WORLD BANK MIDDLE EAST AND NORTH AFRICA ECONOMIC STUDIES 15966 Worh In progress lor pu bhc d,scussionl A vg osk I qg 6 Tunisia's Global Integration and Sustainable Development Strategic Choicesfor thye 21st Cenztulry .~~ '/ 1",' .'v;S ?;S WORLD BANK MIDDLE EAST AND NORTH AFRICA ECONOMIC STUDIES Tunisia's Global Integration and Sustainable Development Strategic Choicesfor the 21st Century The World Bank Washington, D. C. Copyright i 1996 The International Bank for Reconstruction and Development/THE WORLD BANK 1818 H Street, N.W. Washington, D.C. 20433, U.S.A. All rights reserved Manufactured in the United States of America First printing August 1996 The findings, interpretations, and conclusions expressed in this paper are entirely those of the author(s) and should not be attributed in any manner to the World Bank, to its affiliated organizations, or to members of its Board of Executive Directors or the countries they represent. 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The complete backlist of publications from the World Bank is shown in the annual Index of Publications, which contains an alphabetical title list (with full ordering information) and indexes of subjects, authors, and countries and regions. The latest edition is available free of charge from the Distribution Unit, Office of the Publisher, The World Bank, 1818 H Street, N.W., Washington, D.C. 20433, U.S.A., or from Publications, The World Bank, 66, avenue d'1ena, 75116 Paris, France. Cover design by Beni Chibber-Rao. Library of Congress Cataloging-in-Publication Data Tunisia's global integration and sustainable development : strategic rhoices for the 21st century. p. cm. - (World Bank Middle East and North Africa economic studies) Indudes bibliographical references (p. ) ISBN 0-8213-3718-1 1. Tunisia-Economic policy. 2. Economic forecasting-Tunisia. 3. Sustainable development-Tunisia. 4. Tunisia-Commerce. 5. Competition, International. I. World Bank. II. Series. HC820.T874 1996 96-32179 338.9611-dc2O CIP Contents Foreword vii Acknowledgments viii Abbreviations, acronyms, and definitions ix Currency and exchange rates xi Executive Summary xiii Chapter I Macroeconomic policy I Monetary policy 1 Monetary and exchange rate policy after 1986 1 Interest rate policy 2 Inflation and other monetary developments 4 Balance of payments and exchange rate policy 5 Savings and investment 7 Fiscal policy 7 Tax reforms 8 Government revenues 9 Fiscal expenditures 9 Fiscal deficit 11 Conclusions 12 Monetary policy 12 Balance of payments and exchange rate policy 12 Fiscal policy 12 Notes 13 Chapter 2 Role of the state in the economy I5 Public sector activity 15 Definition and size of the public sector 15 Divestiture of public enterprises 16 Infrastructure services: provision and maintenance 18 Deregulation and increased efficiency 18 Other measures 19 Social policies and expenditures 20 ... Education policies 20 Basic education 21 Vocational training 21 Tertiary education 22 Health care and social security 22 The environment: growth and sustainability 23 Environmental institutions and policies 24 Paying the price for resource use and degradation 25 Industrial pollution 25 Tourism and coastal zone management 26 Conclusions 27 Infrastructure services: global integration, efficiency, and dynamism 27 Social services: quality, access, and financing 27 Environmental management: analyzing trade-offs 28 Notes 28 Chapter 3 Strengthening market forces 29 Creating an open, competitive economy 29 Itade liberalization 29 Impact of trade liberalization 30 A free trade agreement with the European Union 30 Domestic investment liberalization 32 Foreign investment liberalization 33 Offshore companies 33 Pricing, labor, and industrial policies 34 Price liberalization 34 Labor markets 35 Policies to promote innovation and quality: "La mise a niveau" 37 Reforming agriculture 38 Increasing the role of market forces and strengthening private initiatives 38 The land tenure system 39 Financial sector reform 39 The banking sector 40 Financial markets-stocks, bonds, mutual funds, and institutional investors 41 The stock market 41 The bond market 42 Insurance and pension funds 42 Conclusions 42 An open, competitive economy 42 Pricing, labor, and industrial policies 43 Reforming agriculture 43 Financial sector reform 43 Notes 44 iv TUNISL'S GLoBAL INMEGAMON AND SUSTAINABLE DEVELoPmEm. STRATEGIc CHoicEs FOR THE 21ST CENTUR Chapter 4 Policies for higher growth 45 Growth performance, 1987-94 45 Structural reforms and growth 46 The determinants of economic growth 46 Structural reforms and growth in Tunisia 47 Key macroeconomic indicators: medium-term outlook 48 Conclusions 50 Chapter 5 Challenges of globalization 5I Strategic choices in the 1990. 51 Pace of reform 51 Decisive trade and investment liberalization 52 Refocusing the role of the state 52 Privatization and deregulation 53 Growth and environmental sustainability 53 Sectoral impact from resource constraints 54 Creating an adaptable, agile, flexible economy 54 Transition from public to private sector-led growth 54 Proposed reforms 55 Note 55 Selected Bibliography 59 Statistical Annex 62 Boxes 1.1 Monetary policy instruments, government securities, and foreign exchange markets 3 2.1 Telemarketing in Ireland 19 3.1 Tunisia-European Union Free Trade Agreement: estimated benefits and costs 31 3.2 Free trade zones: maximizing host country benefits 34 3.3 Upgrading the competitiveness of small and medium-sized enterprises: the case of Slovenia 37 Tables 1.1 Nominal and real interest rates 1 1.2 Selected interest rates 4 1.3 Main monetary indicators 5 1.4 Extemal sector indicators 6 1.5 Fiscal indicators 10 1.6 Regional comparisons 10 2.1 Public sector's share of value added (percent share) 16 2.2 Privatization proceeds, 1988-92 16 2.3 Basic infrastructure 17 CoMEnrs v 2.4 Demand for telephone connections 18 2.5 Trends in educational attainment by region, 1985 20 2.6 General education attainment rates, 1992 21 2.7 Comparison of enrollment in tertiary education by field of study 22 2.8a Main providers of health care 23 2.8b Health expenditures 23 2.9 Water prices in 1994 25 2.10 Sources of soil erosion 25 3.1 Average tariff rates, 1994 29 3.2 Share of total imports and exports 30 3.3 Tunisia/EU FTA-Tariff liberalization schedule of industrial products 31 3.4 Policy distortions by industry 34 3.5 Price controls by sector, percent share end 1994 35 3.6 Job creation, 1989-93 35 3.7 Wage differentials 36 3.8 Comparison of commercial and development banks, 1993 41 4.1 Contribution to real GDP growth 45 4.2 Sectoral share in GDP at market price 46 4.3 Determinants of Economic Growth 47 4.4 Determinants of Growth Improvement in Tunisia 48 4.5 Medium-Term Outlook 49 5.1 Priority Reforms 56 5.2 Complementary Reforms 57 Figures 1.1 Nominal and real interest rates 4 1.2 Velocity of money and financial deepening 5 1.3 Nominal and real effective exchange rates 7 1.4 Central government revenue (percent of GDP) 9 1.5 Central government expenditures (percent of GDP) 9 1.6 Fiscal balance (percent of GDP) 11 2.1 Fixed investments by agents 15 3.1 Exports by destination, 1980, 1992 30 3.2 Sectoral distribution of private investments 32 3.3 Foreign direct investment 33 3.4 Structure of Tunisia's financial system 40 4.1 Standard deviation of the annual growth rate, 1983-94 46 vi TUNISiAS GLOBAL INTEGRATION AND SuSTAINABLE DEVELOPMENT STRATEGIC CHOICES FOR THE 21ST CENTURY Foreword This report is the second in a series of World Bank Middle be feasible. Second, the public sector still plays a substantial East Economic Studies. It describes the economic progress role in the economy, constraning private sector develop- and prospects of the Republic of Tunisia, and proposes ways ment and creating difficulties for a clear separation between in which the Government can build on past successes to the political and economic spheres in society. Privatizajon raise the standard of living of the Tunisian people. and deregulation of publicly provided services will be at the Tunisia's recent progress has made it one of the best per- core of any strategy for improving economic efficiency and forming economies in the Middle East and North Africa promoing domestic and foreign private investment. Tbird, (MENA) region. Thanks to a decade-long program of Tunisia is running into environmental constraints that will macroeconomic stabilization, structural adjustment, and only worsen as it enters the 21st century. It needs to con- gradually opening up the economy to the outside world, tinue its strong environmental policies to deal with natural Tunisians have seen a doubling of the annual rate of growth resource degradation and scarcity (especially land and of average income per head compared to the early 1980s- water), problems of solid and industrial waste disposal, and over a period when region-wide trends have been stagnant air pollution in some urban and industrial centers. liken or falling. Macroeconomic outcomes have included rela- together, determined policies in each of these areas today tively low inflation, a halving of the current account deficit will pay huge dividends tomorrow in terms of rapid and bal- since the early 1980s, and a small primary account budget anced growth that benefits all Tunisians. surplus since 1992. Meanwhile, poverty is low and declin- More generally, Tunisia, like the other countries of the ing, the rate of population growth has been reduced to region, faces the challenge of globalization. Here 'the race around 2 percent a year, and most social indicators are is to the swift," as developing countries compete for the above regional averages, reflecting Tunisia's long-standing international investment and know-how that will determine commitment to high quality social services (especially their long-run prosperity. For Tunisia, an educated work- health). force and a strong, competitive and outward looking private Nevertheless, much still remains to be done if Tunisia is sector, able to integrate effectively into the wider interna- to achieve further acceleration of economic growth and wel- tional economy, will be central to successful participation in fare for its citizens. The report identifies three key areas for the benefits of world economic growth. priority attention. First, if Tunisia is to become competitive The World Bank has worked closely with successive in today's fast-moving global economy, its ongoing eco- Tunisian governments in helping to bring their past reform nomic reform program needs to be deepened and speeded programs to fruition. We would hope to deepen our collab- up, especially in the area of trade and investment liberaliza- oration with the government and its EU partners in the next tion. In particular, the recent Association Agreement signed phase of this effort, whose ultimate reward will be further with the European Union (EU) commits Tunisia to a grad- improvements in the economic and social well-being of the udl process of trade liberalization over a 12-year period. It Tunisian people. would be beneficial for Tunisia to accelerate this process-not for the sake of liberalizadon in and of itswf, but in order to Kemal Dezvis achieve the enhanced competitiveness that liberalization Vice President, Middle East and North Africa Region promotes, and without which more rapid growth would not The World Bank vii Acknowledgments The report is a product of a team consisting of Linda Likar economic support). The report was laid out by Mark Bock (Mission Leader and Task Manager), Norman Loayza of American Writing Corporation. Several working papers (Macroeconomic Policy and Policies for Higher Growth), (listed in the bibliography) were prepared by staff from the Aziz Bouzaher and Sarah Forster (Environmental Issues), sector divisions and by Tunisian consultants. Valuable Mohamed Lahouel (Competition Policies) and Guillermo inputs and comments were received by Laurie Effron and Hakim (Labor Policies), Laura Burakreis and Richard David Tarr. Brun (Banking and Financial Sector Reforms), Fayqal The cooperation of the Government of Tunisia, particu- Lakhoua (Role of the State in the Economy), and Juan larly the Ministry of Economic Development