Macroeconomic performance

The economic recovery in Tunisia has struggled to gain traction, despite progress in the country’s political transition. Growth momentum slowed to 2.3 per cent in 2013 from 3.7 per cent in 2012, weighed down by the political turmoil witnessed in the second half of 2013. Economic activity remained modest in the first half of 2014, with GDP growing by just 2.1 per cent. This weak recovery reflects poor performance in the industrial sector, which continues to be held back by labour strikes, as well as subdued activity in non-manufacturing industries and a drop in exports. Unemployment remains high, reaching 15.2 per cent in the first quarter of 2014. Meanwhile, the IMF approved the release of the fourth tranche of the US$ 1.75 billion Stand-by Arrangement in July 2014, which has thus far helped support Tunisia’s external and fiscal positions.

Tunisia’s fiscal account remains strained. The fiscal deficit, excluding grants, widened to 6.2 per cent of GDP in 2013 (up from 5.7 per cent in 2012), owing to an increase in public sector wages and in one-off payments for energy subsidies. Budget pressures are expected to remain elevated in 2014 due to the deferral of cash payments from 2013 of about 3.3 per cent of GDP, as well as increased funding allocations to state-owned enterprises and the pension fund.

Meanwhile, external imbalances have been increasing. The current account deficit widened slightly to 8.4 per cent of GDP in 2013 (from 8.2 per cent in 2012), and has continued to widen in the first half of 2014. This has been largely driven by a marked rise in the trade deficit, mostly due to slower export growth on the back of weak external demand from the eurozone. In addition, a fall in oil production and reduced gas volumes flowing through the transit pipelines have led to higher energy imports. Moreover, inflows from tourism, remittances and foreign direct investment have remained weak. Meanwhile, international financial support – including loan guarantees from Japan and the United States – has helped stabilise international reserves at around 3.5 months of import cover.

The central bank tightened its monetary policy to counter inflationary pressures. In June 2014 the central bank raised its policy rate by 25 basis points to 4.75 per cent (a cumulative rise of 75 basis points since the beginning of the year) to prevent inflationary pressures arising from recent increases in minimum wage and electricity tariffs. However, the key rate is still negative in real terms. Inflation slowed to 5.6 per cent at the end of September from a peak of 6.1 per cent in July 2014, aided by a continued decline in international food prices. Further inflationary pressures could stem from the ongoing depreciation of the Tunisian dinar, which lost about 8 per cent of its value from mid-March to July 2014 against Tunisia’s main trading partners.

Tunisia’s economic recovery is expected to strengthen. The more stable political environment is expected to continue having positive spillovers on the economy. Meanwhile, domestic demand is likely to gradually improve from the recovery (albeit fragile) in the eurozone, from which the majority of Tunisia’s export, investment and tourism revenues derive. Nevertheless, any deterioration of the socio-political situation represents a significant downside risk to the growth outlook, especially for important sectors such as manufacturing and phosphate production.

Major structural reform developments

Reforms to strengthen the business environment have been slow to materialise. Despite the stabilisation of Tunisia’s political situation in early 2014, efforts to ease the regulatory burden and encourage private sector development and competition have lagged, partly due to the difficulty of reaching legislative consensus for reforms. The government withdrew draft legislation for a new investment code in May 2014 after facing opposition on articles deemed controversial by some stakeholders. The new code had intended to offer greater transparency and more attractive incentives for foreign investors. Legislative delays have also held back progress on planned reforms to improve the competition law and the law on public-private partnerships. The passage of these reforms, which are crucial to level the playing field for private businesses and investors, is likely to be delayed until after the general elections scheduled for the end of 2014.

Fiscal reforms have been stepped up. The government has so far been able to meet its fiscal targets for 2014 under the IMF programme, mostly due to the introduction of a series of structural reforms. Since the beginning of 2014 energy subsidies to the cement industry have been eliminated, and electricity tariffs for industrial and household use have been increased by 20 per cent. In addition, fuel prices were raised by 6 per cent in July 2014. Alongside subsidy reforms, the authorities have planned a number of tax policy measures, including higher excise and tourism taxes, and have finalised a tax administration modernisation plan that will improve revenue mobilisation. Nevertheless, further reforms are needed in order to improve the composition of public expenditure, most notably to address the high public wage bill and to assess the structure of salaries in the public sector.

A series of reforms have been initiated to enhance Tunisia’s monetary policy toolkit. In July 2014 the central bank introduced an “exceptional facility” to provide liquidity to banks that are considered solvent, but carry collateral of lesser quality. This step is a prerequisite to setting up a lender of last resort facility, which is expected to be completed in early 2015 in alignment with a new banking resolution framework (see below) and the adoption of new liquidity norms. Meanwhile, ongoing revisions to the central bank law, which is expected to pass by the end of 2014, will provide the central bank with more independence and an enhanced governance structure, along with a clearer mandate to perform its functions.

Some steps have been taken to reform the banking system. Following the successful audits of two of the three public banks (which account for around 40 per cent of total banking assets), their restructuring plans have been finalised and adopted by the government. The audit for the third public bank is currently under way. In parallel, a decree was passed in December 2013 to improve the governance of public banks, mandating that these banks are to be managed on a fully commercial basis.

The authorities have adopted a plan to upgrade the regulatory and supervisory frameworks of the banking system. A new banking law has been drafted. Primarily concerned with defining the framework for bank resolutions, the new draft law, completed in June 2014, designates the agencies responsible for the liquidation of distressed bank assets and proposes resolution tools and enforcement mechanisms for the central bank. The lengthy political transition has hampered progress on the passing of the bankruptcy law, which remains stalled in parliament. However, progress has been made in designing a uniform system to report bank performance.

Efforts have been made to strengthen project implementation capacity, especially at the regional level. A new procurement law was implemented in June 2014, aiming to speed up public investment in the region by streamlining the bidding process. The decentralisation policy launched last year, which sets criteria for selecting and implementing investment projects, will assist in these efforts.