration of the Balance of Payments: 1980-86. In the first half of the 1980s, strong state presence in the economy continued, leaving little room for market mechanisms. This manifested itself in extensive controls over many facets of economic activity and in the dominant role of the state as an economic agent. with large direct investments and expanding public enterprises. Administrative controls included elaborate price controls, - 80 - investment authorizations, and non-tariff restrictions to protect import substituting industries, indicating a more inward-looking industrial strategy than in the 1970s. 5. In this period, economic performance deteriorated due to a number of exogenous factors and government policies. Serious macroeconomic imbalances emerged. World oil prices started to soften and the depletion of oil reserves resulted in a permanent downward trend in oil exports. Manufacturing exports and tourism also slowed down as the Tunisian currency was allowed to appreciate vis-A-vis those of its competitors and as EEC demand fell with recession. Other exogenous factors also contributed to the increasing difficulties. A prolonged drought in 1982 and worse-than-average agricultural performance in 1984, led to increased food imports. In 1985, agricultural performance was very good, but the balance of payments suffered from the repatriation of more than 30,000 Tunisian workers from Libya due to a political dispute, severely reducing workers' remittances. 6. The Government did not respond quickly to stabilize growing macroeconomic imbalances and to adjust to the change in Tunisia's resource position. Instead, expansionary policies continued until 1985 despite the policy adjustments proposed in the VIth Plan (1982-86). In 1980-84, investment remained high at around 31% of GDP, with the greater part coming from the public sector, and wages increased significantly faster than productivity, depressing demand for labor. Consequently, the balance of payments deteriorated rapidly and, in 1984, the current account deficit reached a peak of 10.9% of GDP. These policies, while helping to achieve an average growth of 4.5% p.a., also led to a rise in inflation to 10.0% p.a. The budget deficit increased to 6.7% of GDP on average. The Government resorted to continued external borrowing, increasing the debt to GDP and debt service ratios to 46% and 21%, respectively. 7. Initial Attempts to Resolve Macroeconomic Problems. In 1985, Tunisia began experiencing difficulties in obtaining external financing for its high current account deficit and, with very low reserve levels, it became evident that the policies pursued were no longer sustainable. In 1986, a severe drought and the collapse of oil prices worsened Tunisia's problems. Initially, the Government chose to respond with restrictive measures to prevent an imminent balance of payments crisis. In 1985, import restrictions were extended and tightened and customs tariffs were raised, increasing the anti-export bias of the trade regime. To offset these biases, the Government passed new legislation introducing new export promotion measures. Government investment expenditures were also substantially cut, reducing total investment and the resource gap, real wage increases were frozen and a more flexible exchange rate policy was adopted, leading to a depreciation of the dinar by 5% in nominal terms. Consequently, exports grew by 3.3% and 5.2% in 1985 and 1986, respectively, while imports dropped sharply by 13% in 1985 and a further 2% in 1936 in volume. Though these stabilization policies succeeded in reducing the current account deficit from its 1984 level to 7.1% of GDP in 1985 (and 8.3% in 1986), import restrictions caused shortages of spare parts and raw materials, hampering industrial activity. With the help of these - 81 - measures and the mobilization of donor support at a 1987 Donors' meeting, Tunisia succeeded in averting a full crisis. B. THE MEDIUM-TERM ECONOMIC ADJUSTMENT PROGRAM 8. The Scope and Objectives of the Adjustment Program. By 1986, the Government had begun to recognize the importance of existing structural problems. It accepted that broader and more fundamental policy changes were necessary tz avoid the recurrence of similar balance of payments problems and to manage the transition to a post-oil economy. Economic incentives were distorted due to heavy administrative controls and this had led to inefficiencies in the industry sector with high production costs and dependence on imported inputs. Moreover, with shrinking oil revenues and an increasing debt burden, the Government had to adjust to diminishing resources for the public sector. For an efficient, export-oriented private sector to develop and gradually replace the public sector, the incentive structure needed to change. The structure of the government budget had to be adjusted to declining revenues through fiscal reforms and increased efficiency of public spending. 9. A comprehensive adjustment program was prepared addressing these issues by mid-1986, and its first phase was undertaken later in the same year, following a number of stabilization measures. The program reflected an outward-looking medium-term strategy, based on diversification and the rapid growth of non-oil, non-phosphate exports; sustained growth sufficient to reduce unemployment; increased efficiency of resource utilization; improved current account and budget deficits; and restored creditworthiness. 10. To achieve these objectives, the program focused on policies aimed at restricting demand, increasing efficiency and promoting exports. Immediate demand management policies included limiting wage increases, devaluing the exchange rate to restore the eroding competitiveness of Tunisia's exports, cutting public investment expenditures to reduce the deficit and raising interest rates to positive levels. The medium-term reforms covered a gradual liberalization of the economy as regards imports, prices and investments, abolishing all administrative controls by 1991. Further measures included fiscal and public enterprise reforms and the gradual reduction of subsidies to consumers and public enterprises in order to lower the budget deficit. The objectives of the adjustment program also constituted the basis for and were fully incorporated in the VIIth Plan (1987-91). 11. Sector-specific policy actions defined under the medium-term industrial and trade policy adjustment program (MITAP) complemented and supported the macroeconomic program. MITAP included: (a) a reform of the investment code to fully liberalize investmen:s by abolishing authorizations except when incentives were sought, (b) rationalization of the foreign exchange risk coverage scheme, (c) rationalization of the central bank's supervision of the financial sector to improve competition among banks, - 82 - (d) reform of the institutions dealing with the industrial and trade sectors, (e) indirect tax reform, (f) measures to improve the social security system, wage determination practices and the labor code, and (g) fine-tuning of export promotion measures realized earlier. 12. Bank's Support of and Contribution to the Adjustment Program. The dialogue between the Bank and the Government on industrial sector policy and macroeconomic strategy leading to a structural adjustment program started in 1985 in the context of the recommendations of a comprehensive industrial sector report and a synopsis paper on the medium-term macroframework prepared by the Bank. (It had also been instrumental in the preparation of the Donors' Meeting in Paris in 1987.) Despite the Government's initial policy response to the balance of payments difficulties with restrictive measures, Bank/Government dialogue on structural adjustment progressed without interruption. Gradually the perceptions of the Government and the Bank on the short and medium-term macroeconomic strategy came closer. 