and the Institut Lopez (Comparator Country Analysis and Macro- d'Economie Quantitative, is gratefully acknowledged. vi.i Abbreviations, acronyms, and definitions ANPE Agence Nationale de Protection de l'Environnement (Environment National Agency) BCT/CBT Banque Centrale de Tunisie (Central Bank of Tunisia) BNA Banque Nationale Agricole (Agricultural National Bank) CDs Certificates of Deposits (Certificats de Depot) CNSS Caisse Nationale de Seurite Sociale (National Social Security Fund) CPI Consumer Price Index (Index des Prix a la Consommation) CTN Compagnie Tunisienne de Navigation (Tunisian shipping company) EPA Etablissement Public Administratif (administrative entity) EPIC Etablissement Public Industriel et Commercial (quasi-commercial entity) EU European Union (Union Europeenne) FDI Foreign Direct Investment (Investissement Direct Etranger) FODEP Fonds de Depollution (Anti-Pollution Fund) FTA Free Trade Agreement (Accord de Libre-Echange) FTZ Free Trade Zone (Zone de Libre-Echange) GATT General Agreement on Tariffs and Trade (Accord G6neral sur les Tarifs Douaniers et le Commerce) GDI Gross Domestic Investment (Investissement Interieur Brut) GOT Government of Tunisia (Gouvemement de Tunisie) IDF Institutional Development Fund (Fonds de Developpement Institutionnel) INNORPI Institut National pour la Normalisation des Produits Industriels (National Institute for Industrial Products Normalization) INS Institut National de Statistiques (National Institute of Statistics) MEAT Ministere de l'Environnement et de l'Amenagement du Territoire (Ministry of Enviromnent and Regional Planning) MMR Money Market Rate (Taux du Marche Monetaire) MOA Ministry of Agriculture (Ministere de l'Agriculture) MOH Ministry of Health (Ministere de Ia Sante) NIE Newly Industrializing Economies (Economies Nouvelement Industrialis&es) OC Office des C&eales (National Agency for Cereal Marketing) OECD Organization for Economic and Cooperation and Development (Organisation de Cooperation et de Dve1oppement Economnique-OCDE) ONAS Societe Nationale d'Assainissement (National Sewerage Company) ONH Office National de l'Huile (National Agency for Edible Oil) O&M Operation and Maintenance (Exploitation et Entretien) QRs Quantitative Restrictions (restrictions quantitatives) SICAF Societe d'Investissement a Capital Fixe (dosed-end mutual fund) SICAV Societe d'Investissement a Capital Variable (open-end mutual fund) SME Small-Medium Sized Enterprises (Petites et Moyennes Entreprises) SONEDE Socicte Nationale d'Exploitation et de Distribution des Eaux (National Water Supply Utility Company) STAM Societe Tunisienne d'Affretement Maritime (Tunisian cargo-handling company) ix STIL Soci&e Tunisienne d'Industrialisation Laiti&e (National Company for Milk Marketing) VAT Value-Added Tax (taxe a la valeur ajoutee) WTO World Trade Organization (Organisation Mondiale du Commerce) Ust of definitions Accord deplace. Infornal agreement between commercial banks not to conpete for deposits based on interest rates. Appel d'offes: A weekly auction by the Central Bank of a fixed amount of seven-day funds provided to commercial banks. The appel d'offres operations are based on precisely defined collateral (loans to priority sectors, e.g. agriculture, micro- enterprises. Bon d'equipement: Treasury bonds mandatorily placed by the Govenmuent. Bon du Tresor: Treasury Bills at market-related interest rates. Bon du Tresor n'gociable: Treasury Bills negotiable (NTB) on the bourse and set at maturities of five years or more. Contrat de liquiditM or accord de liquidit,': Obligation for commercial banks to repurchase the securities sold to customers virtually on demand regardless of maturity. Emprunts nationaux: "National loans", borrowing of the Government through bond issues. Prise en pension: A seven-day repurchase facility at a higher interest rate than the appel d'offres, designed to provide banks with additional liquidity. x ABBREVAnTONS, ACRONYMS, AND DEPINMONS Currency and exchange rates Currency unit: Tunisian Dinar (TD) Fiscal year TD per US$ January I-December 31 Period averages Weights and measures 1980=0.4050 Metric system 1981=0.4938 1982=0.5907 1983=0.6788 1984=0.7768 1985=0.8345 1986=0.7940 1987=0.8287 1988=0.8578 1989=0.9493 1990=0.8783 1991=0.9246 1992=0.8844 1993=1.0037 1994=1.0116 x Executive summary Elements of Tunisia's success analyzes the areas expressed by the government as being strategic for Tunisia's future: achieving higher rates of In the mid-1980s, Tunisia made the strategic choice to growth in the context of sustainable environmental man- become a modem, market-oriented, and internationally agement and the enhanced competitiveness of the econ- integrated economy. Tunisia's macroeconomic performance omy in the global market. In addition, the report includes since introducing stabilization and structural adjustment key issues raised by other groups in Tunisia (the private reforms in 1986 has been impressive. The per capita GDP sector and members of the academic community) on the growth rate increased significantly from an average of 1.15 role of the state in the economy, the development of the percent a year for the period 1981-86 to 2.44 percent a year financial sector, and the adequacy of the education system for the period 1987-94. The inflation rate (4.5 percent in in meeting the human capital requirements of the twenty- 1994) is approaching the average rate of the EU countries first century. Three key messages emerge from the analy- (4.1 percent). The central-government primary balance has sis which can contribute to the country's strategy been in a slight surplus since 1992, and the ratio of tax rev- formulation: enues to GDP is higher than the respective averages for * The pace of structural reform needs to move forward selected countries in the Latin American, Southeast Asian, more decisively, particularly in the areas of trade and invest- and Middle Eastern regions. The current account deficit ment liberalization. Although the Tunisian economy has averaged 4 percent of GDP during 1986-93, thus improv- become stronger and more sophisticated since the late ingwith respect to the early 1980s when it averaged 8.5 per- 1980s, the external environment has not stood still. The cent of GDP rest of the world is also changing rapidly, so that countries The economy is also becoming more diversified and like Tunisia need to liberalize their economy with determi- more open, as manufactured output replaced the previous nation and in a timely manner to maintain their growth dominance of oil and phosphate production and as the ratio prospects and enhance their international competitive of nonpetroleum and nonphosphate exports to GDP position. increased from 25 percent in the early 1980s to 35 percent * The state needs to decrease further its size and role in the in the early 1990s. With the implementation of monetary economy, strengthen its actions in the provision of public and financial sector reforms, Tunisia's financial market is goods, and encourage a higher level of private investment- deepening and the capital market is becoming very active domestic and foreign. Further disengagement of the state (after more than twenty years of dormancy). At the same and the deregulation of public sector monopolies (for exam- time, the country has made impressive social advances over ple in telecommunications, maritime transport, and in the the past decade: the incidence of poverty is low and declin- banking sector) and an acceleration of the privatization pro- ing, and income distribution is improving. The progress gram would promote productive and allocative efficiency in achieved in the development of human capital, the reduc- the economy and enable the Government to focus on the tion of the population's growth rate, and an increase in life enforcement of regulations that encourage profitable activ- expectancy are also highly commendable and are important ities, protect the public, and preserve the country's natural ingredients for stronger growth. resources. * Environmental constraints mean that furither adjust- Strategic choices in the 1 990s ments in growth plans must take place, particularly in agri- culture and tourism. By undertaking the necessary This report focuses on the policies that will influence the adjustments now, the Government will be in a better posi- future growth and development of Tunisia. The report tion to implement these reforms gradually. .d.i Report outline market in government securities are all necessary elements for the efficient conduct of monetary policy, whose goals con- The report is organized as follows: chapter 1 sist of achieving price stability and minimizing GDP fluctu- (Macroeconomic policies) covers monetary, balance of pay- ations around its full-employment level. ments, exchange rate and fiscal policies; chapter 2 (Role of the state) covers the role and size of public enterprises in the Balance of payments economy, the provision of infrastructure services, health and education policies, and environmental management; chap- Tunisia's rather sizable trade deficit and the large role of ter 3 (Strengthening market forces) covers a range of poli- tourism receipts and workers' remittances in financing the cies designed to create a more competitive economy (trade, trade deficit make Tunisia's external position vulnerable to pricing, labor, industrial, financial and agriculture); chapter adverse developments in the region's economic and politi- 4 (Policies for higher growth) applies the findings of the cal stability. Faced with an adverse economic or political more recent growth literature and comparative country shock, it would be rather difficult under current intema- analysis to the case of Tunisia; and chapter 5 (Challenges of tional conditions to finance a larger current account deficit. globalization) proposes a strategy to maximize the benefits This is so because of both higher interest rates in developed to Tunisia of a closer integration with Europe and the rest countries and less optimism toward emerging markets of the world. The foilowing sections summarize the main (partly as a result of the Mexican crisis). However, Tunisian points of each chapter. authorities have demonstrated, as in their handling of the Gulf crisis repercussions on Tunisia in 1990 and 1991, their Macroeconomic policies and management determination to avoid serious balance of payments dise- (chapter 1) quilibria. Imposing trade restrictions (as in 1991) is effec- tive in the short run to deal with balance-of-payments The stabilization measures introduced after 1986 brought a imbalances, but at a high cost. In the long run, only policies significant degree of macroeconomic stability and a much that encourage competition and a diversified production improved level of efficiency in the use of resources in structure, stimulate flexibility of wages and relative prices, Tunisia. The accomplishments described earlier are remark- induce higher public and private savings (which are all goals able. Nevertheless, some areas in macroeconomic policy still of the Tunisian structural reforms), and allow for a market- merit further improvements. determined exchange rate (which is the motivation behind the introduction of the interbank foreign-exchange market) Monetary policy result in a socially efficient, sustainable external position. An examination of the behavior of national savings and Further liberalization of interest rates is essential to obtain a investment shows that the worsening of the current account market-driven yield curve in Tunisia. This can be accom- deficit from 1989 to 1993 was accompanied by a rise in both plished by eliminating all remaining preferential rates, savings and investment, with the latter increasing at a faster encouraging competition among commercial banks on the rate. To the extent that external savings are being used to basis of both interests rates and portfolio quality, and pro- finance higher and better quality domestic investment, the moting a secondary market inTreasury securities through the sustainability of the current account deficit is preserved. removal of restrictions in their clearance and settlement pro- This