Tunisia - The economy of Tunisia

RESTRICTED Report No. EMA-1Z iTis reporT WaS prepared Tor use within t-o B nu nd iiated organizatl0n;. They do not accept responsibility for its accuracy or completeness. The report may not be published nor may it be quoted as representing Their views. INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION THE ECONOMY mttNTTYT A T UiNJ.lIS1 August 25, 1969 E~urope, Middle East anu North Africa Department  _..TyvwrA T M T-1 0 CULRkREL1N LI JUX V.-%Z1.4 IO 1 dinar = 1. 905 US dollars 1 dollar 0. 525 dinars 1 million dinars = 1. 905, 000 dinars 1 .,illion dollarsa - 525, 000 drinar  P R E F A C E This repwort vas prepared by an economic mission which visited Tunisia in March/April 1969. The members were: Ernst F. Schaad (Chief of Mission) Michael Payson (Chief economist) Denis Mortier (General economist) Gabriele Sciolli (Fiscal economist) Robert Mangolini (Consultant, agricultural economist) Louis Pouliquen (Transport economist) Cornelis van DiJk (Education specialist) Hans Thias (Education specialist) David Miller (Population specialist) Geraldine Prefontaine (Secretary)   TIM ECOOMOY OF TUNISIA *1'An1TTt w ri nwi'vun' UWPUt ANU-L JCOCLJUS10UPa . . . . . . 4. 1. 11ZURiDUV-u.fg- . . . . . . . . . . . . . II. EC0NOKCntR n at nflnlfl.RRA.C 1 II. GEvM B urCTIS OF THE .WR- .R.A .99-12. A. Totemisimn Yaiprience i i Pinning . . . . . . . B. Growth Objectivesaofthe Plan. ...... . 3 C. Porpulation and Family Planning. D. Education and lpoyment . . ...... . . 6 E. Structural Retoua and the Cooperative Movement . . . . . . 9 IV. PROBLEMS AND PROPECTS OF THE PRINCIPAL SECTORS OF TUE ECONOMY .. A. Agriculture . . . . . . . . . . . ..... i B. ManufacturingandMining .. ......... . 15 Cc Transport . . . . . . . . . .. . . .1 D. Tourism . .... . .. . .. . ... .. . 19 V. DOMETIC FINACE . . . . . . . . . . . . . . . 21 A. PublicPinance *............... 21 B. Money ad Credit . 26 VI. FOREIGNRAEAD PAY DP A.Y.M.T.S. . ........... 29 A. Trends of Goods and Services . .. .... . 29 B. Trade Reltions and Policies ... . . . . . 31 C. Foreign Capital Inflow, Debt and Debt Service 34 VII. PROBLEMSAND PROSPECTS.... ..... .. 31 VIII. STATISTICAL APPENDIX   SIMMARY A-MD CONCLUSITRONS 1. Tunisia has enjoyed internal stability since it became independent in 1956= Cansi4der&ble effort- hae been made to transfor- a h&rkIqrd and tradition minded comunity into a mzodern, western oriented society vith the a~4 m u.iA ~ ^ 4 agelm '~I +riy- introductio0nv of new sociZ-l -ad econo..o4 Struact-Wre%Xas in ag.cavltuwe, trade and industry. Although much remains to be done before this objective is ach w ,m su'a+bt.+4 l' p.vtwan has = .,aade ..made ..a4d ia appes" determined to continue the effort. 2. The Tunisian economW grew at an average ,nnusl rate of about 5.5 percen" in tbe erlJ 9yu - v . Despite bad -weather anad consequenu poor hr vests in 1967 and 1968, growth was still about 3 percent during the last Pln 196-1968). sue uei- r.LSU (19u6 1-9Y7 proposes a gruw>u %O %L 6A percent, which appears feasibl.e. During the last Plan investments accounted .or About a querter of gros6 domestic product, and are expected to remain close to that level during the next one. As in the past, financing invest- meants of this magnitude will remain difficult. 3. Tunisias population nas been increasing rapidly and rached estimated 4.8 million in 1968. The annual growth rate accelerated from less than 2 percent around 1930 to about 2.3 percent around 1960 and for 1968 the Annual rate of natural increase is estimated at 2.8 percent. It is hoped that an extended effort in family planning would initiate a gradual decline in the growth rate. The chances for successful implenentation of such a program are enhanced by favorable social, religious, and governmental conditions. 4. E;ploymnt is projected to increase at an average annual rate of 2.6 percent during the 1968-1972 period, implying that 122,000 more jobs will be available by the end of the Plan. Hoaever, reliable assessments of the long-term demd for middle and high level mnpover which might serve as a guide for planning the specific requirements of the educational system are not available. The targets set for the development of primary educa- tion are reasonable and those for higher education may be too modest but plans for secondary education are far more ambitious and likely to exceed effective manpower demands. 