13. In mid-1986, this close Bank/Government collaboration resulted in the design of the macroeconomic adjustment program described above. The program presented a macroeconomic and sector policy framework (MITAP) that was appropriate for Bank financing, and the Government expressed a strong preference for long-maturity, fast-disbursing Bank financing. Given the strong commitment of the Gover::nent to carry out the program, the Bank supported these efforts with two rapidly-prepared adjustment operations: ASAL-I, focusing on agricultural policies; and ITPAL, focusing on industrial and external trade policies. Although technically ASAL-I preceded ITPAL, they were designed and implemented virtually simultaneously. Since these were the first two adjustment operations in Tunisia and there was no prior IMF program in place, both loans had strong macroeconomic foci and they both supported the same medium-term macroeconomic framework in addition to secLor specific measures. These loans also marked a turning point in the Bank's lending program in Tunisia, which, for a while, shifted to adjustment lending and increased rapidly with subsequent structural adjustment operations, i.e., the SAL, ASAL-II and PERL. 14. The transition of the Presidency from Mr. Bourguiba to Mr. Ben Ali in the midst of the adjustment process in 1987 did not slow down the implementation of the program. On the contrary, this change of power strengthened the commitment of the Government to economic liberalization and provided the political stability needed for adjustment. In fact, the preparation of the SAL which recapitulated the reforms and medium-term adjustment started with ITPAL was completed shortly after Mr. Ben Ali's rise to power. 15. In the policy dialogue leading to ITPAL and ASAL-I, the main counterpart of the Bank was the Ministry of Planning and Finance (MOPF). (Mr. Ismail Khelil, then Minister of the MOPF was a former Executive Director at the IMF and a strong supporter of structural adjustment and liberalization policies.) Once the MOPF was prepared to undertake a medium-term adjustment program, other ministries followed. The MOPF was responsible for the macroeconomic components of ITPAL, and the Ministry of National Economy and - 83 - the Central Bank assisted in the design .a.nd implementation of policies concerning the industrial sector (i.e., liberalization programs) and the financial sector (i.e., the interest rate policies), respectively. 16. Background Studies and Economic Sector Work Used in the Preparation of the Program. There were a number of studies and reports !-hich contributed to the design and formulation of the ITPAL. The Bank's Industrial Sector Study, which was undertaken in 1984 and completed in 1985, served as a background document in designing industrial policy reforms. Similarly, the synopsis paper, formulating the medium-term prospects and necessary stabilization and medium-term adjustment measures, was one of the key documents used in Bank/Government discussions. Furthermore, a 1983 study on effective protection rates in the electro-mechanical sector and its extension to the whole industry, produced by the Institute of Quantitative Studies (Bach Hamba) of the Ministry of Planning with the Bank's assistance, were extensively used in designing the tariff reform. The action program identified in a joint Bank/Tunisian Government industrial employment study (1983) was the basis for preparing the employment policy component of the program. In addition, field surveys and visits of manufacturing firms carried out earlier for two lines of credit and an SSI project also proved useful in designing employment policies. 17. A number of studies were initiated and completed during the loan period which served to clarify objectives, analyze issues, and formulate policy reforms in critical areas. Some were included in the ITPAL conditionality and financed under it. These are: (i) Tourism sector study to assess and optimize the sector's capacity in financial P.nd economic terms: Agreement on its terms of reference was a condition of effectiveness; (ii) Study on the foreign exchange risk coverage to reform the existing mechanism: Agreement on the terms of reference was a condition of effectiveness, and agreement on a system of foreign exchange risk coverage based on the study results was the condition of the second tranche release; (iii) An actuarial study of the social security system: It was done in connection with the second tranche release condition on the reform of the social security system. It was financed under the loan. 18. The IMF Program. Although the Government had consulted with the IMF on various economic and financial issues prior to 1986, the IMF's financial support was not requested until after the Government agreed with the Bank on the overall adjustment strategy, including a substantial real devaluation of the Tunisian dinar. Formal discussions between the IMF and the Government for a Stand-by arrangement began in mid-1986 and the IMF provided technical advice to the Government on exchange rate policy, including the selection of a basket of currencies against which exchange rate adjustments are made to maintain the competitiveness of Tunisia's exports. After the IMF's approval of the macroeconomic stabilization measures and medium-term strategy described earlier, a Stand-by arrangement from November 1986 to May 1988 for the equivalent of SDR 104 million (75% of the quota) and purchases of the equivalent of SDR 115 million under the Compensatory Financing Facility (CFF) were made available to Tunisia. This Stand-by program was successfully completed in 1988. Following the Stand-by, the IMF continued its support with - 84 - an Extended Fund Facility (EFF) for the equivalent of OR 207 million which was approved in July 1988. During the preparation of the EFF which largely coincided with the preparation of the Tunisia SAL, the Bank and the IMF worked closely and agreed on the overall medium-term program. C. ASSESSMENT OF THE ADJUSTMENT PROGRAM Accomplishments under the ITPAL - Adjustment Program Macroeconomic Program 19. The initial phase of the program focused on demand management and stabilization policies and launched the price and trade liberalization programs. As described in the following paragraphs, macroeconomic performance under the loan has in many respects been better than predicted. 20. One of the most important steps taken was the 1986 depreciation of the Tunisian dinar including a 10% nominal devaluation in August 1986. At the end of 1986, together with the 5% depreciation realized in 1985, the total depreciation of the real effective exchange rate against a basket of currencies amounted to 17.5%. The substantial depreciation of the dinar helped restore the competitiveness of Tunisian exports and increased the relative price of capital goods to wages. It also prepared the conditions for carrying on the liberalization program that began in 1986. Smaller exchange rate adjustments continued in 1987 and 1988, maintaining a competitive real exchange rate. 21. The Government continued its cautious wage policy, (although the minimum wage was increased by 10% in July 1986 for the first time in three years), and real average salaries declined by 2.9% in 1987 and rose by only 1.2% in 1988. The restraint on wages and salaries curbed domestic demand and further improved the competitiveness of Tunisia's exports. Public investment, sharply reduced in 1985-86, continued to decline, largely contributing to the fall in total investment as a share of GDP from 23.5% in 1986 to 20.3% in 1987 and to 18.8% in 1988. 