Documentof The World Bank FOR OFFICIAL USEONLY ReportNo. 32297 -TN INTERNATIONALBANK FORRECONSTRUCTIONAND DEVELOPMENT PROGRAMDOCUMENT FORA PROPOSEDLOAN INTHEAMOUNT OFEURO 116.1MILLION (US$lSOMILLIONEQUIVALENT) TO THE REPUBLICOF TUNISIA FORA FOURTHECONOMIC COMPETITIVENESSDEVELOPMENT POLICY LOAN May 10,2005 Finance, PrivateSector and Infrastructure Department Middle East andNorth Africa Region This document has a restricted distribution and may beusedby recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. TUNISIA - GOVERNMENTFISCAL YEAR January I-December 31 CURRENCYEQUIVALENTS (Exchange Rate Effective as of May 4, 2005) Currency Unit Tunisian Dinar (TD) US$l.OO TD 0.80 WEIGHTSAND MEASURES Metric System ABBREVIATION AND ACRONYMS M U Association Agreement with the EuropeanUnion AfDB African Development Bank CAS Country Assistance Strategy CFAA Country Financial Accountability Assessment ECAL Economic Competitiveness Adjustment Loan FIAS Foreign Investment Advisory Service GDP Gross Domestic Product EU European Union FSL Fixed-Spread Loan GNP Gross National Product IBRD InternationalBank for Reconstructionand Development IMF InternationalMonetary Fund LDP Letter of Development Policy LIBOR London Inter-Bank Offered Rate MENA MiddleEast and NorthAfrica MFA Multi-fiber Agreement MFN Most FavoredNation MOF Ministry of Finance N P L S Non-Performing Loans OED Operation Evaluation Department PER Public ExpenditureReview ROSC Report on the Observance o f Standards and Codes SMES Small and Medium Enterprises T D Tunisian Dinar VAT Value Added Tax WTO World Trade Organization Country Director: Theodore 0.Ahlers Sector Director HosseinRazavi Sector Manager: Zoubida Allaoua Task Team Leader: Aristomene Varoudakis This document has a restricted distribution and may be used by recipients only inthe performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. FOR OFFICIAL USEONLY Republic of Tunisia FOURTH ECONOMICCOMPETITIVENESSDEVELOPMENT POLICY LOAN TABLEOF CONTENTS LOANPROGRAMAND SUMMARY ................................................................................................................ i I INTRODUCTION . ........................................................................................................................................ 1 I1. COUNTRY CONTEXT ............................................................................................................................... 1 A. 2 B. RECENTECONOMICDEVELOPMENTSINTUNISIA........................................................................ MACROECONOMICOUTLOOKAND DEBTSUSTAINABILITY...................................................... 3 I11 . THE GOVERNMENT PROGRAM ...................................................................................................... 4 A. 4 B. GROWTH.EMPLOYMENTAND MACRO-ECONOMICPOLICY...................................................... 6 C. TRADEREGIME...................................................................................................................................... 6 D. PRIVATEINVESTMENTCLIMATE...................................................................................................... FINANCIALSECTORDEVELOPMENT.............................................................. ............................. 7 I V . BANK SUPPORT TO THE GOVERNMENT STRATEGY ............................................................... 9 A. 9 B. LINKTOCAS........................................................................................................................................... 9 C. RELATIONSHIPTO OTHERBANKOPERATIONS............................................................................. COLLABORATIONWITHOTHERDONORSAND THEIMF............................................................. 9 D. LESSONSLEARNED............................ ....................................................................................... 10 E. ANALYTICAL UNDERPINNINGS.............................................. ..................................... 10 V . THE PROPOSEDECONOMIC COMPETITIVENESS DEVELOPMENT POLICY LOAN ...........11 A. OPERATIONDESCRIPTION................................................................................................................ 11 Maintaining a Sound Macroeconomic Framework ............................................................................. 12 StrengtheningthePrivate Investment Climate ..................................................................................... 15 16 B. Promoting Financial Sector Development........................................................................................... LOANAMOUNT AND TRANCHING .................................................................................................. 19 Loan Amount and Tranching ............................................................................................................... 19 Conditions of Tranche Release ............................................................................................................ 19 C. POLICYAREAS ..................................................................................................................................... 21 VI. OPERATIONIMPLEMENTATION .................................................................................................. 21 A. POVERTYAND SOCIALIMPACTS.................................................................................................... 21 B. SUPERVISION....................................................................................................................................... 21 C. DISBURSEMENTAND AUDITING..................................................................................................... 22 FIDUCIARYASPECTS.......................................................................................................................... 22 E. D. 22 F. ENVIRONMENTALASPECTS............................................................................................................. RISKSAND RISKMITIGATION.......................................................................................................... 22 ANNEXES ANNEX 1:LETTER OFDEVELOPMENTPOLICY (ENGLISH & FRENCH) ......................................... 24 ANNEX 2: OPERATIONPOLICY MATRIX .................................................................................................. 53 ANNEX 3: FUNDRELATIONSNOTE ............................................................................................................ 61 ANNEX 4: COUNTRY AT A GLANCE(INCLUDES COUNTRY MAP) ..................................................... 65 This document has a restricted distribution and may be used by recipients only in the performance of their official duties Its contents may not be otherwise disclosed. . without World Bank authorization. This note was prepared by a core team comprising: Paloma Anos Casero, Country Economist; Jean Pesme, Sr. Financial Sector Specialist; DimitriVittas, Sr. Adviser; Aristomene Varoudakis, LeadEconomist;and Steve Wan, Sr. ProgramAssistant. Guidancehas been providedby ZoubidaAllaoua, Sector Manager. Contributionsand comments have beenreceived from Dominique Bichara, Sr. Counsel; Samir El Daher, Regional Financial Sector Adviser; Pierre Demangel, Sr. Country Economist; and Etienne Guillabert (Consultant,Banque de France). Peer reviewers are Pedro Alba andDanielaGressani. Two identificationmissions to Tunisia, jointly organized with the African Development Bank and the European Commission, have been conductedfor the preparationof this project. The project team has benefitedfrom exchanges of views with representativesof the two institutions,in particular,Hans Duynhouwer,Luca Oriani Vieyra, BemardBrunet, Cecile Abadie, Olivier Scherpereel (European Commission), andBeneHoane, Valentin Zongo, KannyDiallo (AfncanDevelopmentBank). i LOANAND PROGRAMSUMMARY Republic of Tunisia FOURTH ECONOMtC COMPETtTlVENESSDEVELOPMENT POLtCY LOAN I Borrower Government of Tunisia IIImplementing Agency Ministry of Development and International Cooperation Amount EURO 116.1million (US$l50 millionequivalent) Terms Commitment-linked, Fixed-Spread Loan (FSL) of EURO 116.1 million (US$l50 million equivalent). A capitalized front-end fee of EURO 580,500 (US$750,000 equivalent). The lendingrate applicable is six month LIBOR plus a fixed spread for FSLs denominated in EURO. The loan repayment period will be 16.5 years, including a five year grace period. Interest and other charges will be payable semi-annually on February 15 and August 15 of each year. The final reimbursement date is August 15, 2021. Tranching Two tranches of EURO 58.5 million each (US$75 million equivalent), the first one to be disbursed after effectiveness and the second one 18 months after effectiveness, following the Bank's review of policy actions implemented as per the loan agreement. The program will support mutually reinforcing development objectives: (a) maintaining a sound and reactive macroeconomic framework, in particular by promoting fiscal consolidation and strengthening the medium term fiscal framework; (b) improving Tunisia's private investment climate and increasing private investment opportunities; and (c) reinforcing the financial sector's capacity to finance growth, by supporting initiatives to reduce the level of non-performing loans, further strengthening the regulatory framework for bank intermediation, and fostering development of contractual savings, especially in the insurance sector. Benefits would result from a stronger macroeconomic framework, from an improved investment climate creating more opportunities for private investment and from a better functioning and more efficient financial sector, better positioned to support higher growth and investment. This should contribute to better preparing the Tunisian economy to the challenges of its insertion inglobal markets, o f the full roll-out of the Association Agreement with the European Union and of progressive move towards full convertibility of the Tunisian Dinar. The main risks are an unfavorable exogenous and/or endogenous shocks, a weakening drive for reform or slow pace o f change and technical capacity constraints. The pace of reduction of the level of NPLs would depend on improvements in the relationship between the banks and some key corporate borrowers, which could be opposed by vested interests. Private investors' reactions (both inthe on-shore and inthe off-shore sectors) to the progressive evolution of the incentives framework will be key to comfort the Government's reformist stance. Operation IDNumber PO75893 IBRDPROGRAMDOCUMENTFOR A PROPOSEDFOURTH ECONOMIC COMPETITIVENESSDEVELOPMENT POLICY LOAN TO THE REPUBLICOF TUNISIA I. INTRODUCTION 1. The loan supports a reform program including actions to improve Tunisia's private investment climate, strengthen competition, enhance corporate transparency and governance; take further steps to improve the quality of banks' loan portfolios and reduce the amount of non-performing loans in the banking sector, liberalize the insurance sector, while reinforcing the regulatory and supervisory framework in securities markets and the insurance sector, and further strengthen the medium-term macroeconomic framework. The proposed program is based on the work of the authorities inpreparing the next (ll*) development plan and on the recommendations of recent Bank reports: the five-year Financial Sector Assessment Program, the Development Policy Review and the Accounting and Auditing Report on Observance of Standards and Codes. 2. The loan supports Tunisia's macroeconomic stability. Tunisia has demonstrated its firm commitment to prudent and forward-looking macroeconomic policies and has established credibility among international investors and domestic economic agents. Uncertainties in the extemal environment and emerging competitive pressures could lead to pressures on the balance of payments by increasing financing requirements or by temporarily raising the cost of borrowing on international markets. In response to surrounding risks in the external environment, the authorities have strengthened the fiscal framework and debt managementpolicies and stand ready to adopt additional measuresif necessary. 3. The proposed operation would be the fourth in a series. The first ECAL, (ECAL I) introduced wide-ranging first generation actions aimed at promoting private sector development (PSD); the second ECAL (ECAL, 11) supported improvements in the soundness, efficiency, and competitiveness of the banking system. ECAL IIIconsisted of a broad range of second generation measuresaimed at enhancing private sector development, pursuingfinancial sector reform and expanding it to the non-bank financial sector, and supporting the liberalization of the telecommunications sector. The ECDPL IV i s designed with the aim of furthering this set of reforms, in a de facto programmatic approach, with an emphasis on financial sector development, in particular by removing impediments to the efficiency of the banking sector stemming from the high level of non-performing loans. At the same time, the program supports the creation of new opportunities for private investment, by improving the regulatory framework for investment and facilitating market entry through the strengthening of competitionpolicy. 