IMF on Tunisia's economic performance

The International Monetary Fund has expressed satisfaction over Tunisia's economic performance, calling on this country to continue its reforms especially in the public sector.

In its annual publication which was issued on Thursday evening the IMF said that its board of directors congratulated Tunisia over it strong economic performance since the mid of the 1990s, the continued growth and the improvement of its foreign position and containing inflation and the recession of poverty.

The multilateral financial commission considered that these results have become possible "because of correct economic policies characterized by transparency and an organizational framework which has been improved and a progress in liberalizing the economy and a concentrated economic policy." Simultaneously, the IMF "stressed the need of reforming the public service to improve its effectiveness and revenues and to reduce wages imposed on government." It expressed hope to reform the social insurance system also.

It added that the "basic challenge will be the acceleration of measures conducive to an open market economy to deal with other files which include high public debts and unemployment."

Here are some statements from the IMF report:

Tunisia's favorable economic performance since the mid-1990s has been based on appropriate macroeconomic policies, a forward-thinking but gradual opening of the economy, particularly under the Association Agreement with the EU (AAEU), and well-targeted social policies. Until 2001, the authorities followed a constant real effective exchange rate rule to help maintain competitiveness. Since then, the central bank has let the dinar depreciate by more than required to keep the real exchange rate constant in order to partially offset the impact of reduced external protection on competitiveness.

The year 2002 was difficult for the Tunisian economy. Monetary and fiscal policies were tightened in response to excessive demand growth, while the economy was hit by a series of shocks: terrorist attacks, a slowdown in export markets, and a fourth year of drought. The policy tightening led to a rapid correction in the external balance, despite a drop in tourism and export growth. Even under these circumstances, real GDP advanced by 1.7 percent, and market confidence in Tunisia did not wane. Tunisian debt performed well in financial markets after September 11, 2001, and the country's investment grade rating was raised by Moody's in 2003 after the Iraq war. The external reserve position rose to the equivalent of three months of imports by the end of 2002 and has remained there since. External vulnerability indicators have improved.

The outlook forÊ2003 is favorable: GDP growth could once again exceed 5 percent with a rebound in export growth and agriculture. Recent indicators point to a resumption in tourism flows, although tourism poses a key risk to the outlook. The external current account deficit is forecast to narrow, in part because of continued slack domestic demand, while external reserves are projected to remain close to threeÊmonths of imports. The exchange rate depreciated by 3.5Êpercent in real effective terms over the last 12 months.

The government will keep a tight rein on expenditures in 2003 in an effort to lower the budget deficit by 0.3 percent of GDP, although revenue growth was weak in the first quarter because of slow domestic activity and low import growth. This consolidation should reduce government debt as a share of GDP to below 60 percent. The central bank has eased monetary policy in response to slack credit growth, lowering the credit auction interest rate in March and June. There are no signs of inflationary pressures. Financial conditions in the banking sector have weakened with the drop in tourism and slower growth, but at present do not constitute a threat to economic stability.

The authorities turned their attention in 2002 to formulating a new macroeconomic policy framework based on three pillars: a well-defined monetary policy with clear objectives and operating targets, a floating exchange rate, and an open capital account. As a first step, the authorities began in 2002 with measures to deepen financial markets, including opening a small share of the treasury bill market to foreign investors and easing the requirements for opening bureaus de changes.

Unemployment remains high at 15 percent and economic growth has not been sufficient to meet the authorities' goal of raising real incomes to lower-tier OECD country levels. In this context, the authorities are implementing structural reforms with support from the World Bank, the EU and the African Development Bank under the Economic Competitiveness Adjustment Loan. The loan deals mainly with the private investment climate, telecommunications, and the financial sector. The World Bank is also preparing strategy papers on employment and the tourism sector, as well as a study on public debt management. Structural impediments to growth include labor market rigidities, an excessive state presence in the economy through price controls and government ownership, financial sector vulnerabilities, high overall trade protection, and a heavily-regulated onshore sector.

Tunisia continues to improve the quality and dissemination of statistical data and increase the transparency of its economic policies. Tunisia has published all Executive Board documents and staff mission statements in recent years, and intend to publish the 2003 Article IV Staff Report and Supplement.

Executive Directors commended Tunisia's solid economic performance since the mid-1990s, with robust economic growth, an improving external position, subdued inflation, and declining poverty. These results stemmed from sound and transparent macroeconomic policies, an improved regulatory framework, progress in trade liberalization, and well-targeted social policies. As became evident over the past two years, these advances have contributed to a more diversified economy better able to withstand shocks as well as enhanced Tunisia's credit rating and access to international capital markets. A key challenge going forward will be to accelerate steps to strengthen an open market economy in order to address remaining challenges, including the high levels of public debt and unemployment.