22. Interest rates, which were brought up to positive levels in real terms during 1985-86, were also largely liberalized. On January 1, 1987, 75% of lending rates with the exception of those for agriculture, exports, small and medium enterprises (SME), and energy efficiency projects, were set free. Furthermore, approximately two-thirds of interest rates on commercial banks' deposits were decontrolled. 23. Liberalization Proarams. Parallel to the stabilization measures, the first phase of liberalization policies were launched at the end of 1986 and beginning of 1987. In this initial phase, in order to avoid price hikes caused by monopoly-pricing, producer prices were decontrolled for a group of - 85 - well-established industries where conditions for domestic competition were present. In 1986 95% of the domestically produced goods were subject to price controls. The ratio of output with decontroled prices increased to 50% in 1987, to 55% in 1988 and to 60% in 1989. Under the SAL program, this ratio is expected to increase to 70% in 1990. The import liberalization program started quite cautiously, leaving virtually all import restrictions on domestically produced goods in place. This was due to the fact that under the ITPAL, trade liberalization was monitored on the basis of "percentage of free imports" but not on "the percentage of domestic output whose imports are free". Imports liberalized in 1986-87 consisted of raw materials, intermediate capital goods and spare-parts essential for domestic producers whose imports had become restricted in 1985-86. A large group of capital goods and a few consumer goods not produced domestically were added to free imports in 1988. Moreover, in 1986 as an additional incentive for exports, firms exporting more than 25% of their turnover were allowed to freely import all inputs needed. In 1987, this policy was extended to firms exporting a minim-,-a of 15% of their turnover. As a result, the number of free tariff positions increased from 450 in 1986 to 1,560 in 1987, to 2,166 in 1988 and to 3,078 in 1989. In 1988, about 50% of imports were imported freely. However, the remaining QRs continued to protect most domestic industries. In the same period, the share of domestic production covered by QRs declined only marginally: In 1986, the QRs covered 98.9% of total manufacturing and this ratio only declined to 91.2 in 1988. Consequently, the first phase of import liberalization had the effect of improving the environment for import- substituting firms by increasing the availability of foreign inputs and investment goods. It failed however, to significantly increase import competition among domestic--import substituting--industries which remained, to a great extent, protected by quantitative restrictions (see Table "Elimination of Quantitative Restrictions", Annex IV, page 1). The SAL emphasized the elimination of QRs and supported the reduction of QR protection on domestic industries, and the elimination of virtually all QRs in the medium term. Accordingly, an additional 15% of domestic output will be free of QRs at the time of the second tranche release of the SAL in 1990. 24. Tariff reform advanced more rapidly than the elimination of non-tariff restrictions. Import tariffs and duties were compressed from 5%-235% to the 15%-50% range in 1987 and to 15%-41% in 1988, and all other import taxes were eliminated or incorporated in tariffs. Moreover, rates within this range were lowered and made more uniform to reduce the disparities in tariff rates for different sectors (see Table "The Reform of the Tariff Structure", Annex IV, page 2). Sector Program 25. The medium-term sector program complemented the liberalization program in changing the incentives framework for the industry and trade sectors by focusing on the regulatory and institutional environment. Consistent with the macroeconomic program, it aimed at stimulating non- phosphate manufacturing exports, increasing the efficiency of the industry and - 86 - trade sectors, and expanding the role of the private sector. It also included measures addressing the issue of employment creation. 26. Liberalization of Investment and the New Investment Code. As part of liberalization policies and a condition of the ITPAL, a new investment code was prepared becoming effective in August 1987. The new investment code eliminated authorizations on all investments with the exception of those seeking special incentives. It also reduced the number and importance of incentives available and improved the transparency and symmetry of incentives available for foreign and domestic investments. Elimination of investment authorizations was an important step in increasing the role of market forces, stimulating private investment and encouraging the development of a competitive domestic industry. 27. Liberalization of Banking Activities. In addition to the Government's own initiative in moving to a more liberal regime in the banking sector, additional constraints on the banking sector were removed under MITAP. The prior authorization requirement by the Central Bank for loans in excess of a certain minimum was relaxed. Short-term lending up to TD 5 million and all medium-term lending to the private sector became free of authorizations as of January 1987. 28. Improvements in the Institutional Framework and Regulatory Environment. MITAP supported a number of institutional reforms and efficiency-improving changes in the regulatory environment for the trade and industry sectors. The roles and mandates of public institutions dealing with the manufacturing sector were reviewed and, consistent with the shift in the Government's policy towards export-orientation and liberalization, steps were taken to reorganize some of these institutions. In this context, the Investment Promotion Agency (API), which had been responsible for investment authorizations, became the Industrial Promotion Agency with the promulgation of the new investment code. The National Center for Industrial Studies (CNEI) and API were merged into the new API to increase institutional efficiency. Also, a reorganization of API was initiated to transform its role from investment control to providing assistance to industrial development. Similarly, in 1987-1988, the Center for Export Promotion (CEPEX) was reorganized and the promotional activities of the Tunisian Trade Office (OCT) were merged with CEPEX to increase its effectiveness. In 1988, CEPEX was further expanded after merging with CNFE (National Council of Fairs and Exhibitions). MITAP also supported more active private sector involvement, in particular of the Tunisian Union for Industry, Trade and Craftsmenship (UTICA), in industrial and export promotion so as to better reflect private sector views. As regards to the three existing technical centers, i.e., Centre Technique des Industries Mdcaniques et Electriques (CETIME), Centre Technique des Matdriaux de Construction de la C6ramique et du Verre (CTMCCV), and Centre National du Cuir et de la Chaussure (CNCC), the MITAP recommended a more efficient use of these and, increasing their financial independence from the government budget. 