confirms the conclusion that Tunisia's external position cedures. These changes will also allow the Central Bank of is secure to the extent that the structural reforms are imple- Tunisia (BCT) to control monetary expansion through sys- mented. tem-wide open-market operations in Treasury bills rather than by allocating funds on a bank-by-bank basis, provided Fiscal policy an integrated secondary market for Treasury bills and bonds exists and provided the banks achieve stronger deposit bases Generalizing the value-added tax (VAT) and broadening the in proportion to their credits. System-wide monetaty expan- income-tax base will both reduce the reliance on foreign- sion, market-driven interest rates, and a thriving secondary trade taxes and increase total tax revenues. These improve- xiv TuNIsigs GLOBAL INfEGRmON AND SuSTANmABLE DEVELOPMENT STRATEGIC CHOICES FOR THE 21sT CENTURY ments and controlling the expansion of the government these efforts have had a positive impact on reducing trans- wage bill are necessary not only to compensate for a likely fers to the PEs, transfers are still significant (3 percent of future decline in petroleum-sector revenues but most GDP), and it is unclear whether some of the transfers have importantly, to finance increased expenditures in infrastruc- been shifted to the banking system (through debts) or to the ture, education, and public health. public (through higher prices charged by PEs in a protected Although the deficit of the central government seems to or quasi-monopoly position). Several cross-country studies be well under control, the question of the sustainability of show that even in spite of improved PE performance, own- the consolidated-government deficit, for which accurate ership does matter. It determines the incentive structure of information is unavailable, remains. The Government the enterprise, which, in turn, is the force that promotes pro- should prepare information on (1) the consolidated nonfi- ductivity in a competitive environment. For a variety of res- nancial public sector (consolidating the central government sons-political and social-PEs have more difficulty than with local government, social security, and nonfinancial pub- private enterprises in adapting quickly to an open, compet- lic enterprises) and on (2) the consolidated total public sec- itive, and rapidly changing international environment. Since tor (which adds to the first consolidation the central bank 1991/92, the Government has been preparing sectoral stud- and the public banks). Some data on public banks and ies (in order to evaluate divestiture options) and amend- enterprises reveal that their profitability is considerably ments in legislation in order to create a legal environment lower than that of their private counterparts. This, together which will facilitate stronger privatization efforts in 1995/96. with the distortionary effect of government direct participa- tion in competitive economic activities, cals for an acceler- Deregulation and increased efficiency in ation of the privatization process initiated in 1987. infrastructure services Role of the state (chapter 2) In 1985, a law was passed that opened merchandise trans- port to the private sector, but the law was not applied until Estimates of the public sector's (government and public 1989. The Government has also been slow to deregulate enterprises) share in total output and in total investment cargo handling and maritime transport in the main Tunis have slowly come down between the early 1980s and early ports, despite the slow and costly service. Several studies 1990s from 48 percent to 42 percent for output and from have been prepared, and in 1995 the Government is in the 57 percent to 54 percent for investment. But this share is process of exploring privatization/deregulation options to still quite high compared with other countries. For develop- improve the situation. Deregulation of public bus transport ing economies as a whole, the public enterprise (PE) share has been slow, and noncharter air transport and telecom- of GDP is around 11 percent (14 percent for the poorest munications are both state-owned monopolies. countries), and it has come down to about 7 percent for Progress has been made in reducing public sector force industrial countries, compared to an estimated 20-25 per- account for operation and maintenance (O&M) works cent in Tunisia. Privatization, namely the divestiture of state under the National Water Supply Utility Company assets and public enterprise dosures, have so far played a (SONEDE) and the National Sewerage Comapny modest role in the government's restructuring and 'com- (ONAS), both of which use private subcontracting for most petitiveness upgrading" efforts. Total cumulative sales since of their O&M works. In the transport sector, recurrent road 1987 amounted to about US$180 million in 1994 (about 1 maintenance is still largely done by public sector force percent of GDP), with roughly half of the privatizations in account. In 1995 the Government is planning to open some the tourism sector. infrastructure projects in electricity, solid waste treatment, highways and water purification to private concessions, hop- Privatization and divestiture ing to attract foreign investment. The Government is also raising prices for many infrastructure services with the The Government's strategy so far has focused more on con- objective of encouraging demand management and cover- straining new PE investments and on trying to make PE ing the full cost of operations and part of investment cosu operations more efficient and more autonomous. While by the year 2000. ExEcuVE SUMMAR XY The quality, access, and affordability of social services been traditionally dominated by the public sector (higher education, vocational training, medical services, agricultural The Government has secured good quality and nearly uni- extension, and veterinary services). Shifts in public/private versal access to health care through the public provision of financing policies need to be introduced so that limited pub- health services. The Government needs, however, to secure lic funds are used to finance priority areas with high social a sustainable system for financing growing costs-a problem and economic returns, for example, increasing completion not dissimilar from what many OECD countries face. rates of nine years of basic education and further improving Tunisia also needs to meet the demands of a population still preventive health care. Private financing needs to increase growing at 2 percent a year as well as the demands of a grow- in areas where private benefits are high: medical expenses ing older population with more chronic diseases that are (with public/private insurance policies) and tertiary educa- expensive to treat. As the main provider and financier of tion (with loans and scholarships for the needy). health care, the Government needs to promote the active private sector provision of health services by enhancing its The environment-paying the price for resource use own supervisory role and by reducing its widespread provi- and degradation sion of subsidized services (nearly half the population receives free or highly subsidized care). To maintain the The natural beauty of Tunisia, its vulnerability to climatic quality of existing services, the Government needs to better variations, and the important role of such an environmen- target health care subsidies, increase some user fees, tally sensitive acivity as tourism in the economy have height- encourage an expanded use of private resources and ser- ened the need to take full account of the costs and pricing vices, and focus public funds on preventive care. of resource use and degradation. The authorities have The Government's Secondary Education Reform learned from past experience: inappropriate pricing policies Program must succeed in increasing the completion rates that did not take into account the economic value of of primary education (grades 1-9). A solid primary educa- resources; haphazard coastal zone planning; and fiscal and tion base provides the cognitive, language and analytical financial advantages for activities that exacerbated erosion skills to improve employment and earning opportunities and water scarcity problems. The Government is making and ensure Tunisia's ability to integrate confidently with the good progress in correcting these policies and in organizing highly educated European labor force. The Government is itself institutionally to assess the costs and benefits of devel- trying to make tertiary education and vocational training opment and investment initiatives with a longer term per- more relevant to the country's future development needs. spective. The donor community is providing budgetary A comparison of 1992 higher level student curriculum assistance and technical advice to support the shows that the largest share of students (one quarter) are Government's program. studying humanities, compared to 5 percent in teacher Tunisia's environmental program can, nevertheless, be training, about 6 percent in business administration, and strengthened by: (1) ensuring that the costs of environmen- less than 10 percent in engineering. These percentages con- tal degradation are borne by resource users and polluters; trast quite sharply with those in such countries as Portugal, (2) promoting community-based actions and developing the Malaysia, and Chile. In order to meet the demands of grow- central and local capacity to monitor progress; and (3) ing numbers of young people seeking higher education and ensuring that the government's development strategy in to provide the quality needed, more resources will be agriculture, industry, and tourism is based on the economic required. At present, virtually all (97 percent) of higher value of natural resources, particularly land and water. The education is provided and financed by the state, contrast- types of problems which Tunisia will face in the twenty-first ing with trends in other parts of the world where private century indude natural resource scarcity, solid and industrial funds and private provision play a larger role in vocational wastes, and water and air pollution in selected areas. To training and higher education. tackle these problems will require additional resources (gen- In Tunisia, regulatory reforms, including accreditation erated through pollution charges), and some reallocation of and supervisory policies, can speed up the entrance of pri- expenditures-away from municipal waste water treatment, vate investors in many different service activities which have for example. xvi TuNIsLi's GLOBAL INTEGRATION AND SuSmINABLE DEvEwPmENT. STRATEGIC CHOICES FOR THE 21ST CENTurY Progress in strengthening market forces Tunisia to: (1) compress the schedule of QR eliminations (chapter 3) and tariff reductions currently agreed on with the EU; (2) begin lower tariffs on all manufactured goods in the first The number of import restrictions, or quantitative restric- year (1996); (3) apply reductions to al of its trade partners; tions (QRs), has come down since 1990. Those that remain and (4) seek greater access to the EU market, particularly were estimated to cover 25 percent of domestic production for services. by end 1994 (mainly some agricultural products, processed food, and textiles). Many of the restrictions, however, could Investment liberalization-domestic and foreign be replaced with tariffs, since the estimated tariff equiva- lents of the QRs faDl within Tunisia's legal tariff range agreed A 1987 manufacturing investment law abolished capacity to under the GATT. The average tariff rate for domestic pro- licensing and removed prior government authorization for ducers is stiDl quite high (33 percent) compared to 36 per- aDl projects not requesting investment incentives. The prob- cent prior to liberalization reforms. The reason the average lem with the law, however, was that it introduced generous rate has not falen more sharply is because the removal of incentives on a sectoral basis (exceeding 1 percent of GDP) many QRs after 1990 was offset by temporary surcharges of and created distortions in the