4. The proposed loan is consistent with the base-case scenario reflectedinthe Bank Group Country Assistance Strategy (CAS) for Tunisia discussed by the Executive Directors on June 3rd, 2004. The proposed loan amount is in line with the level of development policy lending foreseen inthe CAS. The proposed operation has been prepared in collaboration with the European Union (EU) and the African Development Bank (AfDB) who will support the Government's program on the basis of a common action matrix with the EUproviding a grant of EURO 78 million and the AfDB, expected to match the Bank's loan of US$150million equivalent. The macroeconomic framework and performance indicators for this operation have beendefined inclose collaboration with the Intemational Monetary Fund(IMF). - 2 - 11. COUNTRY CONTEXT A. RECENTECONOMICDEVELOPMENTSINTUNISIA 5. Thanks to a steady pace of structural reforms and sound macroeconomic management, Tunisia experienced fast and sustained growth. Sustained structural reform efforts since the early 1990s, supported by the World Bank and other Figure 1 Average annual realGDP growth-Tunisia and mmparalon (in%) multilateral institutions, prudent macroeconomic 9 policies, and deeper trade integration in the global 8 economy, have created an enabling environment for 7 growth of the private sector and improved 0 competitiveness of the economy'. Growth accelerated to 5.2 percent during the Ninth Development Plan (1997-2001), outpacing MENA and middle-income countries' average, even though it was slower than in other fast growing countries (Chile, Korea, Malaysia, Mauritius, Thailand-see Figure 1). Strong growth has contributed to a sharp reduction in poverty 1982-1986 1987-1991 1992-lSsB 1997-2001 2002-2003 between 1995 and 2000, with the core poor (thoie living below a lower poverty line, reflecting a minimumconsumption expenditure level) accounting for only 4 percent of the population in2000. 6. Growth has been resilient, even when Tunisiafaced an unfavorable external environment. In 2002, growth slowed to 1.7 percent, from 4.9 percent in2001, due to a drop intourism and manufactured exports and severe drought for a third year in a row. Sluggish growth inthe EUand the prolonged effect of September 11, 2001 on tourism and transport, have hampered export growth. But non-agricultural GDP was resilient, growing by 3.5 percent, supported by construction and other services, especially telecommunications. Thanks to favorable rainfall in the 2002/03 season, agricultural production recovered strongly, by 21.5 percent, in 2003 and 9 percent in2004. This has boosted GDP growth to 5.6 percent in 2003 and 5.8 percent in 2004. However, reflecting weak domestic demand, non agricultural GDP has grown in 2003 at the same pace as in 2002, below the goals set in Tunisia's Tenth Economic Development Plan (2002-06), but has accelerated to 5.4 percent in 2004. GDP growth may slowdown to 5 percent in 2005, owing to a projected decline in agricultural GDP by 4 percent, although the recovery in non agricultural GDP growth will continue at a rate surpassing 6 percent. Despite healthier growth, private investment remains weak and in2004 has declined as a share of GDP for a thirdconsecutive year. 7. Despite strong growth, unemployment remains high, at around 14 percent, reflecting demographic pressures, the decrease in the employment intensity of growth, and increased competition. Although demographic growth is slowing down, strong labor force growth i s expected in the years ahead, because educational attainment i s improving while, at 26 percent in 2001, labor force participation by women still remains low. Inthe coming years, tensions inthe labor market will also be intensified by the shedding of labor out of agriculture (22 percent of total employment) and traditional industries such as textile (10percent of total employment). While unemployment remains highest among those with primary schooling or less (86 percent of the unemployed), job creation for skilled workers has slowed in recent years, so that unemployment of people with formal education has increased. Sustained, At above 70 percent of GDP, Tunisia's trade flows (the sum of imports and exports of non oil goods and services) indicate the highest degree of international trade integration among countries included in the EU Neighborhood policy initiative. - 3 - high growth rates, of about 6.5 percent, will be needed to reduce unemployment. Growth of high-skill sectors would also beneededto absorb the continuous flow of new graduatesto the labor force. B. MACROECONOMICOUTLOOK AND DEBTSUSTAINABILITY 8. Forward-looking macroeconomic policies have helped preserve external and internal balances. Despite strong GDP growth over the 1990s, prudent demand management helped bring inflation down, to levels below those seen inother fast-growing comparators (Figure 2). Tunisia's current account deficit-reflecting the sizeable trade deficit, at Figure2 :Tunisia-inflation and externalbalance (10902003) over 10 percent of GDP-was also kept under control, 15 1 at around 3 percent of GDP for most of the late 1990s. However, the external current account deficit surpassed 4 percent of GDP in 2000 and 2001, and in early 2002, the external shocks were further exacerbating the pressures on the current account. The authorities tightened fiscal and monetary policies, thus containing -10 domestic demand pressures. The current account deficit -15 was brought under control, also with support from io90 io92 io94 1996 1008 zoo0 2002 strong agricultural production, reaching 3 percent of GDP in 2003 and 2.1 percent of GDP in 2004. Foreignexchangereserves have stabilized at the equivalent of three months of imports since early 2003. 9. Fiscal consolidation has progressed, but a primary budget deficit still persists. After an important fiscal consolidation effort during the 1990s, in 2000-2001 fiscal policy turned expansionary and the primary budget deficit broadened to 0.7 percent of GDP. The fiscal stance was tightened in the 2002 and 2003 budgets, but the primary budget deficit remained at 0.5 percent of GDP in 2003, due to the weakness of tax receipts. In 2004, the primary budget (excluding grants and privatization receipts) turned into a surplus of 0.3 percent of GDP, mainly resulting from additional non-tax receipts and other one-off factors.2 The primary budget deficit will reach 0.4 percent of GDP in 2005, and its persistence prevents a rapid reductionof public debt. persistent primary budget deficit, public debt hovered at around 60 percent during the 1990s (of which, 39 Figure3 :Foreigndebtin% of GDP (2001) percent foreign and 22 percent domestic debt in 2002). 80 With foreign private debt representing an additional 13 60 percent of GDP, Tunisia's total foreign debt amounted 40 to 52 percent of GDP in 2002. The debt service ratio 20 was brought down to around 15 percent of exports in recent years. Tunisia is among the few emerging market borrowers that have investment grade rating. Prudent "$<8 .\saP%o . * ~ ~ Qae~ ~ ~ ~ G Q0 .+ ** macroeconomic policies have helped Tunisia improve 50 be ,de its access to international financial markets, allowing 6 The non-tax additional receipts reflect 25 MD from the natural gas fee; 75 MD from premiums linked to treasury bills issuance; 15 MD from fines, and 58 MD from other receipts. A decrease in Treasury on-lending (110 MD) reflecting one-off operations, also contributed to the improvement in fiscal balance. - 4 - 11. Monetary and exchange rate policies have supported macroeconomic stability, while responding to changing conditions. The policy mix in Tunisia has traditionally relied on a prudent monetary policy. Monetary policy was swiftly tightened in 2001, with the aim of better aligning credit expansion with the growth in domestic demand. With current account pressures easing, monetary conditions were relaxed in 2003. At the same time, targeting a constant real effective exchange rate has contributed to maintaining a good level of competitiveness and the prudent budget management has provided a necessary anchor for this exchangerate policy. The real exchange rate rule was implemented in a more flexible manner in 2002 and 2003, as the government allowed some real exchange rate depreciation in order to support Tunisia's ongoing trade liberalization and the preparation for a more flexible exchange regime inthe future. 12. Balance-of-payments exposure to changes in oil prices is limited, but the budget remains vulnerable owing to remaining energy subsidies. Currently, higher oil prices have a negligible impact on the external current account because Tunisia's energy trade i s about balanced. However, this i s slowly changing, because exports of oil are on the decline, while domestic energy consumption i s growing. Domestic prices for some energy products (especially LPG) are subsidized, so that, in the absence of domestic price adjustments, increasesin the price of oil impinge on the budget through higher transfers to the distribution companies. It i s estimated that, in the absence of price adjustment, a US$ 10increase in the price of oil increasesthe budget deficit by about TD 350 million, or by 1percent of 2004 GDP. This i s far from negligible, given that the actual deficit i s hovering at around 3 percent of GDP. To mitigate the impact of higher oil prices on the budget, the government adjusted retail prices in early 2004 and again inFebruary 2005. The 2005 budget i s basedon an assumption of US$45/barrel for the price of oil, in line with the projections of the World Bank and the IMF.Under the US$ 45harrel assumption, the cost of subsidies to the budget would be TD 480 million without corrective measures, but recent retail price increases will bring the overall cost to the budget down to an estimated TD 200 million-thus offsetting the impact of oil price hikes on the budget deficit. The Government stands ready to take additional measures should developments duringthe rest of the year drive the price of oil beyondcurrent projections. 111. THE GOVERNMENT PROGRAM A. GROWTH,EMPLOYMENT AND MACRO-ECONOMICPOLICY 13. Reducing unemployment remains the priority of the Government, and calls for a significant acceleration of growth, spurred by much higher private investment. In the years ahead, the need to maintain a sound fiscal framework (see below) will limit the potential for job creation in the public sector. Bolstering private investment and the creation of small and mediumenterprises i s thus the key for stepped up job creation. At the same time, Tunisia will have to maintain strong productivity growth, because improving competitiveness i s a prerequisite to meet the challenge of intense global competition. On current trends in labor force growth and participation rate, reducing unemployment by about 3 percentage points in 5 years would call for growth of about 6.5 percent per year. All else equal, especially regarding productivity growth, this would require a much stronger private investment effort- an increase of its share in GDP of about 7 percentage points. The government i s aware of the challenge to create opportunities for private investment and i s considering options to further improve the investment climate. 14. Greater integration into global markets will raise challenges,first, for the import-competing manufacturing industries-the first challenge that faces Tunisia i s to "extend" the offshore sector performance to the rest of the economy, which will be exposed to increased competitive pressures with - 5 - the completion of the Association Agreement with the EU (AAEU). The regulatory framework of investment incentives and trade facilitation, which currently discriminates in favor of the offshore sector, will have to become more even and supportive to the onshore sector, in particular by lowering transactions costs for this sector. Without proper changes inthe regulatory framework for investment and a more predictable business environment, the onshore sector faces the risk of a serious setback as a result of exposure to stiffer competition. --and, second, for the traditional exporting sectors. The second challenge is to help exporting firms strengthen their competitiveness, upgrade their market niches, and position into new, higher value added exports, while improving the quality and reducingthe cost of services that facilitate trade. This will help exporting firms reap more benefits from the free-trade zone with a 25-member EU, and deal with upcoming threats. With the phasing-out of the Multi-fiber Agreement (MFA) quota system, Tunisia's textile exporters will face stiffer competition from low-cost producers in traditional European markets. They will need to upgrade their market niches and their ability to respond to rapidly changing market demand, with more support from a much better transport and ICT infrastructure, supported inter-alia by reduced barriers to entry in those sectors. This would call for bold steps in the liberalization of trade- related services that still burden Tunisian exporters with high costs. Strengthening competition policy and the quality of the regulatory framework of network industries and infrastructure services would greatly contribute to these efforts. 15. Taking early steps to achieve resolute medium-term fiscal consolidation would provide the neededfiscal room for maneuver to deal with surrounding risks. After a fiscal tighteningin 2002, in the face of external shocks, the fiscal stance has turned neutral inthe 2003 and 2004 budgets. However, a constant fiscal consolidation effort should be maintained. The budget deficit (excluding grants and privatization receipts) diminished to 2.6 percent of GDP in 2004, against 3.2 percent in 2003, but i s anticipated to slightly increase to 3.1 percent of GDP in 2005. Ina context of sluggish fiscal receipts, the fiscal balance has been preserved through a continuous squeeze of capital expenditures, to the potential detriment of long-term growth. Healthy growth in the years ahead would offer a window of opportunity for a more ambitious fiscal consolidation effort. This would call for creating an appropriate primary budget surplus (central government, excluding privatization receipts and grants), and should be underpinned by initiatives to rationalize public expenditure and enlarge the fiscal base as tax revenue collection declines due to the final removal of tariffs on imports from the EU. An issue of particular importance i s the management of the sizeable government wage bill, which, at close to 12 percent of GDP, is among the highest inMENA.The large wage bill introduces rigidity inthe budget that limits the fiscal room for maneuver when adjustment i s needed, typically leading to cuts in the public investment budget, as in2002-03. 