29. MITAP also supported some additional improvements to remove the remaining administrative obstacles facing businesses which would reinforce the - 87 - recently implemented export promotion measures. Additional steps included the completion of computerization and decentralization of customs services and further simplification of customs formalities. 30. Fiscal Reform. An objective ot the adjustment program was to create an environment conducive to private sector development. Complementing the investment code which rationalized fiscal incentives, fiscal reform was aimed at streamlining and simplifying the existing system. MITAP focused on indirect taxes and supported the preparation of the legislation and introduction of a value-added tax (VAT). The VAT was intended as a revenue-neutral reform since the overall tax ratio in Tunisia was already rather high (approximately 27% of GDP) and indirect taxes constituted about two-thirds of all fiscal revenues in 1986. The legislation was prepared in close consultation with the Bank and finalized during the preparation of the SAL. A VAT on production replaced the existing indirect taxes on July 1, 1988 with the exception of a consumption tax on a limited group of products which is to be gradually narrowed to a handful of luxuries.' 31. Foreign Exchange Risk Coverage Scheme. With the growing role of development banks in investment financing and with existing exchange rate instability affecting foreign borrowings, the foreign exchange risk had become an important issue. Under the MITAP, the initial steps were taken to reform the system of foreign exchange risk coverage. Previously, the exchange risk of foreign borrowings of financial institutions and public enterprises was assumed by the Government. With the dinar appreciating due to oil income, this system did not create a burden for the Government until 1981. After 1981, however, the dinar's depreciation led to heavy losses. In 1985, the Foreign Exchange Risk Fund (Fonds de Pdrdquation de Change) was reactivated. But since the fund depended on a constant income from taxes on bank overdrafts, it proved to be insufficient in covering the losses. In order to establish a new system of foreign exchange risk coverage and introduce forward exchange risk coveragc, a study was supported under MITAP. Its terms of reference was prepared in consultation with the Bank, and a study was undertaken in the context of the loan (see para. 17). 32. The foreign exchange risk coverage issue was taken up again in the context of the SAL. A more comprehensive system than previously envisaged, combining financing with hedging, was designed and accepted during the preparation of the SAL. The Foreign Exchange Risk Fund's operations have been limited to its obligations as of August 15, 1988. Since the preparation of the new system required additional time, its completion was extended beyond the present loan. A waiver of the related second tranche condition was requested and granted. Principles of the new system are described in detail in the President's Report of the SAL (P-4808-TUN). 33. Employment and Wage Policies. Given that rising unemployment had been a major concern for the Government, MITAP supported policies to encourage In the context of the SAL, the VAT was extended to wholesale, excluding foodstuffs, in August 1989. - 88 - industrial employment. It incorporated measures to modify wage policies and other incentives to favor labor-intensive investment. MITAP acted in three areas. First, to reform the social security system, an actuarial study was initiated to assess the possibility of reducing employers' social security contributions without hurting the financial integrity of the system. Completion of the study and adoption of measures based on its recommendations, however, extended beyond the loan period. The first part of the study, undertaken by the International Labor Organization (ILO), was recently completed. Bank staff reviewed it and commented on the preliminary recommendations. Second, in the area of wage policy, consultants (from ILO) were hired to train staff from the Ministry of Social Affairs and selected enterprises in applying a wage policy based on productivity increases. The consultants were financed under the loan. Third, the Government has begun preparations for revising the labor code to increase its flexibility and adaptability. The interpretation and application of the existing labor code as much as the code itself have been a serious impediment to new private sector investment and the expansion of industrial production. Flexibility in the practice of hiring temporary workers and in lay-off policies has been lacking. However, since this is a socially sensitive issue, the Government has been moving carefully and cautiously in revising the labor code and in assuring a more flexible application of the existing code. Weaknesses and Failures of the Program, 34. Compliance with conditionality. As the above discussion indicates, compliance with most conditions of the loan and with key actions attached to the industrial development policy letter was highly satisfactory. However, there were some delays in the fulfillment of a few conditions. These conditions were related to studies supported by the loan in the areas of wage and employment policies and the coverage of the foreign exchange risk. In the case of the study on the reform of the foreign exchange risk coverage, the delay was due to ongoing discussions on the focus of the study and the division of responsibilities in carrying out the study and, as such, was inevitable. In the case of the (actuarial) study on the social security system, the Government had originally intended to finance the study through other sources, but later ran into difficulties in financing it. Eventually, it was financed under the ITPAL after an amendment of the loan agreement allowed for this. This process took a longer time than originally expected. 35. In addition, Bank staff requested a waiver of the ITPAL second tranche condition concerning the reform of the foreign exchange risk coverage system (see para. 32). The reform was completed under the SAL. Since this resulted in the improvement of the system which was eventually put in place, the waiver should not be perceived as a failure of the program. It only reflects an over optimistic evaluation of the time and effort needed for the design of the new system. 36. Weaknesses in the Trade Liberalization Program. The trade liberalization program has been a crucial part of the reforms supported by ITPAL as well as the overall adjustment program. Although it contained most - 89 - necessary elements of a sound trade liberalization program, in retrospect, its impact could have been improved if the foliowing pcints had been incorporated in the program. (i) In specifying the tariff reform, the loan based its medium-term target on an average effectiye rate of proteccion of 25%. Defining the target on the basis of effective rates makes the monitoring of the condition difficult if not impossible. This figure of 25% was derived from a 1983 study of effective rates of protection in Tunisia. Since 1983, however, there has been no new effective rate of protection study that takes into account the effects of quantitative restrictions. In discussions with Tunisian officials, this has been a source of confusion as average nominal rates were treated as effective rates of protection. (ii) The sequencing of tariff reform and elimination of quantitative restrictions (QRs) under the loan were such that tariff reform advanced much faster than the elimination of QRs. Bank approach to trade liberalization in other countries had been the opposite, namely, the elimination of QRs came first and the tariff reform later or simultaneously. The rapid compression of the tariff range while most QRs remained in place has created problems for further elimination of QRs. The Tunisian industrialists and some part of the administration argued that lower tariffs did not provide sufficient protection to allow for the removal of QRS. This issue has negatively affected Bank/Government discussions on the pace of trade liberalization in the medium term. (iii) Targets for monitoring the elimination of QRs were defined in terms of number of tariff positions and val.te of imports. Although both are useful indicators, they do not indicate whether import-substituting firms face foreign competition or not. Since the ultimate aim of trade liberalization is to increase the competitiveness and efficiency of Tunisian products, a more appropriate indicator would have been the share of domestic output not protected by QRs. Under the SAL, the Bank has switched to this indicator to monitor the pace of trade liberalization (see para. 23). 