alocation of investment up to 30 percent. resources. Most investors wanted the incentives, hence Government approvals continued to play a critical role. In Trade liberalization December 1993 Parliament passed the Unified Investment Code which was ratified in 1994. The law reduces sectoral On July 17, 1995, Tunisia became the first country in the incentive distortions and reduces the number of invest- Middle East and North Africa region to sign a Free Trade ments requiring government approval. The new code is Agreement (FTA) with the EU-its largest trade partner, more open to foreign investment and strengthens the invest- accounting for 75 percent of its imports and exports. The ment liberalization commitment begun in 1987. But invest- agreement marks another important step in opening ment restrictions in many support services (such as Tunisia's economy to international competition, a process transportation, telecommunications, tourism, education which began in 1986, and has included its accession to the and cultural establishments, real estate, computer and infor- GATT in 1990 and its signature to the Uruguay Round mation technology, consulting, and auditing) remain in agreement in 1994. The elimination of the remaining trade place and investments in sectors not specified under the new barriers in Tunisia wiDl largely be influenced by the pace of code remain regulated (restaurants, financial services, min- Tunisia's trade and commercial integration with the EU. ing, energy). The draft FTA provides for extensive technical support Foreign investment in Tunisia has not been weDl-inte- from the EU to harmonize product standards and upgrade grated into the rest of the economy. Already in the 1970s, a the quality of Tunisian goods and services which brings dichotomy developed between the "offshore" companies important benefits to Tunisia. The agreement also aDows (that produce for export) and the "onshore" companies for some tariffs to be removed immediately (those that do (that produce for the domestic market). Offshore compa- not affect domestic production), while other tariffs on nies face a completely liberalized trade regime and pay little more sensitive products would be removed more gradu- or no taxes, while onshore companies were heavily pro- ally-over the next five to twelve years. Discussions on tected, but faced more controls with respect to import market access for agricultural products and services both duties, taxes, and other regulations. The new code attempts in the EU and Tunisian markets have been postponed for to place domestic companies on a more equal footing with five years (although the access for some agricultural prod- export companies. Continued efforts, perhaps with the sup- ucts has been increased). The benefits of free trade with port of the EU, to improve infrastructure services, rational- the EU are estimated to be very large for Tunisia (between ize tax laws and incentives, and ensure that the tariff 4-5 percent of GDP a year), provided Tunisia removes the protection system is applied in a streamlined and uniform high tariffs on the most protected sectors in the short term manner for all enterprises-direct and indirect exporters (less than five years). It would, thus, be beneficial for alike-would promote a doser integration of domestic com- ExECunVE SUMMAy xvii panies in offshore activities and promote higher levels of pri- Government is reassessing labor legislation with the objec- vate investment. tive of increasing employer flexibility to adjust the size of the work force. Price liberalization Reforming agriculture Considerable progress has been made in reducing producer price controls and regulated distribution margins in the agri- Input subsidies have been reduced significantly, but the cultural and manufacturing sectors. By ond 1994, only 13 Government should reassess its agricultural policies that percent of producer prices in agriculture and manufactur- hinder private sector participation in marketing some ing were still regulated and 30 percent were regulated at the agroindustrial products. Policies that entail price supports distribution stage. The two main sectors where controls and credit subsidies to maintain or increase cereal produc- account for a significant share of production are agroindus- tion need to be reassessed in light of trade integration with tries and construction materials, and, at the distribution Europe and the expected impact of the Uruguay Round stage, for machinery and equipment. Regulated distribution agreement. The land tenure system (characterized by poorly margins for fresh fruits and vegetables should be removed, defined property rights) hinders the use of market mecha- given the extent of domestic competition in this subsector nisms as a means of ensuring that land and agricultural and the need to transmit dear price signals back to produc- inputs are used as efficiently as possible. The state, as a ers. Cereal prices are not incduded in the price liberalization major owner of prime crop land (11 percent of total cul- calculation, but are set by the Government, and the prices tivable land) should consider expanding its program of leas- of many services and nonmanufactured goods continue to ing land to the private sector and reassess the costs and be regulated. benefits of selling state lands to the private sector. Labor markets Banking reform The population growth rate of 2 percent (and the young age Tunisia has come quite far in creating a healthier and more structure of the population), the entrance of more women efficient banking sector. Prudential regulations were rein- into the work force, and rural to urban migration flows are forced in 1994, including stringent capital adequacy increasing the urban labor force at the rate of an estimated requirements, and the supervisory role of the central bank 5 percent a year. Unemployment is estimated by the Bank has been strengthened. The most notable feature of the to be between 11-12 percent, with the main unemployment banking sector is the predominance of public sector banks, problem being for first-time job seekers. The growing size which account for 70 percent of the banking sector's total of the urban work force puts pressure on the authorities to assets and whose performance is significantly weaker than increase economic growth and create more jobs. Between that of the private banks. 1989-93, job creation has been faster than the average for The Government's efforts have focused on recapitalizing the economy in the services sector (4.3 percent) which the public sector banks and improving the quality of their accounts for the largest share of total employment (24 per- portfolios. In order for these efforts to succeed, the policy cent). Employment in government administration is high environment has to encourage competition-based on the (18 percent of total employment and 25 percent of total provision of services and on interest rates. A gradual divesti- wage earners), and it has also been growing faster than the ture of these banks (through selling some shares on the economy's average (3.2 percent compared to 2.1 percent). stock exchange) would be an ineffective substitute for sell- The authorities may wish to introduce quarterly or annual ing a controlling interest to a core group of shareholders that labor surveys, which are used in many countries to give pol- can appoint key board members and managers that can run icymakers more up-to-date information on labor market the banks after divestiture. With respect to the government- changes. The Government is currently preparing a strategic owned development banks, the Government should explore study of labor issues for the Ninth Plan covering labor leg- options with its partners (the governments of other Arab islation, costs, productivity and wages. In particular, the states) to reorient the development banks' activities toward xviii TuNIsEs GLOBAL INTEGRATnON AND SuSrAINABLE DEVELOPMENT STRATEGIC CHOICES FOR THE 21sT CENTURY investment banking, restructure some, or link some of them This work has been applied to the case of Tunisia, by up with commercial banks. comparing per capita GDP growth improvements from 1981-86 (the period prior to undertaking adjustment Financial market development reforms) with those during 1987-94 (the period during which structural reforms have been under implementation). After being dormant for more than 20 years, since 1989, the The analysis compares the predicted improvement with the Government has strengthened the necessary laws and reg- actual improvement, and it estimates the growth impact of ulations which have encouraged the stock and primary several policy measures, as determined by the cross-country bond markets to begin functioning. Between 1990 and empirical analysis. The main elements that contributed to 1994 primary bond market activity grew steadily, while improved growth in Tunisia were estimated to be (1) an stock market activity increased dramatically. Over this increased openness of the economy, (2) a reduction in price period, the stock index increased 350 percent, the capital- distortions, (3) imnprovement in population health indica- ization of the 20 listed companies on the Tunis stock tors, (4) advancement in the level of education, and (5) exchange jumped from TD 543 million to TD 2.4 billion, financial deepening. All these elements significantly and the demand for stocks exceeded the supply by 200-500 increased the economy's total factor productivity. Given percent. The average price/earnings ratio on the Tunisian that physical capital investment as a ratio to GDP was lower stock market is high (25), compared to average ratios in in 1987-94 than in 1981-86, the rise in total factor produc- other emerging markets that range between 10 and 15. The tivity was the main source of the improved growth perfor- Government should consider: (1) speeding up the privati- mance in the reform period. zation program to increase the supply of stock offerings and Conditional on a timely completion of the reform pro- help to satisfy the excess demand for stocks and (2) remov- gram, real GDP is projected to grow at an average of 6.2 ing fiscal distortions in the form of large tax benefits that percent over the next nine years. It is estimated that about encourage investors to oversubscribe to initial stock offer- one third of the growth improvement with respect to the ings. It will nevertheless take time for many of Tunisia's tra- period 1987-94 would be explained by a larger investment ditional, family-owned companies to go public. The rate. Thus, most of the growth improvement would come Government has overseen the development of an increas- through a further rise in total factor productivity, generated ingly sophisticated financial sector. With the implementa- by both stronger market incentives for private activity and tion of reforms to strengthen institutional investors, and by more efficient public services. Given the environmental ensuring market-driven interest rates and an active sec- constraints facing Tunisia, agriculture's share in total pro- ondary market for government securities, the financial sec- duction is projected to decrease in the coming years at the tor will be significantly strengthened. same time as manufacturing and nongovernment services (with a slightly decreased role for tourism) become the lead- Policies for higher growth (chapter 4) ing growth sectors. Tunisia's extemal position would remain sustainable, particularly under the high-growth scenario, as In the mid-1980s, several prominent economists began private savings respond favorably to financial sector reforms focusing their attention on how long-run growth is enhanced and as the exports to GDP ratio rises due to Tunisia's by socioeconomic developments and govemment policies. enhanced intemational competitiveness. This theoretical and empirical research uses cross-country data to measure to what extent different structural reforms The challenges of globalization (chapter 5) promote economic growth. Their main conclusion is that economic growth is maximized when the incentives to invest Successful economic performance will be increasingly