16. Main benefitsfrom fiscal consolidationwould include: Securing domestic finance for greater investment, by mobilizing more public savings, so as to minimize pressures on the external balance over the mediumterm. Reducing the level of public debt. This would further bolster the confidence of domestic and foreign investors. At 60 percent of GDP, public debt remains high by international comparison and possibly denies Tunisia a more favorable access to international capital markets. 0 Creating enough room in the budget to: (i) adjust to severe shocks; and (ii) possibly conduct counter-cyclical action, to offset part of the impact of adverse external shocks. 0 Creating room for expanding the social safety nets, to offset the social impact of structural changes due to deeper trade integration. - 6 - B. TRADEREGIME 17. The upcoming completion of the free-trade zone with the EU in 2008 is promoting private sector development in a more competitive environment. Implementation of the tariff dismantling schedule under the AAEU is on track, with around 55 percent of the tariff reductions already in place. Tariffs have been totally dismantled for capital goods since 1996 and for raw materials and intermediate goods since 2000. Import duties on consumer goods and imported goods that are also produced locally have been cut by about one half and one fourth respectively by the end of 2001. Initiatives have beenalso taken to rationalize and reduce tariffs on non-EU imports, in both the 2004 and 2005 budgets. The number of custom duty rates has been reduced from 54 to 14 and their level has been reduced across the board while tariff peaks have been eliminated. Moreover, the 2005 budget granted the government regulatory powers to adjust trade tariffs on a discretionary basis (via a ``dbcret permanent"), instead of having recourse to the budgetlaw. 18. However, despite progress in nominal tariff reduction, the trade regime remains protected, and Tunisia still lags behind in regulatory reform to open services to competition. Although recent initiatives go inthe right direction, Most-favoredNation (MFN)tariffs are still highinTunisia compared to other EUNeighborhood countries. Targeting tariff reductions that bring Tunisia's MFNtariffs as close as possible to the EU's external tariffs for industrial products would be essential to prevent distortions from possible trade diversion as a result of the free-trade zone with the EU. Most importantly, services liberalization remains limited. While Tunisia has granted WTO commitments for tourism, financial services and communication services, market opening i s proceeding slowly, and the absence of commitments in other key sectors, such as the transport and distribution, i s of concern for competitiveness. Finally, imports of several products, such as petroleum products, drugs, cereals, seed oils, tobacco, alcohols, coffee, sugar, and tea, remain monopolized by state trading boards or public enterprise^.^ The government i s aware of the challenge of further promoting trade liberalization to take fully advantage of Tunisia's deeper international trade integration and has committed to pursuing the processinparallel with the evaluation of the impact of the free-trade zone with the EU. C. PRIVATEINVESTMENT CLIMATE 19. The Government has maintained a long standing commitment towards promoting private sector development. The Tunisian authorities have maintained a policy of generous privileges for investments in selected economic activities and for exporting, by supporting the creation of "offshore" firms. Over the years, this strategy has helped address the import substitution bias of Tunisia's trade policy and thus contributed to promoting export-oriented growth. Measures have also been implemented to reduce transaction costs (fast registration, reduction in the number of procedures and of customs documents, new system of normalized and simplified documentation for external trade transactions). Attention has also beenpaid to develop financing mechanisms to Small-and-Medium Enterprises (SMEs) and start-ups. The Tunisian authorities have recently extended to 2007 the main investment advantages granted to the export-oriented activities. They have in parallel also taken some discreet steps to reduce the gap between the incentives framework for offshore companies and others, without laying out however a broader vision of the overall investment promotion framework after 2007. 20. Tunisia suffers nonetheless from a structural private investment gap. Despite solid macroeconomic fundamentals, private investment remains compressed below potential, at around 14 percent of GDP (Figure 4). Several factors account for this situation: heightened business uncertainty, Dismantling of trading monopolies in products where domestic prices are subsidized (cereals) or administered at below international prices (some petroleum products, coffee, tea, soybean oil), would call for appropriate adjustments of domestic prices, which will require more time and preparation, especially inpetroleum products. - 7 - of strong government interference in the economy and 1970.74 1975-79 198084 198569 1990-94 199599 1 21. Tunisia has taken significant steps towards privatization but recent scheduled transactions have been delayed or less successful. In the context of ECAL 111, the authorities have made public a privatization program and a related timetable. Progress has been achieved in the meantime, including in the context of ECAL III. However, the divesture from the Socie'te' Nationale de De'veloppement des Hydrocarbures has not proceeded as quickly as expected. In addition, the outcome of the privatization process for the Banque du Sud was unsatisfactory, as no proposal was eventually filed. 22. Against this background, the authorities have emphasized in the ldhdevelopmentplan their commitment to further promote primate investment, higher-skill exports and services, while facilitating the emergence of the knowledge-based economy. Liberalization initiatives inthe ICT sector have started to pay off, with large pent up demand boosting growth especially of mobile communications services. Promoting the liberalization agenda in the trade-related and employment creating services would greatly help achieve the Government's goals for better competitiveness and catching up with the front runners inthe knowledge-based economy. Among MENA countries, Tunisia appears relatively well positioned in attracting investment and in the emergence of such a knowledge-based economy. It i s however ina less favorable position than direct competitors in other developing regions. D. FINANCIAL SECTOR DEVELOPMENT 23. Tunisia presents an overall well-developedfinancial sector, even though the banking sector remains the key source of finance for the economy. It has also put in place a rather satisfactory legal and institutional supervisory and regulatory framework, although enforcement remains an issue. Important strides have been achieved, with support of ECAL ll(banking sector) and ECAL 111(insurance sector) operations, to put the banking sector on a more sound footing, by making progress in absorbing non-performing loans of public enterprises, and improving the non-banking financial sector, with a far- reaching revamping of the insurance sector framework. However, market reaction has so far not been as positive as expected (inparticular for life insurance). 4 Examples of lack of transparency and predictability of the regulatory framework include: the process for obtaining prior authorization for private sector investments in the sectors where private investment i s restricted and for majority ownership of Tunisian firms by foreign investors; the process of limiting VAT reimbursements to non- exporting firms (cconshore), sector), which are submitted to the unpredictability of fiscal controls; the absence of sufficient safeguards for taxpayers in terms of fiscal examinations and claims and the absence of administrative appeal processesfor taxation matters; the inconsistent way by which auditing rules are applied to firms which borrow significant amounts; the absence of a legal framework on concessionswhich would clarify the rule of engagement for private firms participating in infrastructure investments. - 8 - 24. A key impediment for Tunisia's financial sector development remains the level of non- performing loans in the banking system. Despite progress over the 199Os, the level of non-performing loans (NPLs) is still large, at 23.6 percent of commercial bank total claims in 2004, according to Central Bank of Tunisia provisional estimates. Recent trends have not improved the situation, as NPLs experienced a 17 percent increase from 2001 to 2003 - while the claims under litigation were experiencing a 22 percent decrease over the same period. Non-performing loans of the services sector represented 50 percent of total in 2002. It i s recognized that, on current trends, the stock of NPLs will be only marginally reduced by 2008 (to an estimated 18 percent of total bank assets, from 22 percent in 2003). Owing to heavy reliance on real estate collateralPven though its liquidity i s doubtful-the level of provisioningof these NPLs stands low, at 49.2 percent in 2000 for commercial banks, and has recently decreasedto 45 percent in 2004, according to Central Bank of Tunisia provisional estimates. HighNPLs increase the cost of bank intermediation, and imply inefficient credit decisions, highly leveraged borrowers and poorly performingprojects. Realestate guarantees also posefinancial risks to the banking system because they are illiquid and possibly overpriced-in view of the questionable viability of some loss-making borrowers (especially inthe tourism sector). By reducing risk-taking, the high level of NPLs has also reduced the banks' ability to finance private investment (including SMEs), in a situation where securities market have not so far been used as alternative funding sources. Drawbacks in the availability and quality of financial information (in particular for non-listed companies and family-owned conglomerates), insufficiencies in the design of corporate and credit registries, lack of enforcement of corporate governancerequirements also weaken the quality of credit assessment and risk managementby banks. 25. The development of securities market has been hindered by excessive reliance on easy bank financing for large companies, and by weaknesses in Tunisia's corporate sector. Corporate ownership in Tunisia is characterized by a strong prevalence of family-owned business (and of family-owned holdings), which are more than often wary of diluting their control and of adopting transparency requirements. Improving transparency of these family-owned businesses and holdings i s necessary, including to encourage more accurate and informed risk-taking behaviors by the banking sector. In addition, this corporate ownership structure so far relying on lending and bank financing coupled with the relatively small size and young age of the average Tunisian enterprise (in terms of both capitalization and turnover) have impeded the development of securities markets. At the same time, the weak corporate governance framework, with insufficient protection of minority shareholdersand low quality of financial disclosure and accountability requirements for corporate managers and directors, has not contributed to promote confidence in the integrity of the securities market. The conclusions of the auditing and accounting ROSC provide strong evidence of the need for reform to improve trust and confidence in financial information. The absence of sanctions of key securities crimes (insider trading for instance) and more broadly the weak enforcement of the current regulatory framework also impair investor confidence. The limited scope of the privatization program so far, which has not privileged public offerings and remains timid in terms of opening the capital of public utilities, and the limited role played by contractual savings and collective investment schemes have also impeded the development of capital markets. 