37. Weaknesses of the Price Liberalization Program. The price liberalization program was based on the decontrol of producer prices only. The distribution margins which are also widely controlled in Tunisia were left out of the reform program. This could be justified by the sectoral focus of the loan. However, its inclusion would have strengthened the program since distortions at the distributiun level have negative effects on industrial efficiency as well. Liberalization of distribution margins is a part of the program supported under the SAL. Under the SAL, 20% of distribution margins will be liberalized, and in the medium term this ratio will reach 50%. 38. Weaknesses in the Sector Program - Employment and Wage Policies. Although the sector program was comprehensive and had many strengths, it could - 90 - have gained much from greater precision in the action program for employment and wage policies. The conditionality concerning the improvements in wage policy, reform of the social security system, and revisions in the labor code could have been based on more substantial achievements which are easier to monitor. (i) Wage Policy. As discussed under the macroeconomic Irogram, the macro-wage policy supported by ITPAL has been quite successful in keeping real wages under control. At the sectoral level, however, the program failed to achieve a tangible progress in wage-determination practices. Consultants hired to train the administration and enterprises in linking wage increases to productivity, devoted an excessive amount of time to modelling and theoretical work. A practical approach would have been more successful. In retrcspect, the ITPAL condition would have been more effective if it emphasized market-based wage practices and more autonomy for enterprises. (ii) The actuarial study on the social security system. The study has already taken longer than anticipated. Moreover, preliminary results of the first part of the study indicates that lowering social security contributions may be more difficult than expected if the financial integrity of the system is to be maintained. The final outcome of the study is yet to be seen and evaluated by Bank staff. (iii) Labor Code. So far, the labor code has not been revised. The Government has run into difficulties in implementing the planned revisions due to strong social pressures. However, as indicated in para. 32, it seems that even in the context of the existing labor code a more flexible employment practice can be adopted by enterprises. The Government is concentrating its efforts in this direction. Discussions, to this effect, continue between the Government, labor unions, and enterprises. The Human Resources Division has maintained the dialogue with the Government on the Labor Code and employment practices as well as the social security system. In addition an education and training loan, approved by the Board in May 1989, supports improvements in employment practices. Impact of the Adjustment Program 39. Evaluating the impact of an adjustment program shortly after its completion has some limitations since most of the impact is to be expected in the medium term. Moreover, in such a short period of time, it is difficult to isolate the impact of the reform measures from those of exogenous and conjectural factors. Nevertheless, certain aspects of the program can be evaluated on a qualitative, if not quantitative, basis. The following sections discuss the impact of the macro and sectoral measures to the extent possible. - 91 - Macroeconomic Impact 40. Pet..aps the most striking change in macroeconomic balances in 1987 and 1968 was the sharp turnaround in the balance of payments as the current account deficit declined to 0.9% of GDP in 1987 and gave a small surplus of 1.1% in 1988. This sudden improvement is partly attributable to the measures taken in the context of the adjustment program and partly to exogenous factors. In 1987, non-oil exports and workers' remittances from abroad responded strongly to the devaluation, increasing 33.6% and 26%, in real terms, over their respective 1984 levels. Export promotion measures, strong demand from OECD countries and an exceptionally good agricultural crop also contributed to this increase. Export growth, particularly in manufacturing and tourism, remained strong in 1988 resulting in a 42% growth of total exports over 1987-88. The tourism sector greatly benefitted from improved relations with Libya in 1988, which led to an unexpected influx of a large number of visitors for that one year as well as stimulating indirect exports of goods and services. 41. Devaluation and demand restraint measures had a dampening affect on imports. However, they were also significantly influenced by extreme fluctuations in agricultural performance in 1987 and 1988. With the help of a bumper crop in 1987, imports declined by 5.7% over their already low level in 1986. In 1988, however, agricultural output was drastically reduced due to a severe drought and locust infestation, resulting in a 50% increase in food imports. This, combined with increased input demand for soaring exports led to a sharp rise in total imports (16.2%). 42. The authorities adjusted the monetary/ctedit policy as reserves increased because of the sharp improvement in the balanc; nf payments from 1.3 months of imports in 1986 to 2.8 months by the end of 1988. The Central Bank reduced net credit to financial institutions by TD 140 million in 1987 and by a further TD 283 million in 1988 as the liquidity of the economy (deposits, capital accounts, and certain other items) increased. These decreases were accompanied by smaller reductions in Central Bank credit to the Government. With prudent credit and monetary policies, inflation was contained at 7.2% in 1987 and reduced to 6.3% in 1988. 43. The demand restraint measures described above also helped reduce the government deficit to 3.0% in 1987, but food subsidies soared again in 1988 due to drought and high international cereal prices leading to a rise in the deficit to 4.2% of GDP. The GDP growth for 1987-88 reflected the impact of these policies and exogenous factors. In 1987 GDP growth reached 5.8% following a decline of 1.5% in 1986 and despite highly unfavorable agricultural conditions, the economy grew by 1.5% in 1988. The unemployment rate, however, continued to rise, exceeding 14% in 1987, and employment in the manufacturing sector declined slightly. The drought in 1988 led to an increase in the unemployment rate to 15%. The short-run negative effect of demand restraint measures on employment, particularly the sharp fall in total investment, outweighed the impact of decline in real wages. The fall in total investment reflected not only the consecutive cuts in public investment but - 92 - also the continuing decline in private investment since the beginning of the 198A,. -uggish private investment and unemployment remain as major concerns of ..e I rernment. 