deter- in physical and human capital as well as in technological mined by a country's adaptability to accelerating change in innovation are detemiined by free-market forces. the rest of the world. A strong human capital base, trans- Govemments assist this process by providing an environ- parent rules and regulations, and private sector dominated ment of macroeconomic and political stability and the enterprise management structures offer Tunisia its best appropriate public infrastructure. chance to compete successfully in the global economy. The ExEcuTm SUMmMAY xix government plays an enormous role in creating an environ- emphasis on trade liberalization measures, since the pres- ment that promotes entrepreneurial agility, strong human sure of international competition will require Tunisia to fol- resources, and labor force flexibility. low a comprehensive adjustment strategy to respond to that Tunisia has been liberalizing its economy for nine years, pressure. By adhering to well-known and straightforward and in many respects it has gone quite far. But past sources reform timetables, the Government shows strong political of growth are diminishig and many face growing environ- commitment toward competition, and economic agents- mental resource constraints (hydrocarbons, mining, agricul- entrepreneurs, local and foreign investors, and civil ser- ture, tourism). New investments and new sources of growth vants-become convinced that the system has changed need to be developed with the private sector taking the lead irreversibly. in a competitive environment. At this advanced stage in the Tunisia has much to gain from accelerating reforms in adjustment process, the remaining reforms that need to be trade liberalization, the deregulation of state monopolies, undertaken are all important and complement each other, and a reduction in the predominance of the state in the pro- and therefore should, ideally, be pursued concurrently. vision of goods and services. The goal of high sustainable Although undertaking numerous reforms simultaneously growth is achievable in Tunisia, but requires strong deter- may be economically desirable, it may be politically difficult. mination to maintain macroeconomic stability and push for- For this reason, the report places a particularly strong ward the implementation of structural reforms. D: Tuwmsugs GLOBAL INTEGRAON mAD SUSTAINABLE DEvEwop?mwr STBAIGIc CHoIcEs FOR THE 21sT CENYW Chapter 1 Macroeconomic policy The mid-1980s marked a turning point for the Tunisian projects and crowded out investment in other areas of the economy. Since 1986, the economy has been undergoing a economy. transformation which has combined the elimination of Loan repayment was low, because of the highly cumber- macroeconomic disequilibria with gradual but important some judicial process, which slowed down payment collec- structural reforms aimed at refocusing the role of the state tion through legal means. The BCT had to give prior (see chapter 2), and transforming a highly regulated and approval for most loans. Knowing that the BCT would bail protected economy to an open, market-oriented one (see them out, banks were mainly concemed with expanding chapter 3). Stabilization measures launched the reform loans, with little consideration to their portfolio quality. The program in 1986. Structural reforms have been applied real interest rate on term deposits was also mostly negative throughout the period, but gained increasing importance during 1972-85, hence generating financial disintermedia- after 1990. This chapter looks at the macroeconomic devel- tion. Thus, the reduced amount of savings channeled opments and policies pursued from the mid-1980s to through the banking sector could not satisfy the large today, tracing the shifts in monetary policy, balance of pay- demand for loans that the artificially low interest rates had ments and exchange rate policy, and fiscal policy. The generated. The excess demand for loans created the need analysis of Tunisia's growth performance and its sources, for an expansion in money supply, which in turn led to a sig- particularly in relation to the reform program, is under- nificant rise in inflation (8-9 percent). taken in chapter 4. Monetary and exchange rate policy after 1986 Monetary policy Given a nominal exchange rate fixed with respect to Prior to 1986, the main objective of the Tunisian Central Tunisia's main trading partners, a relatively high domestic Bank (BCT) was to provide credit to support the Government's economic development plan. The TABLE 1.I Government's control of the commercial banking system Nominal and real Interest rates allowed the BCT easy management of financial markets. BCT preferentwl Money market rate The BCT controlled the growth and distribution of credit Infaion rate (end of period) as well as various interest rates (table 1.1). The spread Year (CPl) Nominal Reai Nominal Real between the rate paid on deposits and that charged to the 1982 13.7 - - 8.50 -0.40 private sector bore little relationship to the excess demand 1983 9.0 - - 8.38 -0.62 for credit. Furthermore, to enforce the distribution of 1984 8.5 - - 8.89 -0.39 1 985 8.0 - - 10.28 2.28 credit according to the rationing scheme imposed by the 1986 5.8 5.13 -0.68 10.25 4.45 BCT, commercial banks needed the Central Bank's 1987 7.2 5.31 -1.89 9.50 2.30 1988 6.3 5.31 -0.99 9.63 2.33 approval for most of their operations. Priority sectors 1989 7.7 5.31 -2.39 11.31 3.61 (mainly agriculture, tourism, manufacturing of heavy 1990 6.5 6.50 0.00 11.81 5.31 equipment, exports, and small enterprises) had preferential 1991 8.2 6.50 -1.70 11.81 3.61 1992 5.8 8.50 -2.70 11.31 5.51 access to credit and paid lower interest rates. In fact, the 1993 4.0 8.50 4.50 8.81 4.81 real interest rate on loans to priority sectors was negative 1994 4.5 8.50 4.00 8.81 4.31 for most of the period from 1972 to 1985. Heavily subsi- - Notbble. Sorce:CenrtalBankoTusia,exceptMMRfrom 1981 to 1985, IMF Financial dized credit created an incentive to invest in low-return statli. 1 inflation hindered the competitiveness of Tunisia's products The stability of the BCT-controlled rates over time in world markets and led to an unsustainable current results mainly from a policy of monetary expansion based account deficit by 1986. To deal with the short-run balance- on interest rate targeting. The BCT only partially fulfills the of-payments crisis, the BCT sharply devalued the Dinar and, banks' demand for auctioned funds and through dissua- more importantly, changed its monetary and exchange rate sion, curtails the use of the pension. Although refinancing policies in accordance with a comprehensive package of facilities are open to all banks, some credit access regula- economic reforms. tion must be in effect in view of the fact that the interest With the goal of improving the efficiency of credit allo- rates are so stable and the BCT has a target for monetary cation, decreasing inflation, and maintaining equilibrium in growth. the external accounts, in 1987 the Government initiated two The use of the interest rate as an intermediate target of major improvements in monetary policy: (1) a shift of monetary policy-that is, pegging the interest rate by accom- emphasis from direct control of credit and monetary expan- modating money demand changes-may not accomplish an sion to indirect management through refinance facilities and important objective of the Central Bank, namely, the mini- (2) a gradual elimination of preferential interest rates and mization of real GDP fluctuations around its full employment quotas (box 1.1). level. In an economy with limited intemational capital mobil- Since 1987, monetary policy in Tunisia has been directed ity and a managed exchange rate, targeting the interest rate at reducing inflation and strengthening the external reserve will lead to smaller fluctuations in GDP only if the main position of the Central Bank. On both accounts, the BCT has source of uncertainty arises from shocks to the demand for been quite successful. There are a few aspects of interest rate money. However, if the main source of uncertainty resides in policy that warrant further discussion and improvement. the demand for goods and services or in aggregate supply, then interest rate pegging will lead to higher GDP fluctua- Interest rate policy tions.I InTunisia, shocks to aggregate supply and the demand for goods and services are a significant source of uncertainty, Preferential interest rates and mandatory financing for pri- as demonstrated by several events in the early 1990s: the Gulf ority sectors are still in effect, although their share in out- crisis, which led to a substantial decrease in export growth standing bank loans declined from 25 percent in 1990 to 10 and tourism receipts in 1991; the droughts of 1993 and 1994, percent in 1993. Authorities intend to eliminate all the which led to a considerable drop of cereal harvest; and the remaining preferential rates and mandatory financing by the sharp terms-of-trade deterioration and the slowdown in mar- end of 1995. ket growth of Tunisia's trading partners in 1992. Given the Nonpreferential interest rates have been considerably importance of these nonmonetary shocks, a mixed (interest liberalized, and all interest rate controls have been removed. rate/money supply) targeting rule seems more appropriate to Nevertheless, interest rates have been surprisingly stable minimize fluctuations of real GDP around its full-employ- over the past years (table 1.2). There are two aspects to the ment level in Tunisia. stability of nominal interest rates. The first refers to the An additional problem of having nominal interest rates nearly constant spread between the two BCT refinancing that are adjusted infrequently is that rate movements follow, rates (appel d'offres and pension) and the money-market rather than anticipate, changes in the inflation rate. (MMR) and deposit rates. The second refers to the over- Consequently, in the context of decreasing inflation which time stability of these rates. characterizes the Tunisian experience of the last seven years, The rigidity of the spread between BCT-controlled rates real interest rates have tended to be high. During 1993 the and the money-market and deposit rates is largely due to the BCT induced the sharpest decline in nominal interest rates accord deplace, an arrangement by which commercial banks of the previous four years, with the biggest single drop (from agree for the most part not to compete on the basis of inter- 11.81 percent to 8.81 percent) occurring only late in the year. est rates. The accord deplace is a form collusion, which ham- However, inflation had already decreased significantly in pers market-driven competition, unduly protects the less 1992 (figure 1.1 and table 1.1). The resulting high real inter- efficient banks, and erodes the informational content of est rates in 1992 and 1993 explain in part the sharp drop in interest rates as relative prices. investment and GDP growth in 1993. 