26. Strengthening the soundness of the banking system, and improving the diversification of sources of finance is key to ensuring adequate finance for private investment. The Government has taken important steps to strengthen the supervision of the banking system, absorb non-performing loans of public enterprises in 1997, and modernize the infrastructure and the regulatory framework of financial markets. But important elements remain in the financial sector reform agenda. Reducing the level and improving provisioning of non-performing loans i s a key element, because it would hedge major risks posed to the banking system by excessive reliance on illiquidreal estate guarantees. This would also help reduce the cost of financial intermediation and improve access to finance by sustainable SMEs. The authorities have also engaged a reflection on the possibility of a public plan of support to the tourism - 9 - sector, which would, in their view, contribute to decrease the level of NPLs. At the same time, energizing the non-bank segments of the financial system i s key to promoting diversification of the sources of finance for private investment; better mobilizing long-term savings; reducing refinancing and currency risks for public debt; and avoiding overstretching of the banking system that has served until now as the major conduit of investment financing. Rebalancing the sources of finance towards greater access to capital market financing with an increased supply of own funds and lowering of enterprise leverage would also contribute to redirecting part of bank financing towards smaller enterprises. Improved governance, both of domestic banks and non-financial enterprises, along with better corporate transparency and financial disclosure, are at the core of the reform agenda. Reforms would be mutually reinforcing: with little progress on the banking front, banks would keep taking limited risks, directing credit inpriority to the safest large enterprisesthat would be diverted from seeking finance on the capital markets. IV. BANKSUPPORT TO THE GOVERNMENTSTRATEGY A. LINKTOCAS 27. ECDPL IV is expected to support the Governmentof Tunisia in addressing thefirst challenge identified by the CAS: strengthen the business environment to support the development of a more competitive, internationally integrated private sector and improve competitiveness of the Tunisian economy. Inline with the expectations laid out in the CAS, ECDPL IV intends to contribute to four of the CAS outcomes under this objective: improved incentives systems and increased transparency of the regulatory framework; reduced transactions costs for firms, leading to increased production and exports; a banking sector more responsive to the needs of the private sector, increased budget flexibility, and better fiscal mobilization to reduce public debt. B. COLLABORATIONWITH OTHERDONORSAND THE IMF 28. ECDPL ZV is being prepared jointly with the European Commission and the African Development Bank, building on the overall successful experience under previous ECALs. Intensive coordination has taken place from the outset, with dialogue on the diagnostics and on the key policy actions to be supported. All preparatory missions have been jointly conducted. Inaddition, drawing the lessons of ECAL III,ajoint policy matrix will be the common reference for disbursement of the various tranches. 29. The WIF has been closely involved in the preparation of the operation, especially on the macro- economic framework, the trade agenda, and the restructuring of the banking sector. The macroeconomic framework underpinning the program has been elaborated in consultation with the IMF mission to Tunisia for the Article IV consultation. C. RELATIONSHIPTO OTHERBANK OPERATIONS 30. ECDPL I V i s strongly related to the series of three previous ECALs, building on their achievements and on the lessons learnt from their implementation. As far as on-going operations are concerned, the Export Development Project IIpursues objectives which are complementary and cross- reinforcing with those of ECDPL IV,by targeting trade facilitation and reducing hurdles to international trade. - 10- D. LESSONSLEARNED 31. Zn its Project Performance Assessment Report on the three Economic Competitiveness Adjustment Loans (ECALs) in Tunisia, OED noted that the ECAL programs successfully promoted policy reforms. Substantial financial sector reforms were achieved, as well as the removal of some of the disincentives for investment and the privatization of public enterprises and banks. The implementation of the AAEU led to an economy considerably more open to the outside world. The main areas of structural reform supported by the ECALs contributed critically to the long run competitiveness of the Tunisian economy. 32. According to OED, the main lessons to be drawn for the series of ECALs are: Tunisia's successful economic performance was due to three attributes: ownership and broad political consensus, a well-developed human resource base, and a stable macroeconomic environment. Experience in privatization and the financial sector shows the need for the Bank to be flexible. Developmentpartners should stay the course and show flexibility intheir support, provided there i s evidence of genuine and sustainedreformefforts. For example, by accepting partial reforms in some areas, and building on partial successes to deepen them in subsequent operations, the support from the Bank and other partners was ultimately effective. Patience, perseverance and flexibility paid off. An important lesson for other small emerging countries seeking to lay the foundations for sustainable growth and poverty reduction i s the success of Tunisia in creating a competitive economy by the coordinated use of macro and structural policies and reforms. 33. Inaddition, the Bank identifiedthree design-related lessonsfromECAL III: The need to set clear and precise (measurable) loan conditions. The need to step away from "transactions-related" loan conditions, in the context for instance of state divesture. The need to avoid sector-based tranches as they complicated the disbursement mechanisms and didnot allow the Bank to accompany the progressive implementationof the reformprogram. E. ANALYTICAL UNDERPINNINGS 34. ECDPL ZV builds on sound analytical underpinningsfor all its components, resultingfrom extensive dialogue with the authorities. The Development Policy Review (DPR) undertaken in parallel to the CAS preparationprovides an overall picture of the challenges facing Tunisia bothinterms of fiscal management and policy mix and of the structural reforms and a detailed analysis of the main sector reforms to be undertaken to address these challenges. In the financial sector, the Financial Sector Assessment Program provides an in-depth analysis of the Tunisian financial sector, focused on the key stability risks and on the conditions for further development. These analyses were complemented by studies undertaken in the context of ECAL I11focused on the non-performing loans, which provided an up-dated picture of the related issues and reviewed various options to accelerate the reduction of the stock and inflows of non-performing loans. On the investment climate, the Private Sector Development Strategy prepared in 2000 continues to provide useful indications on the challenges facing Tunisia. It had been usefully up-dated and complemented by the FIAS study realized in the context of ECAL 111, notwithstanding the differences of points of views with the authorities on some of its recommendations. On top of these broad analyses, ECDPL N also builds on more targeted ESW, such as the accounting and auditing ROSC for instance. In addition, several studies (capital market development, insurance - 11- market development, debt strategy) were used to design sub-components of the proposed reform program. V. THE PROPOSEDECONOMIC COMPETITIVENESSDEVELOPMENTPOLICY LOAN A. OPERATIONDESCFUPTION Objectives and Structure of the Program 35. Theprogram will support mutually reinforcing development objectives: (a) maintaining a sound and reactive macroeconomic framework, in particular by promoting fiscal consolidation and strengthening the mediumterm fiscal framework; (b) improving Tunisia's privateinvestment climate and increasingprivate investment opportunities; (c) reinforcing the financial sector's capacity to finance growth, by supporting initiatives to reduce the level of non-performing loans, further strengthening the regulatory framework for bank intermediation, and fostering development of contractual savings, especially in the insurance sector. 36. ECDPL ZV builds on the achievements of previous adjustment operations supported by the World Bank and other donors. A number of reforms will be pursued with support from ECDPL N, based on measures initiated inthe context of ECAL lTI and previous programs (see Box 1).Most notable among these reforms are: further steps in banking sector restructuring (increases in provisioning, reduction in the level of NPLs, improved risk-taking behaviors); additional improvements in the relationship between tax payers and the tax administration (VAT reimbursement mechanisms); enhancements in the financial disclosure framework. In addition, in the logic of the de facto programmatic approach under the series of ECAL operations, ECDPL IV intends to pave the way for further reforms to be supported by future programs, particularly with a view to further strengthening the investment climate, by reforming the system of investment incentives and pursuing liberalization initiatives -in line with the objectives set out by the authorities and the CAS. Box 1: Program linkages -ECAL 111achievementsand ECDPL IV objectives Investmentclimate Competitionpolicy ECAL 111:Adoption of an Action plan to reinforce the institutional framework for competition, amendments to the competition law, training and awareness raising workshops organized ECDPL IV: Additional strengthening of the Competition Council (autonomy, ability to initiate cases) Taxframework and relationshipbetweentax authorities and taxpayers ECAL III:Adoption of a revised Code offiscal rights and procedures and related regulations ECDPL IV: Clarification of remaining issues pertaining to the Code of fiscal rights and procedures, increased autonomy of the Commission offiscal offenses Simplification of proceduresfor start-upand operation of private enterprises ECAL HI: Creation of a "single contact" (guichet unique), reduction of the number of prior authorizations, simplification of customs procedures ECDPL IV: Improvements in VAT reimbursementsprocedures, reduction in the number of prior authorizationfor new activities, reduction in minimal capital requirementsfor companies Accountingand auditing ECAL III:Publication of new accounting standards, submission to Parliament of a Law on Conglomerates ECDPL IV: Requirement for companies "of public interest" to publish certified consolidated financial statements, progress in enforcement of financial transparency requirements - 12- Financial sector develovment Public banks restructuring and NPLs ECAL III:Revision of the code of civil and commercial procedures, increase of the share of tax deductible provisions, study on NPLs, relaxation of conditionsfor loan write-offs, creation of credit registries ECDPL IV: Tightening of prudential regulations for bank provisioning; study on the performance of asset recovery companies and adoption of related action, creation of an annual review of NPLs and provisioning policies, preparation of a Financial Security Law Development of the insurance sector ECAL III: Revision of the Insurance Code, creation of the Comiti Giniral des Assurances, launch of the restructuring of the weakest insurance companies, increase of automobile insurancepremia ECDPL IV: Grant independence to the insurance supervisor, further the restructuring of the weakest insurance companies, further increase automobile insurance premia, possibility of majority participation of foreign investors in the insurance companies Medium-term macro framework ECAL III:Study on debt management ECDPL IV: Creation of a Middle ofice for theformulation of a debt management strategy 37. To address these challenges, the project will include measures in three components: macroeconomicframework; investment climate;financial sector development. All three components will be reflected in each of the two tranches of the operation. Given the mixed experience under ECAL III, proposedoperationwouldcomprisetwo"horizontal" tranches,eachcoveringallthecomponents the of the operation, so as to better reflect the progressive sequencing in the implementation of the reform program. Inview of the policy priorities outlined above, horizontal regulatory reforms to strengthen the environment for private sector development, and reforms aimed at restructuring and privatizing public enterprises will be highly complementary and mutually reinforcing. However, these initiatives will need to be sequenced appropriately. The proposed program will support in priority efforts to deepen key horizontal regulatory reforms, with the aim of strengthening the investment climate and lay the groundwork for more successful public enterprise restructuring and commercial operations inthe future. 38. The project will encompass a substantial reinforcement of key institutions, by: (a) improving the enforcement of the competition policy by strengthening the related institutions (Competition Council); (b) enhancing the role of the financial sector supervisory bodies and their coordination mechanisms; and (c) improving the transparency and decision-making processes of several Government of Tunisia bodies (public debt managementauthorities, tax authorities). Maintaining a Sound Macroeconomic Framework i. Medium-termprospectsandpolicygoals 39. The medium-term macroeconomic framework for the program assumes a generally benign external environment, despite a gradual projected increase in interest rates. It i s assumed that undisrupted growth will be maintained in the EU over the period covered by the program, providing overall support to Tunisian exports. No major terms-of-trade shock or reversal of capital flows i s foreseen, with oil prices evolving according to World Bank projections. International interest rates are projected to gradually increase as from 2005, in line with World Bank projections for the global economy. Assuming a strong macroeconomic framework will be maintained, the spreads of Tunisian bonds will remain unchanged. Domestic interest rates will follow an upward trend, with a somewhat increasing premium over international rates to reflect the need to offer attractive enough returns to domestic savings in the context of a progressive easing of restrictions on capital flows-especially to foreign investment by residents. The macroeconomic framework assumes a stable real exchange rate, despite possible pressures on the external current account as a result of the completion of the free-trade - 13 - zone with the EU or the removal of the MFA quotas. The need of offsetting real exchange rate movements will be inversely related to productivity and competitiveness gains resultingfrom structural reforms pursued by the Government. 