44. Impact of Liberalization Programs. Despite lower tariffs and the removal of import restrictions on a group of products, imports remained low in 1987 as described earlier. In 1948, however, imports of intermediate goods and a few capital goods picked up. Lower tariff rates reduced tariff revenues for a given level of imports, consistent with the shift in the focus of government policy to cuts in expenditures in stabilizing the budget. Producer price liberalization did not have a strong effect on inflation as sluggish domestic demand eased inflationary pressures. 45. Another expected impact of trade liberalization is on private investment and its sectoral allocation. In the medium term, this impact is expected to be positive, as private investment should pick up and new investments should concentrate in tradeables sectors. However, in the short run the impact can be negative due to uncertainties created by changing incentives structure. As quantitative restrictions are eliminated and tariffs lowered, the relative profitability of various sectors should change drastically. In Tunisia, the Government has not layed out the specific steps of the liberalization program and the sequence in which particular sectors will be liberalized over the medium term. Thus, potential investors hesitate to invest until the program is completed and the new profitability structure becomes clear. Continued sluggish private investment in Tunisia can partially be attributed to this short-term impact. Private investment has been on a downward trend since the early 1980s. Its share in GDP has declined from 8.5% in 1980 to 4.3% in 1987 and only increased slightly to 4.8% in 1989. At this early stage, it is difficult to judge the future trend in private investment. Sectoral Impact. 46. Investment code. It is difficult to isolate from other factors the impact of the investment code on private investment trends, employment creation, and the sectoral allocation of new investments. There are other factors which affect the trend in private investment as mentioned in para. 44. The Industrial Sector Note analyses the data from API on investment declarations for 1987-88. New investment declarations submitted to API indicate an increase in private investment in 1988. However, since these figures show only intentions, the realization of private investment in the coming years is still highly uncertain. - 93 - API - Industrial Investment Declarations. 1987-88 1987 1988 Number Value Avg. size Number Value Avg. size (TD million) (TDOOO) (TD million) (TDOOO) Total Declarations* 995 340.8 343 2,189 469.5 215 With Foreign Partner 111 42 7 385 224 74.1 331 By off-shore firms 225 58.2 259 515 117.6 228 Not excluded from incentives n.a. n.a. n.a. 725 78.1 108 Numbers for 1987 refer to investment approvals by API, i.e., after rejection of proposals which could not assure financing while in 1988 they refer to projects registered with API prior to securing financing. 47. According to these declarations, out of 2,189 projects only 23.5% were export sector projects while the remaining were fully or partially oriented towards the domestic market. These figures also give an indication of the utilization of incentives provided by the new code. Out o! the 725 projects eligible for incentives, only 287 were actually granted Ldvantages. 48. Institutions. So far, the -mpact of the reform of public institutions on investments, exports, and private sector development has been negligible. A recent Bank review of the new API showed that little has changed since its reorganization and merger with CNEI and AFI. The desired integration among the three agencies has not materialized, and resource utilization has yet to improve.2 Moreover, investors seem to be still skeptical about the usefulness of services provided by the new API and most choose not to seek special incentives. The Government is aware of these problems and continues with the fine-tuning of API and the introduction of new services which would facilitate new investments. CEPEX's reorganization is also not over. So far, its support and assistance to enterprises and potential exporters has been mostly limited to invitations to participate in trade fairs. In the future, it intends to allocate more resources to direct assistance and provide more services for exporters in the future. However, it is still questionable whether API and CEPEX could assume their intended roles in the near future and play useful functions in the development of the private sector and Tunisia's exports. The Tunisia Industrial Sector Note makes recommendations as regards to the future role and status of these institutions. UTICA has been making efforts to change its image and expand its role in the development of the private sector. However, it does not yet have the technical or skilled staff to assume this role. The financial self- sufficiency of the three technical centers remains a future goal though each has been able to generate some income from their services and sales. A large portion of their incomes still come from the government budget. However, their sectoral promotional rolts have been growing, and this has had some positive impact on their respective sectors. Tunisia - Industrial Sector Note, report no: 8277-TUN, green cover. - 94 - 49. VAT. The implementation of the VAT on production has been smooth, and the first experience with it has been positive. The initial impact on fiscal revenue has been better than expected. VAT revenues amounted to TD 243.6 million in 1988 and to TD 210 million in 1989. In the short run, a revenue shortfall was anticipated since the VAT introduced lower tax rates. The revenue short fall in indirect tax revenues in 1989 was smaller than anticipated (about 0.7% of GDP or TD 47 million). In fact, this short fall may have been due to over-optimistic revenue exstimations in the first place. In the medium term, the reform is expected to be revenue neutral, as the tax base expands and tax collection improves. As a step to expand the tax base the VAT was extended to wholesale distribution excluding foodstuffs in 1989. With this extension and improved tax collection, the VAT revenue is expected to increase to TD 240.5 million in 1990. D. IMPLEMENTATION AND MONITORING OF ITPAL 50. Disbursements. Disbursements of ITPAT. were much slower than anticipated. Given the balance of payments projections and estimated external resource gap for 1987 and 1988 at the time the loan was prepared, the ITPAL was expected to be fully disbursed within 18 months of effectiveness (August 5, 1987) closing on December 31, 1988. In fact, the loan amount had been increased from US$100 million to US$150 million at the Government's request during negotiations. To facilitate and accelerate disbursements, a revolving fund--special account-- was established with an initial deposit of US$35 million. However, disbursements remained slow until March 1988 and the first tranche (US$100 million) was not fully utilized until March 1989 (see Table on Loan Disbursement, Annex II, Page 2). This contributed to the slippage of the release of the second tranche until January 19, 1989. The closing dote of the loan had to be extended for one year to allow the Government sufficient time to utilize the second tranche funds. The loan was fully disbursed on December 19, 1989, a few weeks before the new closing date. The slow pace of disbursements was to a great extent due to unexpected improvements in the current account during 1987 and 1988. The current account deficit was reduced drastically in 1987 and became a small surplus in 1988. ITPAL projections of the current account indicated, however, large deficits in the order of 8% of GDP for the same period. The reason for this sharp turn- around are discussed in paras. 