2 TuNISi'S GLOBAL INTEGRAnON AND SuSTiANABLE DEVELOPMEN STRATEGIC CHOICES FOR THE 21 ST CENTURY Box .I Monetary policy Instruments, government securities, and foreign-exchange markets Monetary instruments The control of monetary expansion is conducted on a bank-by-bank, rather than a system-wide, basis through two instruments: the appel d'offres and the prise en pension. The appel d'offres is a weekly auction of a fixed amount of seven-day funds. The pnse en pension is a seven- day repurchase facility at a punitive, higher interest rate, designed to provide banks with additional liquidity to that obtained through the oppel d'offres. Whereas for pnse en pension operations the BCT accepts as collateral all refinanceable papers (except Treasury bills), appel d'offres operations are conducted on the basis of precisely defined collateral (certain loans to priority sectors, for example, agrculture, microenter- prises). The appel d'offres and pension rates maintain a fixed spread between them: 1.5 percentage points through 1991 and 1992, and I per- centage point since December 1992 (see table 1.2). Since 1990, the interbank (money-market) interest rate has stayed fairly constant for long periods of bme, changing discretely when the appel d'offres and the pension rates are changed by the Central Bank; since December 1990, the interbank rate has remained at I /16th below the pension rate. Interbank trading, which on average amounts to only one-third of the liquidity obtained through the Central Bank facilities, has remained low because of the lack of easily tradeable financial instruments and the banks convenient access to the pension. As explained below, banks have been virtually unable to trade government securibes with each other in the secondary market. Government securities Prior to 1991, non-bank domestic financing of the fiscal deficit consisted of the forced placement of ten-year Treasury investment bonds (bons d'cquipernent) at below-market rates. As part of the financial liberalization program, the govemment has, since 1991, relied mainly on Treasury bills (bons du Tresor) at market-related interest rates to finance the deficit. Treasury bills were first introduced in 1989 and modified on several instances. These securites are placed through weekly auctions to the banks, which then sell them to the public at a slightly lower interest rate. The rates for Treasury bills bid by the banks have remained virtually constant with respect to the appel d'offres rate, and the interest rates for the shortest maturities are only slightly lower than for the longest-maturity Treasury bills. Treasury bills have been quite successful as a means to finance the budget deficit. In principle, Treasury bills may also serve as the basic instrument of open market operations and interbank trading. However, a secondary market on Treasury bills has not developed in Tunisia due to (I ) the lack of competiton among banks on the placement of govemment securities and (2) restrictions in clearance and settlement procedures. In fact, transactons have been limited to those between each bank and its customers because property rights cannot be trans- ferred from one bank to another in the accounts of the BCT. The market-making responsibility assigned to the banks by the BCT has been thus interpreted as an implicit contrat de liquidite, by which banks are obligated to repurchase govemment securities virtually on demand, regardless of maturity. Consequently, the term structure of interest rates (yield curve) has been basically flat. In order to obtain a suitable, longer-term debt maturity structure, the Tunisian authorites introduced in late 1993 the opbon of having banks convert a Treasury bill (bon du Tr&sor) into a negotiable Treasury bond (bon du Trisor negociable), which would be traded solely at the Bourse. At first, due to problems in the settlement procedure, trading in the new securibes did not take place. In June 1994, the authoribes changed the bon du Tresor negociable into a bond with maturities of five years or more, to be issued through and traded at the Bourse. Correspondingly, the maturities of the simple bon du Tresor were limited to four years or less. ft is expected that this change, together with improvements in the settlement procedure, will increase the attractiveness and marketability of the negotiable Treasury bonds, thus increas- ing their share in domestic public debt. Foreign exchange markets Until recently, the BCT has tightly controlled the determination of the nominal exchange rate. In March 1994, the BCT introduced an inter- bank foreign-exchange market with the purpose of obtaining a more flexible and market-determined rate. During the launching period, the BCT sets a central exchange rate on a daily basis around which banks trade among themselves within a t I percent band. Furthermore, in order to protect small customers, the BCT dictated a maximum buy-sell spread of 0.25 percent. Although these corntrols help avoid erratic daily fluctuations of the exchange rate, they should be relaxed, and eventually eliminated, in order to obtain market-determined rates as banks adaptto the new system. The BCT has instituted prudential regulations to prevent the excessive exposure of banks to foreign exchange risks. Currently, 70 to 80 percent of all foreign exchange transactions are conducted in the interbank market. Such a large bank participation is an early indication of the success of the new system. The level of sophistication in foreign-exchange transactions is bound to improve: presently, derivative products (swaps, reverse repurchase agreements, futures, and options) are absent from the market. Note: Abo Brun and Burakre4 1995. MACROECONOMIC POUCY 3 TABLE 1.2 Seected Interest rates 1986 1987 1988 1989 1990 191" 9m 193 1994 Money market rate 10.25 9.50 8.63 11.31 11.81 11.81 11.31 8.81 8.81 Cmw bank Appd d'offree - - - 10.31 10.38 10.38 10.38 7.88 7.88 A.se en pensioMb - - - 11.31 11.88 11.88 11.38 8.88 8.88 Padiscount of preferential credit 8.25 (end of peiod) 7.75 Export-reled credit 4.00 4.00 4.00 4.00 6.25 6.25 8.50 8.25 8.25 Crop credit 4.50 4.75 4.75 4.75 5.75 5.75 9.50 7.75 7.75 Agricultura equipment 5.50 6.00 6.00 6.00 6.50 6.50 - 8.50 8.50 SraWl- and medium-sized enterprises 6.50 6.50 6.50 6.50 7.50 7.50 - 9.50 9.50 Commecl banks Maximum lending ratec 12.63 13.00 11.63 13.75 14.81 14.81 16.50 14.44 - Speca saving deposit rated 8.15 7.50 6.63 9.25 9.63 9.63 9.63 7.38 7.38 a. Auction of refinance credit. It is a fwed amount of seven-dey iiquidty that is audioned against ets held by the bank. b. Repurchase bdlity. It is an utomatic repurdse window at the initiatv of the bank. c. The maximum lending rate was set at the money market rate plus 2.5 points in 1989 and pkis 3 points in 1990-91. In 1992, the average tending rate for each bank was limited to the MMR pls 3 points. All retrictiora were ifed in June 1994. d. The interest rate for speci saving deposits was set at the MMR o the previous month minus 2 points since 1987. - Not available. Source: Centra Bank ofTunisia Stastques FiRnances and Rapport Annure. The BCT's reliance on interest rate targeting (and some accomplish monetary control on a system-wide basis, pro- credit regulation) to control monetary expansion may be vided an integrated secondary market for Treasury bills and due to three factors. First, the BCT has not based its inter- bonds exists, and provided the banking system achieves ventions on a monetary programming framework, that is, on stronger deposit bases in proportion to their credits. Banks formal estimation of the demand for money. With appropri- would meet their specific liquidity needs in the system ate monetary programming, the BCT would not have to rely through the secondary market for Treasury notes, having at on interest rate targeting (or credit regulation) in order to their disposal both short-term instruments, traded over the satisfy movements in money demand to accomplish its counter in the interbank money market, and long-term objectives of inflation control and real GDP stability. instruments, traded on the Bourse. Third, banks are emerg- Second, the BCT has controlled money growth on a bank- ing from a past in which they accumulated weak portfolios by-bank basis rather than on a system-wide basis, partially and are now being obliged to meet stringent prudential due to the lack of an active secondary market on Treasury norms. The banks' needs differ and the BCT may feel that notes. Open-market operations on Treasury notes will help it must nurse them through this transition by using its refi- nancing facilities discriminately across banks. FIGURE 1.1 Nominal and real lnterest rate Inflation and other monetary developments Percent NomwW kfte re 12 (Money m-ie me) The annual inflation rate-as measured by changes in the 1o ~ --. , ' ' ^.* consumer price index (CPI)-decreased from an average of 8 9.5 percent during the first half of the 1980s to 6.2 percent 6 ~~/\ during 1986-94 (see table 1.3). An annual inflation rate of 4.5 percent is estimated for 1994, dose to the average rate 4 \" inW en rate of 4.1 percent in Tunisia's main trading partners for 1994. 2 After the stabilization program of 1986, the average 9 growth rate of the money supply (Ml and M2) decreased 1986 1987 1988 1989 1990 1991 1992 1993 sigpificantly, in accordance with a policy of inflation control. Source: Central ank ofTunima Stotsiues Fir iu. Starting in 1988, domestic credit was redirected away from 4 TUNISL'S GLoRAL INTEGRAION AND SuTAINABI DEVELOPmENT STRATEGIC CHOICES FOR THE 2 1ST CENTUR TALE 1.3 Main monetary Indicators 1986 1987 1988 1989 1990 1991 9m I93 1994 Anml pe.mrt chae Domestic aedit 8.3 7.9 1.9 18.7 10.4 9.7 14.7 7.4 7.1 Govemment 13.2 15.0 -6.2 6.7 11.9 5.6 10.1 -0.3 -6.5 PrWate sector 7.5 6.7 3.3 20.8 10.2 10.4 15.3 8.4 8.9 Money plus quasi-money (M2) 5.7 13.7 19.3 16.5 7.3 5.3 7.5 6.7 7.9 M 1 3.5 -1.6 21.3 2.9 4.9 -0.4 5.4 4.8 10.2 Quasi-money 9.5 39.7 17.0 33.6 9.7 10.5 9.2 8.2 6.2 Net foreign assets -73.3 228.6 199.3 25.6 -10.9 -12.2 -24.1 -34.9 -60.8 Inflaion CPI 5.8 7.2 6.3 7.7 6.5 8.2 5.8 4.0 4.5 GDP deflator 3.1 6.7 8.5 7.9 5.1 7.0 6.2 4.6 5.2 Growsth Nominal GDP 1.6 13.9 8.6 9.7 13.3 11.1 14.6 6.8 8.7 Real GDP -1.4 6.7 0.1 1.7 7.8 3.9 8.0 2.1 3.3 Nominal e*fective exchange rate -16.2 -17.2 -5.2 -4.2 -4.6 -2.3 0.7 -1.8 - 1. I R H Monetaybase/GDP(percent) 11.0 10.0 13.0 14.0 11.0 11.0 10.0 10.0 11.0 M4/GDP (percent) 47.0 46.0 51.0 55.0 55.0 55.0 52.0 54.0 54.0 M3`M I 1.6 1.8 1.8 2.0 2.1 2.2 2.3 2.3 2.3 Veboity of M I (GDP/M 1) 3.4 3.9 3.5 3.8 4.1 4.5 5.0 5.0 5.0 Vebcity of M2 (GDP/M2 2.1 2.2 2.0 1.8 1.9 2.1 2.2 2.2 2.2 Source: Central Bank of Tuniia and Minsby of Economrk Develqxnent. the central government. As of 1994, 92 percent of domestic by a marked deterioration in the Tunisian terms of trade and credit was allocated to the private sector and public enter- a decline of petroleum exports due to adverse price and vol- prises. The reduction of money financing of the budget ume developments. Such continuous current-account deficit was accomplished by the introduction of competi- deficits led to both rising external debt and an erosion of tively priced Treasury bills in late 1989. international reserves. The deterioration of Tunisia's exter- Since 1986 the growth rate of quasi money (the interest- nal position was evidenced by the doubling of the ratio of earning component of M2) has been consistently higher debt service to current receipts between 1981 and 1986. than that of Ml due in part to the consistently positive real During 1986 and 1987, the BCT devalued the Tunisian saving interest rates in the period. However, since 1989 the dinar, inducing a real depreciation of about 27 percent. velocity of M2 has trended upwards as more attractive long- Starting in 1987, the Tunisian government initiated a pro- term financial instruments became available. In 1988, com- FIGURE 1.2 mercial paper (issued by nonfinancial institutions) and cer- Velocity of money and financial deepening tificates of deposit (issued by comnmercial banks) were introduced, open- and closed-end mutual funds (SICAVs 55 and SICAFs) were started, and in 1989 T-easury bills were 5.0 successfully introduced. The rising ratio of M3 to Ml pro- 4.5 of M I vides evidence of the degree of financial deepening occur- 4.0 GM 1) ring in Tunisia during this period (figure 1.2). 3.5 Balance of payments and exchange rate 3.0 2.5 Vebcit of M2 policy (GDP 12) 2.0 In the first part of the 1980s, Tunisia suffered large current- i.. ----l-.s.