40. The medium-term framework assumes a stepped up pace of structural reforms. Accelerated reforms, supported by the proposed program, will pave the way for healthy growth, despite increased international competition, with GDP growth reaching 6 percent by 2007. Non agricultural GDP growth could accelerateto a projected 6.4 percent by 2007, from an estimated 5.4 percent in2004. Exports could grow steadily due to the development of new markets, although at a more moderate pace due to stiffer competition as a result of the removal of MFA quotas. Improvements inthe business environment could lead to a gradual increase of the investment-to-GDP ratio by more than 1percentagepoint of GDP over 2004-07. However, given the continuing strong growth of the labor force, and assuming no growth of employment inthe public sector and agriculture, the unemployment rate will be reduced only marginally, to slightly below 13 percent by 2007 from 13.9 percent in2004. 41. Continuedstructural reform efforts andprudent demand management will help keep inflation and the current account broadly under control. Inflation, as measuredby the GDP deflator, i s expected to recede to 3 percent in 2005, from 3.8 percent in 2004, and remain contained to this level thereafter, due to a prudent policy mix, the favorable impact of tariff dismantling on EU imports and the effect of increased competition, particularly in the service sector. The external current account will also face pressures owing to: (i) the impact of the tariff reductions associated with the completion of the AAEU; (ii) needtoincreaseimportsoncapitalandintermediarygoodstosustaingrowth;(iii) impactof the the the loss of export market share associated with the removal of the MFA quotas and the possible loss of market share in t~urism.~ However, reflecting a continuing improvement in competitiveness, thanks to structural reforms to be supported by ECDPL N and future programs, and sustainedfiscal consolidation efforts, the deficit of the current account could be maintained at around 3 percent of GDP on average during 2006-07. 42. A continuingfiscal consolidationeffort will help reduce Tunisia's public debt to GDP ratio, which remains high by international standards. The proposed medium-term fiscal framework for the program assumes a relatively moderate but constant fiscal consolidation effort, with the primary fiscal balance (excluding privatization receipts and grants) turning to zero in 2007 and into a surplus as of the 2008 budget, from a projecteddeficit of 0.4 percent of GDP in2005. This will help mitigate pressure on the current account and also support the reduction of the public debt-to-GDP ratio. The fiscal consolidation factored inthe macroeconomic framework will reduce the public debt to GDP ratio to 58.3 percent by 2007, from 59.5 percent in 2004. Foreign debt in percentage of GDP will be reduced to 51.5 percent of GDP by 2007, from 62.9 percent in2004. 43. Theprojected fiscal consolidation in 2006 and 2007 could be achieved through expenditure savings and enhanced revenue mobilization. Efficiency gains in public expenditures could be realized through savings on low-value programs, with support from the gradual introduction of medium-term expenditure planning and performance-based budgeting. The World Bank i s providing support to the Government's initiatives inthis area through the ongoing Public Expenditures Review (PER).Enhanced revenue mobilization i s expected to be achieved through the simplification of tax rates, broadening the base of the VAT; and the reduction of tax exemptions and preferential tax regimes, with support from initiatives basedon the tax reform study to be conducted inthe context of the proposed program. Tunisian tourism growth i s losing steam, in spite of the recent economic recovery. Tunisian tourism sector i s losing market share owing to more competitive tourist destinations in the region, such as Egypt and Turkey. In addition, total revenues per visitor are on decline and remain considerably weak when compared with competitors, such as Morocco. - 14- Key Indicators (2003-07) 2003 2004 2005 2006 2007 GDP Growth 5.6 5.8 5.0 5.5 6.0 Non Agricultural GDP growth 3.6 5.4 6.3 5.9 6.4 Exportsof goods andservicesgrowth 0.3 5.2 4.0 5.2 5.8 (constant prices) Importsof goods and services growth 1.7 3.7 4.9 5.4 5.9 (constantprices) Current accountbalance (% of GDP) -3.0 -2.1 -2.7 -3.0 -3.0 Investmentgrowth -3.2 2.4 6.5 7.5 8.0 Investmentrate (% of GDP) 23.4 22.9 23.1 23.7 24.0 PrivateInvestment(% of total) 56.5 55.0 55.6 56.5 57.5 Inflation (ConsumerPriceIndex) 2.8 3.8 3.2 3.O 3.0 Unemploymentrate 14.3 13.9 13.7 13.3 12.6 Fiscalbalance (excl. grants & privatizations) -3.2 -2.6 -3.1 -2.9 -2.6 (% of GDP) Primaryfiscal balance (excl. grants & privatizations) -0.5 0.3 -0.4 0.2 0.0 (% of GDP) Total public debt (% of GDP) 60.4 59.5 59.1 58.7 58.3 Extemaldebt (% of GDP)' 64.4 62.9 57.4 53.8 51.5 Foreignexchangereserves (importsinmonths) 2.9 3.4 3.5 3.5 3.5 Includes external short-term debt .. 11. Policy measures 44. To assist Tunisia in its efforts to maintain a sound macroeconomic framework, the program will support the implementationof the following macroeconomic policy measures over the period2005-06: i) Setting appropriate goals for fiscal consolidation and performance by: (a) reducing the primary budget deficit, to achieve an agreed fiscal consolidation that will help accelerate the reduction of the public debt to GDP ratio; and (b) enhancing revenue mobilization through the simplification of tax rates, broadening the base of the VAT; and the reductionof tax exemptions and preferential tax regimes. Inthis regard, the program will support the preparation of a comprehensive assessment of the Tunisian tax system. ii) Strengthening medium-term expenditureplanning. The budget is currently prepared with a one-year timeframe perspective, limiting the ability of the authorities to factor in medium-term risks and opportunities stemmingfrom the evolution of the international and domestic environments. The program will support the introduction of a rolling, medium-term budget framework by 2006, as part of the "Budget Economique", prepared annually to review the execution of the five-year Development Plan. This will also help improve the quality of the annual budget formulation. The medium-term budget framework will envisage a positive primary fiscal balance (excluding grants and privatization receipts) as of 2008. The Public Expenditure Review that i s being conducted in FY05 will help the Tunisian authorities to define the contents and preparation process of the medium-termbudget framework. - 15 - iii) Strengtheningpublic debt management. Strengthening public debt management will benecessary to reduce debt service over the medium-term. Public debt management i s currently scattered across three different administrative units, making it difficult to develop a more integrated view of the public debt portfolio and implement a more active risk management strategy. The policy measures supported by the program include: (a) the setting up of a middle ofice in the Ministry of Finances specialized in the formulation of public debt management strategy; and (b) presentation of an action plan to consolidate debt management functions into a single entity. These measures aim to ensure a better coordination among the different administrative units currently responsible for public debt management: the Ministry of Finance, the Central Bank of Tunisia and the Ministry of Development and International Cooperation. Strengthening the Private Investment Climate 45. ECDPL ZV will support measures to improve the investment climate and create more opportunitiesfor private investment. The programwill buildon three pillars: 0 To support new businessopportunities, it will focus on: - facilitating primary investment, in particular in activities targeting markets still sheltered from competition, yet with scope for efficiency gains, growth, andjob creation. Inanumber of activities-generally in the on-shore sector-general restrictions apply to investment by bothdomestic and foreign investors, which i s subject to prior authorization. Despite steps to reduce the number of such administrative controls, 260 activities still remain restricted. The authorities have announced a plan to reduce the number of prior authorizations, by 90 percent by 2009. They have accepted in the context of this program to accelerate this process to reduce the number of authorizations to no more than 120 by 2006. The program would support substitution of "codes of duties" / "cahiers des charges" for prior approvals. 0 To facilitate businesscreationand operations, the programwill aim at: - easing the financial conditions for creating a company, in particular by reducing the minimumamount of capital requiredat registration. - improving the relations between the corporate tax-payers and the tax authorities. An increase in the number of companies benefiting from accelerated VAT reimbursement will be supported, by targeting all companies presenting certified accounts. Inthis context, this program will support a re-balancing of VAT rates and an increase of the VAT reimbursement to 100percent as of 2008, on the basis of the recommendations of the study on tax reform. Efforts to improve the relationships between the tax authorities and companies will be also supported, by tackling existing practices that remain below internationalbest practice. Steps inthis direction have been undertaken by the enactment of the Code of Fiscal Rights and Procedures supported by ECAL ITI. The operation will support a change in the composition of the Commission on fiscal offences, to increase its independence. To strengthen competition and facilitate market entry and efficiency, the programwill support: - enhancing the institutional framework and enforcement of competition policy. The program aims at improving the implementation and enforcement of the existing Competition law, which is broadly satisfactory, in particular by enhancing the authority and the autonomy of the Competition Council. It will also grant the Competition Council's ability to initiate cases, while considerably strengthening its human and financial resources. Finally, the responsibilities of the Competition Council and the regulatory / supervisory authorities in the regulated sectors will be clarified by law. - 1 6 - 46. At the same time, the program will pave the way for the more fundamental revision of the investment incentivesframework that will have to take place with the completion of the Association Agreement with the EU. Inorder to preparethis revision, the project will support a comprehensive study of the Tunisian tax regime, which would inform the preparation by the Government of an Action plan covering the overall tax framework (VAT and corporate taxation in particular), with a view to harmonizing the incentives system. This study, to be realized in close collaboration with the IMF,will build on existing analysis (such as the FIAS study) but will adopt a broader perspective by considering together all the elements of the tax policy (personal taxation, VAT and corporate taxation), in order to have a comprehensive view of the resulting incentives framework and of the relationships between these elements. Promoting Financial Sector Development 47. In thefinancial sector, the program will, in priority, aim tofacilitate the restructuring of the bunks' NPLportfolio. Inthis context, main initiatives to be supported would include: - increasing provisioning and strengthening incentives for loan write offs, by enhancing prudential regulations related to provisioning shortfalls (reduction of current limitations on the amount of tax-exempt profits that can be used for provisioning; compelling banks to cover provisioning shortfalls in excess of their annual earnings; suppression of conditions for loan write-offs, clarification of the modalities for transfer to existing Asset Management Companies and improvements inthe efficiency of these AMC). - an analysis of the NPL stock, with specific attention to the tourism sector, so as to better assess the quality of the underlying guarantees and collateral and agree on a strategy to dispose of the NPLs. - analysis of the tools to deepen and accelerate restructuring of the NPL portfolio, including a study at the individual bank level of the quality of the NPL stock, a review of the effectiveness of the existing legal framework, in particular following the revision of the Code of Civil and Commercial Procedures (Code des Prockdures civiles et commerciales), and of the qualityhmpact of its enforcement. This analysis will inter-alia aim at improving the banking regulator's toolkit to foster enhanced provisioning, in particular by developing comparisons between banks' provisioning practices. 48. Inview of the structural nature of the NPLs,the studieswill be conducted with the aimof setting the conditions for more decisive actions on the older NPLs, around three main options: improving loan recovery by realizing the associated collateral; transferring the claims to independent asset recovery companies; and increasing provisioning to 100 percent. The program will require the Central Bank of Tunisia to strengthen prudential supervision as appropriate for banks to increase provisioning of NPLs, including inexcess of earnings in2004 and 2005, to cover provisioning shortfalls assessedby the Central Bank. This will also require attention to be paid to the role and contribution of asset recovery companies, buildingon the lessons learned from the ones currently inplace - which are almost all bank subsidiaries -and amending as appropriate the related legal framework. This should contribute to improving the banks' balance sheets at a faster pace, and without relying excessively on the impact of a possible resumption of growth. The program will support the realization of such a study in the second tranche, with concrete action to also be taken as part of the secondtranche measures. 