39-40. .e availability of other funds from ASAL I and other operations during this period also contributed to slow disbursements. 51. Records and Audits. It had been agreed that an audit report, covering all accounts including the special account, would be prepared by independent auditors acceptable to the Bank within six months of the termination of each fiscal year. However, the only audit report for ITPAL received by the Bank was dated August 1989 despite official reminders from Bank staff. Similar delays were experienced in the preparation of audit reports for other Bank loans, i.e., ASAL I. - 95 - 52. The audit report covering the period until December 31, 1988, was prepared by the Comptrollers Department of the Ministry of Finance. The report unraveled a few errors of conversion of foreign exchange which resulted in an overstatement of the dollar-value of some of the applications for witirawal of funds financed by ITPAL of US$218,223.20. Fortunately, the error was discovered before the loan was closed. Thus, this amount was used for the payment of other imports which had been previously turned down when the loan was thought to be fully disbursed. 53. Saervision. The supervision of the ITPAL macroeconomic program until effectivezn-ss was carried out by the Programs Department in conjunction with its supervision of ASAL I which supported the same macro reforms. Af-er the reorganization of the Bank, the supervision of the loan was taken over by the Cnuntry Operationb Division. With the preparation of the SAL which continued many reforms initiated under the ITPAL, including macroeconomic performance, trade and price liberalization, foreign exchange risk coverage and indirect and direct tax reform, some ITPAL supervision missions were combined with SAL missions. Similarly, labor and employment-related issues supported by ITPAL were followed up closely in the context of operations prepared by the Human Resources Divisior (Education, Training and Employment Loan). This permitted a more frequent supervision of ITPAL's progress than would have been otherwise possible. - 96 - PART II: THE BORROWER'S ASSESSMENT The Project Completion Report (Parts I and III) was sent to the Government of Tunisia for comments, but none were received. - 97 - PART III: STATISTICAL ANNEXES ANNEX I Matrix ANNEX II Loan Data ANNEX III Investment Tables ANNEX IV Trade Reform Page 1 of 3 TUNISIA ITPAL Summary of Performance under ITPAL Status of Conditions & Key Actions POLICY AREA TYPE OF CONDITION STATUS AS OF 31990 Macroeconomic Reform 1987 Budget. Approval of the 1987 Budget in line with Condition of effectiveness The 1987 Budget performance found statisfactory. the targets agreed with the Bank. Overall macro program. Bank confirmation of Condition of second tranche Macro targets monitored were revised under the satisfactory progress in implementation of the overall release. SAL, based on recent developments. The macroeconomic program, based on selected macro momentum of the adjustment process has been indicators. kept up. Overall macro-performance found satisfactory. Price and import liberalization programs and tariff reform were continued under the SAL and further Jteps were specified in these areas covering the period of 1989-90. Incentives Framework o Investment Code. Submission of the new investment Condition of effectiveness. Accomplished on time (May 25, 1987). code to the National Assembly. Adoption of the new investment code. Condition of the second tranche Accomplished on time. The new code adopted release. on August 2, 1987. Institutions Investments Approvals Committee. Issuance of a decree Condition of the second tranche The committee was abolished in July 1988 and separating the approvals committee responsible for release. condition nullified. implementing the new investment code from API's board of Directors. Restructuring. Merging of CNEI's and AFI's activities and Key action. Accomplished. personnel with those of API by January 2, 1988. Restructuring API to focus on promotional activities by Key action. Accomplished. Further fine-tuning of API still January 2, 1988. continues. Merging of OCTs promotional work with CEPEX by end Key action. Accomplished. 1987. A detailed, concrete proposal to reduce financial Key action. Efforts are underway. dependence of technical centers on the budget to 50% TUNISIA ITPAL Summary of Performance under ITPAL Status of Conditions & Key Actions POLICY AREA TYPE OF CONDITION STATUS AS OF 3/1990 Submission of a concrete proposal to expand the role of Key action. Accomplished. Chamber of Commerce and of UTICA before the end of 1987. Export Promotion. Improvement of Customs and other Key action Originally intended as a condition of effectiveness. external trade related services. Govt submitted its program during negotiations which was found satisfactory and the condition was dropped. Money and Credit Liberalization of Banking activities. Deregulation of all Key action Accomplished before loan approval lending and borrowing rates, excluding (i) lending rates (January 2, 1987). on priority activity loans and (ii) borrowing rates on special savings accounts and convertible dinar deposits. Foreign Exchanae Risk Coverage. Agreement on the Condition of effectiveness Accomplished with some delay. The two studies terms of references for (i) a study to improve the system were combined and a single terms of reference of protection against foreign exchange risk; and (ii) a was prepared. lEO and the Ministry of Finance study to improve the system of forward coverage of were responsible for the study. foreign exchange risk Exchange of views on the findings of the foreign Condition of second tranche The foreign exchange risk coverage issue was exchange risk study and the implementation of a new taken up again in the context of the SAL and the system of foreign exchange risk coverage. terms of reference were .evised. The Government and the Bank agreed on the new mechanism to be adopted which combines hedging with financing. A waivr requested for this and it is accomplished under the SAL. Taxation VAT. Submission of a value-added tax legislation to the Condition of second tranche A draft law was prepared on time but the Bank National Assembly for enactment. believed it could be further improved and decided to postpone it a few months. A revised legislation was prepared acceptable to the Bank under the SAL VAT was approved in May 1988 and became effective on July 1, 19. ANNEX I Page 3 of 3 TUNISIA P ITPAL Summary of Performance under ITPAL Status of Conditions & Key Actions POLICY AREA TYPE OF CONDITION STATUS AS OF 3/1990 Direct taxes. Standardization and simplification of direct Key action Accomplished under the SAL A new direct tax taxes on personal and corporate income before the end legislation has recently been approved. of the VIIth Plan (1986-91). Industrial Employment