-- - M3iMI accountdeficits,whichaveraged8.SpercentofGDPforthe 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 years 1981-85. These large deficits were mainly produced Sorce: Tabe 1.3. MACROECONOMIC POUCY S gram of trade liberalization, aimed at shifting resources 1989 to 5.9 percent in 1993 (with the exception of 1991, as from inefficient import-substituting activities to the export described below). In the same period, the trade deficit sector, and a policy of fiscal-deficit control, to diminish the (exduding items related to the Gazoduc and Miskar pro- need for extemal savings. These policies were successful in jects) averaged 12 percent of GDP This trade deficit was to reducing the current account deficit to an average of 4.0 per- a considerable extent financed through receipts from tourism cent of GDP during 1986-93. and workers' remittances, which respectively covered an The reduction of the current account deficit was partic- average of 61 percent and 37 percent of the trade deficit dur- ularly important in 1987 and 1988 due to the strong effects ing 1989-93. In the same period, foreign direct investment of the real exchange rate depreciation combined with an and grants respectively financed about 33 percent and 28 excellent agricultural crop, an increase in oil prices, and the percent of the current account deficit (again excluding the near doubling of tourism receipts caused by the opening of Gazoduc and Miskar projects), whereas external loans and the border with Libya in 1988. From 1989 to 1993, the cur- short-term capital financed the remaining 39 percent. rent account deficit gradually rose (table 1.4 and Tunisia's rather sizable trade deficit and the large role of table SA. 1) due to a deterioration of the terms of trade in tourism receipts and workers' remittances in financing the the period 1990-92; a decrease in the volume of energy and trade deficit make Tunisia's extemal position vulnerable to phosphate exports; the Gulf crisis in 1990/9 1, which led to adverse developments in the region's economic and political a decline in receipts from tourism and workers' remit- stability. In the presence of an economic or political shock tances; a slowdown in market growth in Tunisia's trading that would worsen the trade deficit or decrease tourism partners (mainly EU countries) in 1992 and 1993; and a receipts and workers'remittances, it would be rather difficult recovery of private sector investment, following some trade under current intemational conditions to finance a larger cur- liberalization measures and the devaluation of the dinar rent account deficit. This is because of both higher interest (see figure 2.1). The current account deficit fell sharply in rates in developed countries and less optimism toward 1994 with an unusually large sale of olive oil stocks, lower emerging markets (due to the Mexico effect). However, imports with the economic slowdown, and stronger manu- Tunisian authorities have demonstrated their determination factured exports. to avoid serious balance of payments disequilibria. This was In 1992 and 1993 the current account deficit was abnor- evidenced by the authorities' management of the repercus- mally large (6.9 percent and 8.1 percent of GDP, respec- sions of the Gulf crisis on Tunisia. In 1991 the current tively) due to substantial foreign-financed imports related to account balance actually improved as a result of the the construction of a trans-Tunisia pipeline and natural gas Government's mandated reductions of public enterprises' development (the Gazoduc and Miskar projects). Even investments having high import content. Tunisian authorities exduding these projects, the current account deficit as a per- have at their disposal several mutually complementary ways centage of GDP worsened gradually from 3.1 percent in to increase the competitiveness of domestic products in inter- TABLE 1.4 External sector indicators 1986 1987 1988 1989 1990 1991 1992 193 1994 Ratio (percewit) TradebaIance,GDP -12.8 -9.2 -12.8 -12.0 -13.6 -9.1 -12.1 -12.9 -9.1 Cunit account balance,GDP -8.0 -1.0 1.0 -3.1 -5.5 -4.4 -5.8 -6.7 -1.8 Debtservie/iotf goodsandservices 28.2 28.4 21.9 21.8 24.3 23.8 20.0 20.7 20.3 xtermal debt/GDP 67.2 70.6 67.2 69.5 61.5 61.9 55.1 59.5 57.4 Gross offiial intematonal reserves (inmonthisofimports) 1.4 2.1 2.8 2.6 1.7 1.8 1.6 1.7 2.6 Overall balance of payments (in miRions of dolrs) -704.9 -98.5 96.5 -310.8 -679.0 -577.4 -897.3 -973.7 -315.4 Gross offlcial irtematonal reserves (in millions of doNars) 305.3 525.5 89.3 961.9 794.8 865.9 923.6 937.8 1,544.4 . Ecidng Ih Gaouc and Mwbr projects. Souce: Minity of Economic Deveopmert. 6 TUNISiAgS GLBoL INTEGRATION AND SusNABLE DEVELOPMENr SIREGIc CHoIcEs FOR THE 21sT CENTUR national markets and ensure the sustainability of the coun- Savings and investment try's extemal position. Imposing trade restrictions is effective in the short run to deal with balance-of-payments imbalances, The savings-investment relationship is, of course, the but in the long run, only policies that encourage competition, domestic counterpart to the current account balance, and stimulate flexibility of wages and relative prices, induce its analysis sheds light on, among other things, the sus- higher public and private savings, promote technological tainability of the country's external position. National innovation and high quality investment, and allow for a mar- (and domestic) savings decreased steadily during the first ket-deterrnined exchange rate result in a socially efficient, years of the 1980s from 24.6 percent in 1980 to 15.5 per- sustainable external position. To the extent that the structural cent in 1986. Subsequently, the declining trend was reforms in Tunisia are implemented, the country's external reversed and in 1992-93, national savings averaged 22.2 position is strengthened. percent of GDP This recovery was strongly led by non- After the strong nominal depreciation in 1986 (16.2 per- central government national savings, which rose gradually cent) and 1987 (17.2 percent), the Tunisian dinar has depre- from 9.6 percent in 1986 to an average of 21.0 percent in ciated at moderate and declining rates. In fact, since 1988 1992-93. the rate of depreciation of the Tunisian dinar has been sim- Gross domestic investment was fairly stable during ilar to the inflation differential between Tunisia and its trad- 1980-84 at around 31 percent of GDP Then, in the midst ing partners. Therefore, the BCT has been able to keep the of the balance-of-payments crisis and the ensuing adjust- real effective exchange rate stable at the targeted level (fig- ment program, it decreased to 19.4 percent of GDP in 1988. ure 1.3). In early 1994 the BCT introduced an interbank for- Most of this decline was due to a contraction in gross fixed eign-exchange market, which is expected to lead, by stages, investment by the noncentral government, especially by to a market determined exchange rate. This development public enterprises. From 1989, gross domestic investment implies the gradual abandonment of the policy of real- recovered strongly to an average of 29.7 percent of GDP in exchange-targeting, a policy which in principle is unsatis- 1992-93.2 This recovery was led by private investment (fig- factory, because the real exchange rate, as a relative price, ure 2.1), which responded favorably to the stronger macro- must be allowed to react to changing market conditions. economic stability and the new incentive structure gener- The Tunisian government has announced that it is aim- ated by the structural reforms, and by some public ing for full convertibility of the dinar. The structural reforms enterprises. As shown in chapter 4, the efficiency of invest- in progress (particularly those in the financial system), a fur- ment increased significantly in the period 1987-94 with ther reduction of macroeconomic imbalances, and the intro- respect to the previous six years (see the section on struc- duction of an interbank foreign-exchange market are all tural reforms and growth). consistent with the goal of full integration in international The examination presented above shows that the wors- financial markets. ening of the current account deficit from 1989 to 1993 was accompanied by a rise in both savings and investment, with FIGURE 1.3 the latter increasing at a faster rate. To the extent that exter- Nominal and real effective exchange rate nal savings are being used to finance higher and better-qual- (I980=I00) ity domestic investment, the sustainability of the current 85 account deficit is preserved. 80 75 Fiscal policy 70 ., ~~~~~~~~~~~~Real effectr~e exchange rate 706Real effect" exchange ra A declining and, to a large extent, market-financed central- government deficit, combined with a fairly successful tax 55 6e0edrveexchangerate reform and a rationalization of government expenditures, 50- - - has significantly strengthened Tunisian fiscal accounts. 1986 1987 1988 1989 1990 1991 1992 1993 Nevertheless, there are several areas in fiscal policy that can Source: International Monetary Fund. be improved with potentially large benefits. This section MACROECONOMIC POLICY 7 tries to identify those areas in the context of an analysis of products subject to the 6 percent rate revised, and the list the tax reform, expenditure and revenue policy, and fiscal- of exemptions reduced. In the medium term, the VAT sys- deficit management. tem should be completely consolidated around a single rate (which could be the current 17 percent standard rate). Tax reforms This is important because multiple VAT rates and exemp- tions to the system invite tax avoidance and induce devia- Until the mid-1980s, Tunisia's tax system was complicated, tions from efficient patterns of production. The potential difficult to administer, and inequitable. Moreover, it con- welfare benefit of these measures are substantial tributed to numerous distortions in the allocation of eco- (box 3.1). nomic resources. Maintaining a relatively high ratio of tax EffectiveJanuary 1990, a new tax code covering personal revenues to GDP (23.1 percent in 1986) became increas- and corporate income was introduced. Prior to the reform, ingly difficult as the high fiscal pressure led to rising tax eva- the personal income tax consisted of a general tax (with mar- sion and the establishment of a complex system of fiscal ginal tax rates ranging from 10 percent to 80 percent), a sol- exemptions granted under sectoral investment codes. idarity tax, and a schedular tax (which contained a large Beginning in 1987, a comprehensive tax reform was gradu- number of taxes whose rates and coverage differed accord- ally implemented in Tunisia. The reform measures were ing to the sector of activity.)These taxes were abolished and designed to be revenue-neutral and to cover all areas of tax- replaced by a single personal income tax with six income ation, induding indirect taxes, personal and corporate brackets and marginal tax rates ranging from 15 percent to income taxes, customs duties, and tax administration. 35 percent. The new corporate income tax replaced the old Effective July 1988, the three existing turnover taxes (on system of six rates (differentiated by area of economic activ- production, consumption, and services) were replaced by a ity, with a top rate of 44 percent) by a system of two rates, a value-added tax (VAT) with three rates: (1) 17 percent on standard rate of 35 percent and a special rate of 10 percent. most goods and services, (2) 6 percent on basic consumer The latter rate applies to enterprises in the agriculture, fish- goods and services, and (3) 29 percent on luxury goods. In ing, and handicrafts sectors. 