49. The additional steps considered in the program will consolidate measures already adopted over the past years, with support by the World Bank, to improve the legal framework and gradually reduce the NPL stock. The proposed measures will create a more conducive environment for accelerated restructuring of the NPL portfolio, while more in depth analysis of the quality of real estate guarantees, - 17 - to be conducted with support from the program, is expected to help design stronger and more resolute interventions over the mediumterm. 50. At the current juncture the authorities are concernedthat stronger measures to clean-up the banks balance sheet may have a negative impact, across-the-board, on the financing of the economy by the banking sector. They are concerned, in particular, that SMEs may be disproportionately affected, with a negative impact on economic growth and job creation. However, more decisive action on NPLs will strengthen bank balance sheets and i s expected to improve risk-taking behavior. This i s indeed likely to translate into more rigorous risk-screening by the banking sector, including on Sh4Es. However, at the same time, as provisioning needs will decrease, a reduced level of NPLs will free up bank resources for extending credit to sound and productive new investments, in support of improved risk taking behavior by banks. 51. ECDPL IV will also support the implementation and enforcement of the recent improvements to the securities market and insurance sector regulatory and supervisoryframeworks - in the insurance sector, ECDPL IV would aim to: (i)strengthen the efSiciency of the insurance regulator (in particular its autonomy in the perspective of achieving full independence); (ii) the insurance sector toforeign investors, by lifting the restriction open on majority shareholding of foreign investors in insurance companies; this measure i s expected to strengthen competition in the sector and promote an increased efficiency of Tunisian insurance companies; and (iii) secure the implementation of the action plan on automobile insurance agreed in the context of ECAL III(including the related regulated automobile insurance premia increases). The programwould also support measures to tackle more aggressively the restructuring of the still ailing insurance companies - including the ones where unanticipated weaknesses in technical provisions have been identified. The project would also aim at improving the operations of all insurance companies - so as to bolster public trust intheir capacities and thereby foster the development of life insurance. - to promote domestic securities market development, the program would aim to strengthen the authority of the regulator and its enforcement tools, but also to improve trust in the market, in particular by reinforcing market integrity. The program could also support measures to promote the depth of the markets, by improving public debt management (see macroeconomic component), developing new products (mutual funds), and enhancing the transparency of transactions. 52. Thefinancial component of the operation would support enhanced availability and quality of financial information-a key underpinning of a sound financial system. Key initiatives would include: 0 improving the quality of the accounting standards and bridging the gap with international standards, in particular for consolidated corporate accounts-based on the recommendations of the ROSCreport, enforcing the transparency requirements for companies that obtain significant amounts of bank credit, 0 enforcing the transparency and accounting requirements for non-listed companies, with the aim of reducing the "transparency gap" with listed companies that currently constitutes a disincentive for listing, 0 improving the availability of financial information to the general public by sanctioning related failures. - 1 8 - CAS outcome Measurepromotedunder ECDPLI V 1.1. Improved 4nnual FDIinflows Somprehensiveexamination of tax Study on the tax system(andthe incentives system .ncreaseby 1520%by ;ystem. incentivesframework for on-shore andincreased 2006, and50%by 2008 nvelingof playingfields between andoff-shorefirms) leadingto an transparency and :baseline: $650 million inshoreandoffshore firms through Action Planto be approvedas predictabilityof the iverage 2002-2003) xogressive harmonizationof conditionof tranche 2. Preparationof regulatory ncentivesandcorporatetax an increase to 100% of VAT Framework system. reimbursements.Expectedto open heway for further work inthe :ontext of ECDPLV. Zontinuedliberalizationof foreign idditional stepstowards nvestment. iberalizationof foreign (and lomestic) investmentthroughthe ,eductionof prior authorizations Zompetition Authority and jubstantialimprovementsinthe :ompetition regulatoryframework nstitutionalframework for strengthened. :ompetition policy andinthe role and ;tandingof the competitioncouncil Upgradingthe capacity of the iudiciary. 1.2.Lower Keyimportmonopolies transactioncosts dismantled. for firms RevisedCustoms Code adoptedby Parliament. Commercialregistries modemized. Computerizationof the Trade registries,operations of credit Continuedreductionof tariffs on registries importsoutsideof the EU 1.5.Bankingsector CentralBank sets andenforces Moreforceful stance from the Central moreresponsiveto provisioningtargets 2005 Bank onprovisioning needs of private sector Regulationsoncorporate bankruptcyrevisedby 2007 Regulationenactedto strengthen Improvementsinthe accounting and corporatetransparency auditingframework, andfurther steps Nationalaccountingconsolidation towards improvedenforcement standardsalignedwith Adoptionof the Financialsecurity internationalstandards. Law, addressingthe most important weaknessesincorporatetransparency andgovemance Creditregistry strengthened Furthersteps inthe operation of credit registriesandenhanced enforcementby the CentralBank of relatedduties of financial institutions 3.1 Increased Initialplansmade for reductionof Issue take-up in the context of the budgetflexibility multiplicity of the VAT regimes comprehensivestudy of the tax andbetter fiscal reducedto broadenthe tax base system mobilizationto andnarrow the statutory tax rates. reducepublic debt Debt managementinstitutions Creation of new andcentralized reorganizedand modemizedby institutionsfor public debt 2006. management Reductionof share of non- discretionary items intotal public expenditures. - 19- 53. The operation could inter-alia support the law on financial security currently prepared by the authorities as a main instrument to strengthen the regulatory framework, and promote more effective corporate governance. It could also support a reinforcement of the accounting profession. The conclusions and recommendations of the ROSC on accounting and auditing have largely been taken into account inECDPL IV. B. LOANAMOUNT AND TRANCHING Loan Amount and Tranching 54. The proposedloan, inthe amount of EURO 116.1 million (US$150 million equivalent), will be a two-tranche operation disbursed in equal tranche of EURO 58.5 million (US$75 million equivalent), and covering the period2005-06. 55. One important issue i s to preserve an appropriate balance between the first and second tranche, including making sure that the first tranche supports a critical mass of concrete measures. A first tranche would therefore be disbursed upon effectiveness, and the second tranche before the closing of the loan scheduledfor June 2007. Conditionsof Tranche Release 56. The conditions for tranchereleasefor this operationwould support three mainobjectives: (i) Maintaina strongmomentumof reforms by balancing the contents of the first and second tranches (ii)Ensuresufficientprogressacrossthethreecomponentsoftheoperation, giventheirmutually reinforcing nature (iii)Striketherightbalancebetweentherequiredambitionofthereformprogramandthecritical importance of ownership and realismof the implementationtimetable 57. The release of each of the two tranches would be conditioned on: (i) the maintenance of a stable macro-economic framework, which will be monitored based on the performance indicators outlined in the policy matrix (Annex 2); (ii) progress on the implementation of reforms in each of the three components of the program; and (iii)the following specific actions linked to each tranche and covenanted inthe Loan Agreement: Firsttranche > Investmentclimate (i)ModifythroughthebudgetlawtherateofadvancedVATreimbursementfrom15percentto 25 percent for companieswith certified accounts (ii)SubmissiontotheChamberofDeputiesofadraftlawamendingtheCompetitionLawto introduce: the financial and administrative autonomy of the Competition Council the prior consultation of the Competition Council for every legislative or regulatory action potentially impacting competition 0 the ability of the Competition Council to initiate cases ("autosaisine ") - 20 - Financialsector (iii)CertificationbytheCentralBankthatbankshaveeffectivelyusedthepossibilitytoconstitute provisions beyond profits to cover, in 2004 - or to spread across 2004 and 2005 - the provisioning gap as estimated by the Central Bank against prevailing prudential requirements and as needed, part of their reserves,without decreasingthe capital adequacy ration below the prevailingregulatory limits (iv) Publication of a circular increasing by 5 percent the automobile insurance civil responsibility for the administered sector > Macroeconomic framework (v) Macro performance indicators Secondtranche > Investmentclimate (i)Publication,intheofficialgazetteoftheRepublicofTunisia,aregulationprovidingforthe reduction inthe number of prior authorizations for private investors to no more than 120 (ii)SubmissiontotheChamberofDeputiesfor adoptionin2006, adraftlawprovidingfor an increase as of 2008 to 100 percent of the rate of VAT restitution for accrued credits on the basis of the conclusions of the study of the tax framework > Financialsector (iii)Certification by the Central Bank that commercial banks operating in the Republic of Tunisia and recording a provisioning gap, as estimated by the Central Bank pursuant to the prevailing prudential requirements, have used in2005 the full amount of their earnings, and ,as needed, part of their services for the purpose of fully eliminating such gap, without decreasing the capital adequacy ratio below the prevailing regulatory limits (iv) Adoption by the Central Bank of prudential regulations applicable to credits to companies which do not comply with the transparency requirements set forth under the law on financial security (v) Submission to the Chamber of Deputies for adoption, a draft law for the establishment of the Comite' Ge'ne'raldes Assurances, toprovidefor its administrativeandfinancial autonomy (vi) Submission to the Chamber of Deputies for adoption, a draft law eliminating the restriction on majority participation of foreign investors inthe capital of insurance companies (vii) Submission to the Chamber of Deputies for adoption, a draft law on financial security providing for, inter alia: e the creation of independent audit committees within Boards of listedcompanies 0 the inclusionof information on internal control rules andthe implementation thereof in the annual reports of companies making public offerings for savings e certification by managers on the comprehensiveness and compliance of financial statements with prevailingregulations e the obligation for quarterly disclosure of financial data for listed companies 0 the rotation of auditors e strengtheningthe disciplinary authority of the securities market regulator e strengthening the investigative powers of the securities market regulatory agency 0 the tightening of sanctions for securities offences 0 the establishment of a legal framework for individual savings management similar to that for collective savings e the clarification of the take-over regulations and the reduction of the delays for the declaration when ownership thresholds are reached -21 - > Macroeconomicframework (viii)Macro performance indicators (ix) Formulation of a medium-term fiscal framework satisfactory to the Bank, envisaging a positive primary fiscal balance (excluding grants and privatization receipts) as of 2008, and presented to the Chamber of Deputies as part of the economic budget documentation for FY 2006 58. In addition to the indicators included in the macroeconomic framework of the program, the impact of this programwill also be monitored through the following focused set of indicators: 9 Levelofbankprovisioningas ashareofNPLs 9 Numberandamountofnew lifeinsurancecontracts 9 Jobcreationbyprivatesector, anddecomposition by levelofeducation 9 Evolution ofinvestment by on-shoreandoffshore companies 9 Evolution offoreigndirectinvestment C. POLICY AREAS 59. The main policy areas of the proposed operation are macroeconomic stability and fiscal consolidation, private sector development and financial sector development. VI. OPERATIONIMPLEMENTATION A. POVERTY AND SOCIALIMPACTS 60. The Social Safeguardpolicy pertainingto Involuntary Resettlement (OP/BP 4.12) does not apply to this project. 