5. In 1956 about 65 percent of the labor force was employed in agri- culture, compared with an estimated 48 percent in 1966. Agriculture's con- tribution to GDP has been decreasing from 25 percent in 1960 to some 17 percent in 1968, and is planned to remain above 15 percent in 1972. The average level of agricultural production is to increase by about 5 percent per year over the period of the new Four-Year Plan 1969-1972, while exports are to grow by 5 percent and 40,000 new jobs are to be created. Total in- vestments in agriculture over the Plan period will exceed those of the previous Plan by 28 percent. 6. These targets were fixed before taking the decision to transfer all agriculture into production cooperatives before the end of 1969. The effects of this decision on production, and on manpower and financial re- quirements could not be fully taken into account in the Plan, and cast doubt on the feasibility of the targets.  7. Tunisian industrial policy during the 1960's has favored the development of large enterprises, primarily for import substitution and secondarily to upgrade natural resources such as phosphate rock and other minerals. Government participation has been dominant and public enterprise investment has accounted for some 85 percent of all investment made in man- ufacturing during the past eight years. However, cumulative gross fixed investment in mining and manufacturing totaled D 151 million from 1960-1968 whereas the increase in output in these sectors amounted to only D 30 mil- lion during the period. Despite dominant market positions and protection from import competition, profitability has been lov, and cash requirements have had to be met directly from the Treasury, from the resources of public trading firms, or by increased borrowing from the banking system. 8. The industrial section of the new Plan represents mainly a con- tinuation of past industrial policy including a further moderate increase of investments. During the last Plan phosphate exports stagnated but con- tinued to provide about 10 percent of foreign exchange earnings and the Government hopes to develop this potential through new investment now being undertaken, such as the substantial amounts being invested for the creation of the chemical complex and port of Gabes, a new railroad Gafsa-Gabes and new phosphate mines. These investment decisions were taken some time ago, and are progressively being implemented although the technical and economic studies are not yet completed and there is a great deal of uncertainty re- garding the marketing possibilities at satisfactory prices for increased quantities of Tunisian phosphates and fertilizers. Although facilities of the kind now being constructed may prove to be necessary in the long-run, there are indications that some of them could have been postponed for a few years. More recently, the Government has made increasing efforts to improve existinR enterprises and to ensure that new projects are justified before taking investment decisions. This should improve progressively the produc- tivitv of investments. Q. In recent years newly discovered oil has contributed significantly to foreign exchange earnings and some further moderate increase is expected 9lurina the next Plan. It is tourism, however, which is the most dynamic sector of the economy and which has become the main source of foreign ex- change- Prnvided the substantial financina reauired is forthcoming and barring major international upheavals, the further substantial gains planned shola-ld not bnte d1 ffitiIt. to realize 10. Whether and to what extent produetion and investment forecasts of the Plan are realistic will depend to a considerable extent on a number of economic po14- varia4bln in nit-h arhA crepit. nillhlr finance,- prices and foreign economic relations. Until now, limited use has been made of in- ad,4 r ct mesu -ess to n iide productlon an-d investment. Pr ies for mrnv maior commodities are established on a cost plus basis without sufficient attention toU theA maret 3hile int.er.st r in combination with. the -e ------- of credit amounts reflect mainly the Government's priorities and bear little or no relationship to the demand for and the supply of ^unds and capital. The Government expressed the intention to encourage gradually more realistic pricing and capital coating, but 4rect controls by the Governent are ex= pected to remain the principal means for implementing economic policy during the next four years.  - iii - 11. The new Plan and the cooperative system are looked upon as the Government's major instruments for bringing about economic and social devel- opment. Economic planning has received attention Bince the early 1960's. A planning office and a national planning council formulate priorities and general policies. The new Plan has been substantially improved compared vith past plans in identifring and defining projects, and its implementation can nov be folloved and adJusted throuah annual economic budgets. 12. Attempts at ortanizinr larae narts of the economv in cooneratives vere started during the Three Year Plan (1962-1964), and amplified during the first Four Year Plan (1965-1968) with aricultural nroduction cooDera- tives and specialized regional cooperatives for various economic activities. In Januarv 1969 the Government decided that all azrleultuxre should be in- corporated in production cooperatives before the end of the year. The new Four Year Plan (iQ6Q_-l72 also ineludlaes the -nviam d conanlidation and merger of enterprises in agricultural procesisng, shoe and clothing menu- faetures and in other sim{lar Aetivities. 13. Althouh there ban heen some mPeRlstV nf niwonnitin to the sec4l- erated pace of introducing cooperatives, the Government enjoys popular sup- port aind isn in a ntrong position to push aheasA _t4+h ma4ew *fr%vni- The cooperative idea was greatly promoted at the time by the mass exodus of French colons and the 8ubsequent org-n4 ma+ 40 of agrie"14-tAAn nwdution in cooperatives. It remains to be proven, however, whether this concept cnn he beneficia -l- 1 0 4eral.Aed o-d .-lied +t the ,. ext .+ent in differ- ent circumstances. Efforts should be made to insure that the basic political c oice ^ 4n 4P--_ -_o of doe - pr1..ecl _ude . 4-u a-14-P of _4rict .a-a^_^; -- ^ ... wz am _,tsaswvvSG I.a w a.l- r"ww F& .4"wU ." in..r - --l C' a economic criteria and that short-term measurable economic returns are not sacrif.Cledd Aftr "less cer-tain longf-t-ei,i dere10pwUnt- benefits. k14. The- use of ma r-ke"t forces J- the conduct o f ------ J - po licy nee A no t 0C. &L~~ LlJ . U bA .& LLLI LEA 6 1.VLLJUJUI.A VA C1 UUU WA FJ.'D.j " L be in contradiction with the basic policies of the country. The Government has accepted this View, and for the oil .ndUUstry and partic-ulurly for tourism the boom provides ample evidence of response to the opportunities of the market. SiMilar developments could perhaps be promoted more vigorouSAly in private agriculture and industry by indirect policy measures to increase et.Liciency, enularge mairietD and impro-ve Icen"vses. V~ ALI..~UL1 ~ULU1~ 5MLL~.,~ .UL AmLv LULI,V1 .1,. 1Difi L.ultie may be eSu-ouatere iu r'ifinancing the Prlan. Thu pro- jected 21 percent annual growth in general government savings and the 9 per- cent grOwth in sav ings of identified enterprises rrom i969-i972 seem optim- istic in the light of past performance. Additional resources may also be required to fIinance the nationwide reforms in the agricultural sector not explicitly evaluated in the Plan. Public capital inflows are forecast to total D 270 million for the Plan period compared with D 180 million during the past four years, depending principally on an ambitious acceleration in project implementation and in disbursements ozi project loans. As suggested by the IMF, short and medium-term foreign private borrowings were reduced during the last year and will be limited during the next Plan. rhis implies that shortfalls in public capital inflows will require a reduction in in- vestment.  - iv - 16. For the balance of payments, the planned 6 percent growth rate in exports from 1969 to 1972 appears achievable. Reflecting official priori- ties. consumption imports are expected to decline from earlier levels, while imports of intermediate goods are projected to increase considerably less than in Dast years as a result of progress in import substituting industries. The deficit on current account will depend to a large extent on the level of capital goods imports. which in turn will depend largely on inflows of foreign financial assistance. 17. Service payments on public external debt amounting to 24 percent of forei-n exchange earninas from exports of goods and services in 1968 are high, and it is doubtful whether the ratio can be brought below 24 percent by 1972. The extent to vhich this will be possible in the coming years will depend on success in achieving export growth and also on the level and the ter-ms and eonditions of future borroving. In view of Tunisia's large debt burden, these loans should be to the fullest possible extent on concessionary terms.  INTRODUCTION 1. uni sla economy 'is tiL1L predominant