and Wages Social Security. (a) Exchange of views on measures Condition of the second tranche Accomplished with some delay since it was later aimed at reforming the social security system to prevent release decided that an actuarial study was needed to further increases in employers' contributions in the formulate the reform measures. An actuarial short-term and to gradually reduce social security study, started in October 88, was carried out charges without jeopardizing the financial integrity of the jointly with IL0. Government also began to revise system; (b) Agreement on a timetable for implementing the labor code to reduce social security changes. these measures. Salary Policy. Employment of consultants for the training Condition of the second tranche Accomplished with some delay. IL0 experts were of staff of the Ministry of Social Affairs and of selected release hired as consultants in Sep'mber 1988. enterprises in implementing selective wage adjustment Expenses financed through the loan. policy based on improvements in productivity. Labor and Employment legislation. The Bank's review of Condition for the second tranche Accomplished with delay. The Government has proposed changes in labor and employment legislation release started revising the labor code and introducing to improve its flexibility and adaptability and agreement other measures to bring more flexibility. on a timetable for the implementation of the changes. Tourism Policy. Agreement on the terms of reference for Condition of effectiveness Accomplished on time, with a small delay. a comprehensive study of policies necessary to increase revenues from tourism. - 101 - ANNEX II Page 1 of 2 TUNISIA INDUSTRIAL & TRADE POLICY ADJUSTMENT LOAN LOAN DA Amounts (US$ M) US$150 As of April 30. 1990 Oriinal Disbursed Cancelled Repaid Oustanding Loan No. 2781-TUN 150.00 150.00 -- -- 150.00 Original Loan Date Actual or Re-estimated nitiating memorandum 4/86 9/86 etter of Develop. Policy N/A 1/27/87 egotiations 11/24/86 12/18/86-12/24/86 oard Approval 2/87 2/24/87 Loan Agreement N/A 3/6/87 ffectiveness 4/87 8/5/87 Loan Closing 12/31/88 12/31/89 Actual Completion 12/19/89 CUMULATIVE LOAN DISBURSEMENT FY 88 FY 89 FY 90 (i) Planned 110.0 150.0 150.0 (ii) Actual 71.0 133.8 150.0 (iii) (ii) as % of (1) 64.5% 89.2% 100% MISSION DATA Mission No. of No. of Staff Date of Month/Year Weeks Persons Weeks Report Preparation I 4/17/86-5/1/86 2 4 8 5/19/86 Preparation II 6/23/86-7/11/86 2 1/2 8 20 8/4/86 Lppraisal 10/4/86-10/22/86 2 1/2 7 17 11/5/86 ;upervision I 3/15/87-3/21/87 1 1 1 Supervision II 3/23/87-4/1/87 1 1 1 4/15/87 Supervision III 4/27/87-4/30/87 1/2 2 1 6/3/87 Supervision IV 12/11/87-12/18/87 1 3 3 Supervision V 2/1/87 7 1 1 3/4/88 Supervision VI 12/4/88-12/15/88 1 1 1 12/19/88 Completion 12/3/89-12/10/89 1 1 1 12/28/89 - 102 - ANNEX II Page 2 of 2 FOLLOW-UP ON ADJUSTMENT OPERATIONS (COUNTRY: TUNISIA) A Second Industry Trade Policy Adjustment operation was not undertaken. But Structural Adjustment Loan No. 2962-TUN approved on June 15, 1988, in the amount of US$150 million continued the macroeconomic program and most of sectoral action areas included in ITPAL. LOAN DISBURSEMENT Date Planned Cumulative Actual Cumulative September 30, 1987 35 35 35.22 .35.22 December 31, 1987 25 60 -- 35.22 March 31, 1988 25 85 2.28 37.50 June 30, 1988 25 110 33.47 70.97 September 30, 1988 20 130 16.62 87.59 December 31, 1988 20 150 3.04 90.63 March 31, 1989 12.34 102.97 June 30, 1989 30.82 133.79 September 30, 1989 6.53 140.32 December 31, 1989 9.68 150.00 STAFF-WEEK COST SUMMARY FY85 FY86 FY87 FY88 FY89 FY90 Pre-Appraisal 7.3 29.8 55.3 Appraisal 35.9 Negotiations 29.4 Supervision 10.2 7.1 8.7 Completion 9 - 103 - ANNEX III SIZE DISTRIBUTION OF PROJECTS INCENTIVES Under TD 200 TD 200-500 TD 0.5-1 Over TD 1 M thousand thousand million Number 28 41 15 23 Aver. Size (TD thousand) 114.1 354.2 764.5 3,912.5 API DECLARATIONS IN 1988 Off-shore firms Projects with Firms granted Total no incentives incentives Declarations Number 515 1,387 287 2,189 Average Invest. (TD thousand) 226 118 658 215 Aver. Job Creation 48 12 20 21 Average cost per new job (TD) 4,700 9,833 32,900 10,230 Source: Tunisia Industrial Sector Note, Green Cover - 104 - ANNEX IV Page 1 of 2 ELIMINATION OF QUANTITATIVE RESTRICTIONS TUNISIA: QUANTITATIVE RESTRICTIONS ON IMPORTS OF MANUFACTURED GOODS Number of Tariff Positions Year Total Free Controlled % controlled 1981 7178 1707 5471 76.2 1983-4 7178 1615 5563 77.5 1985-6 7178 450 6728 93.7 1987 7178 1560 5618 78.2 1988 7178 2166 5012 69.8 1989 7178 3078 4100 57.1 Percentage of Domestic Production covered by QRs, by sector 1981 83-4 85-6 1987 1988 10 - Food processing and agro-ind. 91.4 87.2 100.0 96.4 96.4 20 - Construction materials 96.8 96.8 99.9 98.4 98.4 30 - Electrical and mechanical ind. 86.9 88.3 95.4 91.9 91.4 40 - Chemicals 32.5 32.9 97.9 92.2 92.2 50 - Textiles 96.6 96.8 100.0 98.0 97.0 60 - Miscellaneous manuf. industries 93.7 95.5 99.8 94.5 89.0 TOTAL MANUFACTURING 85.5 84.8 98.9 96.4 91.2 Source: Tariff positions included on the free list are published, for 1981, in Journal Officiel de la Rdpublique Tunisienne (JORT), no. 75, 27.11.81, for 1983-4, JORT no. 15, 25.2.83, for 1985-6, JORT no. 56, 30.7.85, and for 1987, Annexe au JORT, no. 13, 20.2.87. Weighting factors are based on 1984 domestic output data provided by I.N.S. for 204 manufacturing sub-sectors. - 105 - ANNEX1IV Page 2 of 2 THE REFORM OF THE TARIFF STRUCfigE THE TARIFF DISTRIBUTION FOR ALL IMPORTS FOR THE UllOLE ECOMY (1986-1989) BEFORE LIBERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF BRACKET i98 1987 1988 1989 TARIFF BRACKET 1986 198 1988 1989 .0-25 43.09 57.63 45.97 45.97 .0-5 0.49 0.02 1.42 1.42 25.1-50 34.41 42.37 54.03 54.03 5.1-10 0.02 0.02 0.38 0.38 50.1-75 17.63 10.1-15 22.52 22.58 1.61 1.61 75.1-100 1.06 15.1-20 2.94 3.09 22.22 22.22 100.1-125 2.26 20.1-25 17.12 31.92 20.34 20.34 125.1-150 0.59 25.1-30 10.43 3.51 22.22 22.22 150.1-175 0.70 30.1-35 4.95 4.34 4.13 4.13 175.1-200 0.13 35.1-40 7.30 7.30 6.33 6.33 200.1-225 0.11 40.1-45 7.87 5.02 21.35 21.35 225.1-250 0.02 45.1-50 3.85 22.20 0.00 0.00 >>>250 0.00 >>>50 22.50 0.00 0.00 0.00 TARIFF DISTRIBUTION FOR IMPORT GOODS UITHOUT QUANTITATIVE RESTRICTIONS (1986-1989) BEFORE LIBERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF BRACKET 1986 1987 1988 1989 TARIFF BRACKET 1986 1987 1988 1989 .0-25 41.86 87.28 69.88 46.33 .0-5 1.29 0.65 0.65 1.17 25.1-50 45.29 12.72 30.12 53.66 5.1-10 0.00 0.60 0.60 0.35 50.1-75 10.32 10.1-15 26.32 33.76 1.19 1.08 75.1-100 0.49 15.1-20 2.94 6.51 36.01 23.00 100.1-125 0.37 20.1-25 11.32 47.01 31.43 20.73 125.1-150 0.61 25.1-30 18.12 1.44 20.48 21.95 150.1-175 0.61 30.1-35 4.35 1.97 3.21 3.29 175.1-200 0.12 35.1-40 11.08 1.82 2.86 4.78 200.1-225 0.31 40.1-45 9.49 4.84 3.57 23.64 225.1-250 0.06 45.1-50 2.26 2.65 0.00 0.00 >>250 0.00 >>50 12.85 0.00 0.00 0.00 TARIFF DISTRIBUTION FOR GOODS laER QULANTITATIVE RESTRICTIOleS (1986-1969) BEFORE LIUERALIZATION AFTER LIBERALIZATION BEFORE AFTER TARIFF 9RAKE mi m i TAR1FE BRACKET m 9 9 a 98 .0-25 43.67 19.97 18.44 22.47 .0-5 0.06 0.03 1.71 1.79 25.1-50 28.70 45.11 50.35 51.17 S.1-10 0.03 0.03 0.26 0.42 50.1*75 21.54 34.91 31.21 26.36 10.1-15 20.41 18.15 1.84 2.57 75.1-100 1.36 15.1-20 2.95 1.76 14.63 17.69 100.1-125 3.27 20.1-25 20.21 26.09 14.24 16.14 125.1-150 0.58 25.1-30 6.38 4.32 23.22 20.92 150.1-175 0.75 30.1-35 5.28 5.26 4.64 S.02 175.1-200 0.13 35.1-40 5.31 9.44 8.25 9.09 200.1-225 0.00 40.1-45 7.03 5.09 31.21 26.36 225.1-250 0.00 45.1-50 4.70 29.82 0.00 0.00 >2250 0.00 .>50 27.63 0.00 0.00 0.00