61. The project's objectives to improve competitiveness will have a direct and positive impact on growth and ultimately job creation. However, the opening up for more competition from imports could lead to the decline of currently protected activities and lay-offs, which may hurt segments of the population. However, the program intends to better prepare Tunisia's private sector to the impact of the full roll-over of the AAEU, which will take place independently of ECDPL IV. This operation aims precisely at mitigating some of this potential short-term negative impact by improving up-stream Tunisia's competitiveness and attractivity. B. SUPERVISION 62. The Ministry of Development and International Cooperation and will be the main entity responsible for overall implementation of the proposed operation and for reporting progress and coordinating actions among other concerned agencies (Central Bank, insurance regulator and capital market authority). The World Bank will monitor actions and review progress of the implementation of the proposed operation. At the same time, the overall status of the government's program will be monitored during supervision to determine whether the specific conditions of the proposed operation have changed. In addition, supervision missions will not only allow the Bank to continue the policy dialogue with the institutions involved in the implementation of the program of reform, but also will ensure the deployment of staff and consultants able to advise the government in all of the policy and technical areas involved inthe reforms. - 22 - C. FIDUCIARY ASPECTS 63. The Country Financial Accountability Assessment (CFAA), a core diagnostic undertaken by the Bank, shows that the fiduciary framework of the Government of Tunisia (GOT) i s basically sound and provides a strong control environment. The main findings of the CFAA are that the Tunisian public financial management system is reliable and that the related fiduciary risk i s low. The complete budget process (preparation, planning, and negotiation with line-ministers) is sound. The budget execution i s also of good quality and reliable. 64. The reporting and accounting are reliable, even though there i s a room for improvement and modernization; the computerization of the budget and accounting i s rather simple, but well spread among the public operators and its architecture allows a timely reporting. The cash and debt managements are made in a professional way, due notably, to a strong technical assistanceof the Bank. The whole area of control and audit i s comprehensive and reliable, but still lacking sufficient public disclosure, notably for the annual report of the Cow des Comptes which i s only partially disclosed. D. DISBURSEMENTAND AUDITING 65. The proposed loan will follow the Bank's disbursement procedures for development policy loanskredits. The approved tranches will be disbursed against satisfactory implementation of the development policy programand not tied to any specific purchases and no procurement requirements will be needed. 66. Once the loan i s approved by the Board and becomes effective, the proceeds of the first tranche will be deposited by IBRDin an account designated by the Borrower and acceptable to the World Bank at the Central Bank of Tunisia at the request of the Borrower. The proceeds of the secondtranche will be deposited after all the conditions of the secondtranche release are met. The Borrower should ensure that upon the deposit of the Loan into said account, an equivalent amount i s credited in the treasury current account at the CentralBank. 67. The Borrower will report to the Bank on the amounts deposited inthe foreign currency account and credited to the budget management system. If the proceeds of the loan are used for ineligible purposes as defined in the Development Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The administration of this loan will be the responsibility of the Central Bank. E. ENVIRONMENTALASPECTS 68. Since this proposed project i s a Development Policy Lending (or DPL) it falls under the recently approved OP/BP 8.6. Policies supported by the proposed adjustment loan are not likely to have any significant direct effects on the environment and natural resources; safeguard policies (such as OP 4.01 Environmental Impact Assessment) do not apply to this operation, and an Integrated Safeguard Data Sheet (ISDS) i s not needed. Although the proposed policies will probably have an overall positive impact on the environment, some indirect impacts could arise but are expected to remain marginal. F. RISKSAND RISKMITIGATION 69. (i) Unfavorable exogenous and/or endogenous shocks could hit the economy, with growth slowing temporarily or persistently, depending on the duration of the shocks. Regional instability and - 23 - increased concerns of terrorism attacks could affect Tunisia in the coming years, with tourism failing to reach the expected levels, and Tunisia losing some of its attractiveness for foreign investors. At the same time, greater integration into global markets, in particular, the completion of the M U , will increase exposure to volatility and put pressure on the current account, while the removal of the MFA quotas may pose competitive threats and slow down growth. Such unfavorable developments would be reflected in economic performance falling short of the projections underpinning the macroeconomic component of the program. However, dramatic changes in the external environment are unlikely over the period of the loan, and risks would be mitigated through close monitoring of the macroeconomic framework, in cooperation with the IMF,and through quick adoption of appropriate corrective measuresif needed. (ii) Weakening drive for reform or slow pace of change. The economy's resilience would partly depend on the quality of policy adjustment (as in 2002), and partly on the strength of the investment climate and the soundness of the banking system. Yet, in light of economic and political uncertainties, the Government may choose to slow down or hold back on important reforms in an effort to maintain internal stability. A slowdown in the pace of reforms, inparticular a failure to strengthen the investment climate as needed in the face of stiffer competition would create unsustainable external and budgetimbalances, increasepublic and foreign debt, and leadto increasing unemployment andlower FDI inflows. Risks to specific program components. The pace of reduction of the level of NPLs would depend on improvements in the relationship between the banks and some key corporate borrowers, some of which could have a vested interest to oppose such NPLreduction. Inaddition, the role of the judiciary will be central inensuring the realization of guarantees and loan collateral; expected improvements could not materialize as quickly and firmly as expected. As for the investment climate component, private investors' reactions (both in the onshore and in the offshore sectors) to the progressive evolution of the incentives framework will be key, including to comfort the Government's reformist stance (and hopefully to induce an evenmore ambitious approach). (iii) Technical capacity constraints. Notwithstanding the overall highquality of Tunisian public administration, some of the proposed areas of reforms (performance-based budgeting, debt management, financial markets) could be delayed by capacity constraints. 70. Riskmitigation measures: (0 Furtherstrengthening the macroeconomic framework will help Tunisia reduce its vulnerability to exogenous shocks. Strengthened fiscal consolidation will mitigate the external pressures on the current account over the medium term and help reduce public debt at a faster pace, thus boosting investor confidence and improving terms of foreign financing. (ii)Theproposedprogramprovidesakeyunderpinningtotheresults-basedframeworkinthenew CAS. Policy dialogue with the Government in the context of the implementation of the CAS could help maintain the reform momentum to achieve the key expected outcomes and thus mitigate some of the risks attached to specific components of the program. (iii)TheBankwillworkwiththegovernmentofTunisiatodesignandimplementatailoredtechnical assistance program aiming at strengthening institutional capacity to ensure effective implementation of the proposed reforms. - 24 - ANNEX 1:LETTER OFDEVELOPMENTPOLICY Unofficial Translation REPUBLICOF TUNISIA The President of the World Bank 1818 HStreet, NW Washington, D C 20423 LETTEROF DEVELOPMENTPOLICY Mr.President: Tunisia's performance, particularly over the past fifteen years, i s the result of a choice made in the late 1980sto embark on a path leading to modernizationand openness. The structural reforms undertaken in the wake of the 1986 crisis, which have been deepenedon a sustained basis, have paved the way for the Tunisian economy to transition from a planned and protected economy to one that i s dynamic, diversified, and open. As a result of these reforms, along with rigorous management of the macroeconomic framework and the social policies implemented, Tunisia has achieved rapid and sustained growth during this period, in parallel with harmonious social progress. A number of these reforms have been initiated as part of the various Economic Competitiveness Adjustment Loans (ECALs) supported by the World Bank, the African Development Bank, and the European Union, through a structural adjustment facility, and that are now approaching a fourth phase (ECDPL IV),which serves as a key mechanism for boostingthe competitiveness of the national economy. Taking into account the commitments made during the transition to liberalization and an open market economy, Tunisia firmly believes that the reform effort should be continued and deepened, in order to address the host of challenges facing the economy and to safeguard the economic and social progress made, while at the same time maintaining sound and stable macroeconomic equilibria. The performance of the economy, particularly most recently, the main reforms undertaken, the challenges to be faced, and the main thrusts of the ECDPL IV are discussedbelow. Recent Economic and Social Developments in Tunisia The reforms undertaken since 1986 have put the Tunisian economy back on a growth path, and through its membership in the WTO, it has pursued its strategy of gradual openness to the global economy. This process was subsequently reinforced by the Association Agreement, concluded in 1995, which should lead to the establishment of a free trade zone with the European Union by 2008. As a result of these reforms, Tunisia has posted impressive results duringthe period of the 9* Plan (1997- 2001), reflected in the following main indicators: - An annual averageGDP growth rate of 5.3 percent, a figure higher than the 4.6 percent achieved under the previous Plan(1992-1996); - Greater diversification of the productive base, with the share of manufacturing industries rising -25 - to 21 percent of GDP in 2001 against 19.4 percent in 1996, and the contribution of services to national wealth increasing from 54.3 percent to 57 percent, respectively; - An annual average 11 percent increase in overall investment, which pushed the rate of investment to 26.1 percent of GDP in 2001 against 23.2 percent in 1996, and the private sector share of investment from 53.4 percent in 1996 to 55.6 percent in 2001, reflecting the positive effect of the incentives extended to private investors; - Improvement inthe business environment and basic infrastructure, which led to the attraction of more foreign direct investment, the volume of which more than doubled between 1996 (TD 306.8 million) and 2001 (TD 718.3 million), and inturnto the creation of new enterprises andjobs; - An increase in foreign trade; which in the case of exports, stood at an annual average of 7.4 percent thanks to both the traditional and new sectors, and in the case of imports, at 7.3 percent, owing largely to the robust growth rate; - A consolidation of national savings to 23.3 percent of national disposable incomein2001; - The preservation of macroeconomic equilibria, through the containment of the current account deficit to an average of 3.5 percent of GDP, despite an unfavorable international environment; of the budget deficit, which dipped to under 3 percent of GDP compared to an average of 3.7 percent during the previous Plan; of the debt ratio, which stabilized at 52.3 percent of gross national disposable income in 2001; of the debt service, which fell to 13.6 percent of current revenue in2001 against 17.6 percent in 1996; and of inflation; - From a social standpoint, 322,000 jobs, covering 92 percent of additional demand, were created and per capita income rose from TD 2,090 to TD 2,966 between 1996 and 2001; the poverty rate fell to 4.2 percent compared to 6.2 percent in 1995; life expectancy improved; the infant mortality rate declined; and the rate of illiteracy fell. The significant increase inconnection rates to safe water and electricity inrural areas and the decline inthe proportion of rudimentary houses also reflect the improved living conditions of the population and equitable distribution of the benefits derived from growth. All these achievements, in both the economic and social spheres, have strengthened Tunisia's position and its ability to attract more foreign investment, as evidenced by the credit ratings Tunisia has received from specialized international agencies and, in general terms, its global competitive position, which led the Davos World Economic Forumto rank it first among African countries. The Tenth Development Plan (2002-2006) i s underpinned by the continuation and consolidation of economic reform efforts, centered around three main areas, namely: bolsteringthe competitiveness of the economy, strengthening social progress achieved, and maintaining overall equilibrium and a stable and sustainable macroeconomic framework. The development agenda adopted for the period covered by the Tenth Plan provides for the attainment of