1993 the respective shares in total VAT revenues from the The 1990 tax code reduced exemptions and deductions three rate categories were 86.5 percent (for the 17 percent to expand the tax base, shifted tax payments to a current rate category), 6.5 percent (6 percent rate), and 7.0 percent basis to better match the agents' actual ability to pay, and (29 percent rate). The introduction of the VAT improved prevented double taxation of capital income. However, the collection efficiency and eliminated the distortions inherent tax code is weakened by the fiscal advantages granted in a system of cascading taxes imposed at various stages of under the 1994 Unified Investment Incentives Code. Some production. The current VAT system can, however, be of the fiscal advantages and tax relief provided in the invest- improved. ment incentives code are investment tax deductions within The efficient functioning of the VAT is being hampered a limit of 35 percent of reinvested earnings, the possibility by the current "suspensive" schemes, whereby buyers of of accelerated depreciation for a widespread list of capital some intermediate products, particularly investment goods, and specific tax breaks such as exemption from the goods, are allowed to forgo payment of the VAT when buy- corporate income tax for exporting enterprises for up to ing inputs. By breaking the chain of the VAT system, the ten years. "suspensive" schemes induce fraud and evasion. These Regarding foreign-trade tax reform, quantitative restric- schemes were enacted to compensate for the sluggishness tions have been gradually reduced and replaced by tariffs, of credit reimbursements in the VAT system. The recom- and the customs-tariff reform reduced the maximum tariff mended solution is, of course, to expedite credit reim- rate and significantly narrowed the dispersion rate (see bursements rather than allow agents to circumvent the sys- chapter 3, section on creating an open, competitive econ- tem. Furthermore, the VAT should be generalized to omy). However, the rate structure of the customs tariffs include the retail stage of the distribution process and con- remains complex. It imposes an administrative burden on solidated around a single rate. In the short term, the over- both the customs service and the importer, preventing a valued 29 percent rate should be eliminated, the list of clear formulation of tariff policy concemning protection for 8 TUNISIA'S GLOBAL INrEGRA11ON AND SUSTANABLE DEvELOPmEN STRATEGIC CHOICES FOR THE 21ST CENrURY domestic production, and inducing avoidance of customs taxes on international trade in total revenue are similar to duties with strong repercussions on fiscal revenues. A fur- those of other developing countries. Nevertheless, a com- ther restructuring and simplification of the tariff system will parison with the respective average shares for the European be achieved with the establishment of a free trade area with Union reveals that taxes on international trade play too big the European Union (EU). a role in the Tunisian fiscal accounts, reflecting both a rela- tively high protection for domestic production and a dimin- Government revenues ished ability to raise revenues from other tax sources, par- ticularly on income and on goods and services. Total revenues decreased from 31.8 percent of GDP in 1986 Improvements in the VAT system should help increase the to 27.4 percent in 1993. To a large extent, this was due to a importance of taxes on goods and services. Broadening the steady decline in nontax revenues, especially from the petro- base and strengthening collection enforcement is indis- leum sector. Tax revenues fell by 2.6 percentage points of pensable to bring taxes on income (especially on individual GDP in 1987, the first year of the stabilization program; income) up to international averages. thereafter, they stabilized at about 20-21 percent of GDP (figure 1.4, table 1.5, and table SA.2). The shares of all tax- Fiscal expenditures revenue categories, with the exception of taxes on goods and services, have remained quite stable since 1987. Since Since 1986, the Tunisian government has followed a policy the imposition of the VAT in 1988, taxes on goods and ser- of fiscal expenditure reduction to compensate for the vices have become an increasingly important revenue decline in oil revenues and the increased debt-service pay- source. ments. At the same time, the weights of different expendi- Regarding tax revenues as a share of GDP, Tunisia's fis- ture categories have been changed to reflect the new gov- cal performance compares quite favorably to that of other einment priorities and its effort to improve the efficiency of developing countries, and Middle-Eastem countries in par- fiscal resource use. Total fiscal expenditures fell from 37.3 ticular (table 1.6). The fact that such good performance has percent of GDP in 1986 to 29.9 percent of GDP in 1993 been achieved with moderate marginal tax rates is an indi- (table 1.5 and figure 1.5). Most of this decline was cation of the high compliance ratio achieved by the Tunisian accounted for by reductions in capital expenditures (5.2 tax administration. This is true except for income taxes, percentage points.) Current expenditures could only be which represent a notoriously low fraction of government reduced by 2.3 percentage points. revenues compared to other countries with a similar tax rate For current expenditures, the wage bill remains the structure. The shares of taxes on goods and services and largest category: the average wage bill from 1987 to 1993 FIGURE 1.4 FIGURE 1.5 Central government revenue Central govemment expenditures Percent of GDP Percnt of GDP 35.0 45.0 30.0 40.0 ToW eperdire 25.0 30.0 20.0 ------'' -------------- 25.0 20.0 15.0 5.0 ----- CA$Jcpenit !!res 10.0 Non-ax revwje 10.0 505.0 Net .drlg 0 0 -5.0 1980 1981 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 1980 1911 1982 1983 1984 1985 1986 1987 1988 1989 1990 1991 1992 1993 Swrce: Miniby od Eiawm Deebpment. Same: Mi*by dEcononf c Devopmet MACROECONOMIC POICY 9 TABLE 1.5 Fiscal indkators (percmena of GDP) 1986 1987 1988 1989 190 1991 1992 193 Tota revenues 31.8 29.6 29.9 30.1 28.0 26.5 26.7 27.4 Tax revenues 23.1 20.5 20.3 21.1 20.8 20.2 20.1 20.7 Taxes on income and procrt 5.4 4.1 3.7 3.8 3.7 4.2 4.1 4.8 Taxes on goods and services 16.6 15.3 15.5 16.2 16.0 16.0 16.0 16.9 Taxes on intemational trade 4.6 4.1 4.5 4.8 4.6 4.4 4.4 4.4 Other 1.1 1.1 1.1 1.1 i.i 0.0 0.0 0.0 Nontax revenuert 8.1 7.9 8.0 6.1 5.7 5.1 5.4 5.8 Of which petroleum sector 4.5 4.4 4.5 4.1 3.6 2.1 2.2 2.0 Capita revenues 0.7 1.2 1.7 2.9 1.5 1.2 1.2 0.9 Total expenditures 37.3 32.6 33.6 34.0 33.4 30.5 29.2 29.9 Currem expenditures 25.3 23.5 23.3 26.2 24.1 23.4 22.9 23.0 Wagebill 11.1 10.5 10.5 11.1 10.6 10.9 10.7 10.7 Goods and services 4.0 3.7 3.5 3.8 3.6 3.5 3.4 3.3 Interest payments 2.7 2.9 2.9 3.1 3.0 2.9 3.1 3.3 Subsidies and transfers 7.5 6.4 6.4 8.2 6.9 6.1 5.8 5.7 of which to enterprises 5.2 4.2 4.1 5.6 4.5 3.7 3.4 3.4 CapiWlexpenditures 12.1 9.1 10.3 7.9 9.2 7.1 6.2 6.9 Direct investnent 4.1 3.5 3.6 4.0 4.7 4.2 4.4 4.4 Capita transfers 3.9 2.9 2.0 2.1 3.0 2.0 1.8 1.9 Net loans 2.0 0.6 0.4 -0.5 0.3 -0.4 -0.6 -0.1 Othercapitl uses 1.4 1.1 3.3 1.0 0.7 0.5 -0.2 0.0 Primary balance -2.8 -0.1 -0.7 -0.9 -2.6 -1.1 0.7 0.8 Overal defidt including grants -5.5 -3.1 -3.6 -4.0 -5.7 -4.1 -2.4 -2.6 Total financing 5.5 3.1 3.6 4.0 5.7 4.1 2.4 2.6 Net foreign financing 3.0 1.0 2.0 1.0 2.9 1.1 -0.1 0.6 Net domestic financing 2.5 2.1 1.7 2.9 2.7 2.9 2.6 2.0 a. Nontax revenue is defined as surn ofte oil revenue, interest and diMends, and tranders from social security to gcvemment Source: Wod Bank calculations; data from Ministry of Economic Deveopment, Compte corsolid de (lEtat, table V- I to V-8. TABLE 1.6 Regional comparisons Govemment revenue as a sare of GDP Composition of government 1990 -92 (pernt of GDP) Revenue, 1990-92 (percent) Middle Southest Middle Southeast Tunisia LAC EU East Asia Tunisia LAC EU East Asia Total revenue 29.5 18.8 33.8 25.6 22.9 100.0 100.0 100.0 100.0 100.0 Tax revenue 23.9 17.2 30.0 20.4 18.6 81.0 92.0 89.1 80.3 82.6 On income 3.9 6.6 8.4 6.2 6.9 13.2 37.1 25.2 26.1 29.4 lndMdual 1.7 n.a. 5.3 3.6 1.9 5.8 n.a. 15.6 12.7 8.6 Corporation 1.6 n.a. 2.4 2.2 4.5 5.6 n.a. 7.2 5.5 19.0 Soial security 3.8 0.8 6.5 0.3 0.2 12.8 4.0 17.4 1.3 0.7 On property 0.5 0.1 1.0 0.6 0.3 1.9 0.5 3.3 2.1 1.5 On goods and services 10.0 6.7 14.4 7.5 6.8 33.8 34.1 45.2 30.0 31.7 On inemationa trade 4.8 2.4 0.2 5.0 4.0 16.4 12.7 0.6 17.8 17.5 Other 0.9 0.3 1.0 0.7 0.4 2.9 1.5 3.0 2.8 1.7 Nontax revenwue 5.7 1.6 3.4 5.0 4.3 18.9 7.6 9.7 19.1 17.0 Entrepreneurial 4.8 0.0 1.4 2.7 3.1 15.8 0.0 3.9 9.4 12.3 Fees and fines 0.4 0.8 0.4 0.8 0.6 1.2 3.9 1.2 2.9 2.4 Other 0.5 0.7 1.6 1.3 0.6 1.9 3.7 4.5 5.8 2.3 Capitl revenue 0.0 0.1 0.4 0.1 0.1 0.2 0.4 1.3 0.7 0.4 Note: LAC - Ecuador and Clie; EU - Greece and Portl; Midde East - Jordan, Morocco, and Turkey; Sourheast Asia - Malysia and Thailand. Source: Data are from IMF Govemnment Rrnada Statis. The dab for Tunisia incwukx soial security and are not comparable wsh d Bank standard dassatwon. 10 TuNIsigS GLOBAL INTEGRAION AND SuSTNryABLE DEvELOPMENW STRATEGIC CHOICES FOR THE 21ST CEnruRY was actually higher than that for the early part of the 1980s. surpluses of 0.7 percent and 0.8 percent of GDP, respec- Expenditures on goods and services were maintained at tively, were achieved. about 3.5 percent of GDP during 1988-93. Within this cat- For a complete analysis of the sustainability of the fiscal egory, more emphasis was given to operation and mainte- deficit, not only information on the central-government nance outlays, especially for infrastructure. Subsidies and deficit is required but also information on the consolidated transfers have declined from 7.5 percent of GDP in 1986 to nonfinancial public sector (which consolidates the central 5.7 percent of GDP in 1993, with temporary increases in government with local government, social security, and non- 1989-90 to compensate for two years of drought and high financial public enterprises) and on the consolidated total international cereal prices. Transfers to public enterprises to public sector (which adds to the first consolidation the Central cover their operating losses have declined but seem to be Bank and public banks). Unfortunately, relevant data on pub- still large (although more detailed data on the breakdown of lic enterprises and banks are not readily available. However, current transfers to public enterprises is needed for an there are some indications that the public enterprise, public unequivocal conclusion). bank sector is potentially a source of fiscal disequilibrium. It is encouraging that government direct investment saw Data for 121 of the estimated 200-250 public enterprises, its share in GDP, after a significant decline in 1987-88, in 1992, show a deficit of 6.8 percent of GDP out of total rev- recover to an average of 4.4 percent in the early 1990s. This enue of 34.6 percent of GDP (see chapter 2, section on pub- is important because the provision of public infrastructure lic sector activity and table 2.1). Regarding the public sector is vital to ensure high productivity of capital, which in turn banks, the 1993 audits show that they have a significantly produces high rates of economic growth. Capital transfers higher proportion of non performing loans as a share of their and net lending declined sharply from 1986 to the present, portfolio than the private banks. To a large extent, the dif- from 5.9 percent to 1.8 percent of GDP If this means that ference in nonperforming loans can be explained by the pub- public enterprises are becoming less dependent on govern- lic banks' exposure to loss-making public enterprises and ment support and are seeking to finance their investments because of the public sector banks' efforts (and obligation) on competitive domestic and foreign financial markets, then to follow/implement government development programs the fall of capital transfers and net lending is a very healthy over the past three decades. The situation is improving, as the development. However, if some of these transfers and lend- share of nonperforming loans as a percentage of assets ing are now provided by commercial banks or if public decreased in 1993 over 1992 and is anticipated to improve enterprises are deteriorating as result of low replenishing again in 1994 (the latter will be confirmed when all the 1994 investment, the current fall of capital transfers and net lend- audits are completed and analyzed. ing may only represent a fiscal burden for the Government Deficit financing has changed considerably since 1986. in the future. The share of the budget deficit financed from foreign sources fell from an average of about 55 percent in the first Fiscal deficit half of the 1980s to about 30 percent in 1987-93 (table SA.2). Correspondingly, the share of domestic financing of In the period from 1986 to 1993, the central government FIGURE 1.6 deficit has ranged from 2.4 percent to 5.5 percent of GDP Fiscal balance (figure 1.6 and table SA.2). The budget deficit was highest Percent of GDP in the years 1989, 1990, and 1991. In 1989, this was due to 45 1 I"f bQicel,. the 1988-89 drought (the deterioration of the budget bal- 40 ,.
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Tunisia's global integration and sustainable development : strategic choices for the 21st century
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