an annual average growth rate on the order of 5.7 percent, in line with a 4.8 percent increaseinper capita income, supported primarily by: - A higher overallproductivity of inputs(44 percent against 36 percent during the previous Plan); - A sustained increase in exports despite increasingly competitive conditions resulting, inter alia, from the presenceof new competitors inthe European market; - Consolidation of private investment, the volume and efficiency of which should increase; - 26 - - Promotion of savings through the adoption of appropriate measures aimed at containing the budget deficit with a view to enhancing fiscal balance and the ability of the economy to withstand unexpected exogenous shocks. This Plan started under difficult conditions, in view of the continuation of the drought in 2002 for the fourth consecutive year, adverse international events that have led to a slowdown in global economic growth, and a contraction in trade, tourism, and capital flows. The tourism, air transport, insurance, and foreign investment sectors were the hardest hit by this difficult environment. Despite these factors of instability, the Tunisian economy achieved positive growth, and internal and external financial balance was preserved through the measures and policies implemented to contain the negative effects of economic conditions. As a result, Tunisia's standing with international financial institutions and specialized agenciesremained intact. This performance was strengthened in 2003 and 2004 by improved climatic conditions and the recovery of the global economy. As a result, along with the preservation of macroeconomic balance, a growth rate of 5.8 percent was posted in 2004, despite the surge in the prices of raw materials and oil on global markets, pressure exerted on public finance in particular, and inflation. Savings continued to trend upwards, climbing to 22.4 percent of disposable income in 2004, against 21.9 percent in 2002. Investment increased by 6.5 percent in 2004, after its relatively weak performance in recent years - virtual stagnation in 2002 (0.9 percent) and a decline in 2003 (-1percent), which ledto a drop inits share of GDP in 2004 to 22.9 percent, compared to 23.4 percent in 2003 and 25.4 percent in 2002. International trade returned to satisfactory levels, thereby facilitating higher cover rates of 73.7 and 76 percent in 2003 and 2004, respectively. Incombinationwith the increased revenue generatedby tourism, this improvement in international trade held the current account deficit at 2 percent of GDP in 2004, compared to 3 percent the previous year. All in all, the performance of the different sectors was affected by the international environment and domestic conditions. However, it must be stressed that the reforms implemented over the past two decades have fostered conditions conducive to progress, as a result of a more enabling business climate and the continuing efforts of the Government to develop human resources through training and to improve basic infrastructure: ports, airports, the road and highway network, the telecommunications network, the electrical grid, and the supply of safe water. The Tunisian economy is currently evolving and will continue to do so, in a later phase, in an environment characterized by more rapid globalization and the establishment of a Euro-Mediterranean common space. This environment, into which Tunisia has opted to integrate, presents challenges that must be faced as well as opportunities that must be seized. Tunisia's capacity to do so is contingent on its adaptability and on opportunities to enhance its competitiveness, taking into account in particular the dismantling of tariffs underway, agreedto under the Partnership Agreement concludedwith the European Union, which is entering a crucial phase for Tunisian enterprises, as well as the expansion of the EUto 25 members and the phase-out of the MultifiberAgreement. Moreover, free trade, which thus far has been limited to goods, will be expanded to include services. In this regard, negotiations are underway within the WTO and should soon start with the EUand the Arab Free Trade Zone. In addition, the phase-out of the Multifiber Agreement runs the risk of creating hardship for a large segment of the industrial base, while the new neighborhood policy could give impetus to the reforms already underway. - 27 - The Tunisian Economy Future Trendsand Constraints - The presidential program "Tunisia of Tomorrow" outlined the objectives of and trends in the Tunisian economy for the 2005 to 2009 period. This program opens up new possibilities for Tunisia by identifying, in 21 points, future trends and objectives to be achieved during the upcomingphase that will prepare Tunisia for tomorrow. Drawing support from all segments of Tunisian society, this program i s an affirmation of the resolve to forge ahead with reforms in order to ensure the sustainability of economic growth and social progress. It places employment at the helmof nationalpriorities, bearing inmindthe constantpressureexerted on the labor market and the increase inthe percentageof university graduates among the mainjob seekers. The main thrusts of this program, implementation of which started early this year, focuses on several areas that will pave the way for a more effective positioning of the national economy. The key areas, which are economic in nature, pertain to employment, which tops the list of priorities, the need to provide a solid foundation for building a knowledge-based economy, more rapid creation of enterprises and projects, boosting exports, achieving a higher economic growth plane through a greater level of integration into the international environment, modernization of the banking and financial system, a move that would transform the region into a hub for development, and improving living conditions mainly through higher incomes and greater consumer protection. Building on the progress achieved, Tunisia has decided to continue on a path to development while taking into account the current and future constraints of the next phase, in particular, the top position accorded to employment on the list of priorities. The preservation of this progress and the sustainability of development work remain, however, contingent on the degree of execution of these reforms, taking into account the plethora of constraints that the economy will face in 2005 and beyond, many of which will be imposed on Tunisia by the changing international environment, especially since a number of commitments will fall due early this year, inparticular the phase-out of the Multifiber Agreement. Tunisia will therefore face a host of constraints and challenges, the biggest being strengthening the foundation for growth that is sufficiently sustainable to attain the objectives related to employment in particular, through the achievement, on an ongoing basis, of a growth rate on the order of 6 percent at a minimum, quickening the pace of structural reforms, fostering an enabling business climate and restructuringthe financial system inorder to provide further impetus to the country's economic activity. Job creation The first of these constraints, however, continues to be employment, which has always been among the priorities of the development effort. The unemployment rate, estimated at 13.9 percent in 2004, i s considered relatively high despite the fact that it i s trending downward, but the structure of the unemployed labor force i s changing and now includes graduates from higher education. Owing to a number of demographic factors, including increased female participation inthe labor market, the opening up of the economy continues as does the increased competition resultingfrom this opening; labor market pressures will continue to place a burden on the development effort, making it necessary to achieve a faster pace of wealth accumulation on a sustainable basis inorder to address these pressures and attend to a steadily mountingdemand for jobs. Promotion of private investment The employment challenge i s also tributary of greater private sector participation in the investment effort, which is still regardedas insufficient and falling short of the objectives of the Tenth Plan, as the share of - 28 - private investment in total investment will have to increase further in order to reach the objective of 58.5 percent by the end of the current Plan (2006) and 60 percent by 2009 as set by the "Tunisia of Tomorrow" Program. A number of factors come together to explain this shortage of private investment, including: the extension of the Enterprise Upgrading Program (programme de mise u niveau) for major enterprises to cover medium-sized and small enterprises, which necessarily reduces the overall volume of investment; the structure of the economy, which has further diversified into services, areas of activity which do not require sizable investments; the major privatization operations; and the reduction in investment in the agricultural sector duringa period of drought. Heightened competition The reforms introduced over the past 20 years have enhanced the competitiveness of the Tunisian economy and consolidated its position, in particular following the Association Agreement with the European Union and Tunisia's entry into the WTO. Even greater insertion into the international economy i s foreseen with the liberalization of certain activities in the agricultural and services sectors, meaning that the Tunisian economy will be called upon to evolve in an ever more competitive environment. This new context has created additional constraints that Tunisia will have to address in the years ahead, among which i s the MFA elimination and all that this implies, especially for the textile sector, as regards both production and exports. At the same time, these new rules of the game will have an impact on the labor market and the unemployment rate. Policies and reforms for achieving these Objectives Tunisia's development objectives for the years ahead are embodied in the PresidentialProgram "Tunisia of Tomorrow," which has identified the reforms to be pursued and the policies to be adopted with a view to achieving the objectives set inresponseto the challenges of a globalizedeconomy. Inthis context, the aimis to strengthenthe partnership with the EuropeanUnion, consolidate cooperation with Arab and African countries at the bilateral, multilateral, and tripartite levels, and promote the prospectsfor cooperation with the countries of the Americas and Asia. This greater opening to the outside, which is both necessary and replete with challenges, appears to be the only path toward progress and prosperity. It demands a strengthening of market mechanisms, the promotion of private initiative, and consolidation of the competitiveness of the economy, while continuing to build a free and pluralistic society by strengthening the institutions of government and enhancing the role of civil society so as to guarantee that all citizens participate in the development effort. Improving the competitiveness of the economy depends upon three pillars: - -- Spurringprivate investment; Continuingthe modernizationand consolidation of the banking and financial system; and Maintaining a stable macroeconomic framework that can ensure sustainable development. To spur private investment, both Tunisian and foreign, the Tunisian authorities propose to continue the reform of the administration to adapt it to the new economy and to improve administrative services to enterprises, both by eliminating authorizations and replacing'them by codes of duties, and by mandating - 29 - shorter responsetimes to requests submitted to the Administration. Improving the transport and communications infrastructure, reducing the cost of public services, creating new industrial zones and business centers, strengthening support structures, and encouraging innovation and scientific and technological research-to which end 1.25 percent of GDP will be devoted by 2009- are also part of the action programenvisagedwith a view to spurring private investment. The Tunisian authorities are convinced that development no longer depends solely on capital accumulation, and now depends more and more on the mastery of technology and the skills of workers and entrepreneurs, together with their capacity to adapt to change, act in innovative and creative ways, and demonstrate initiative. Consequently the authorities will continue their efforts to builda knowledge- based economy by enhancing the flexibility of the educational system through the diversification of curricula and specialties, and by ensuring greater complementarily with vocational training, scientific research, and production. Inthis context, it i s planned to support public efforts inthis regardnot only by strengthening the research centers associated in particular with promising and leading edge sectors as part of the policy to create technological hubs and enterprise nurseries, but also by gradually establishing a partnership betweenthe researchinstitutions and the private sector. At the same time, the Government will continue its policy of withdrawing from the productive and commercially profitable sectors in order to concentrate its efforts on establishing, first, a modem infrastructure base and an appropriate training system and, second, a legal and institutional framework conducive to the proper functioning of the rules of the market as well as the elimination of obstacles to Tunisian and foreign private investment. In addition, the Tunisian authorities plan to promote private investment in the social sectors such as education, higher education, vocational training, or health, as well as municipal public services. What i s more, there are plans to offer additional infrastructure projects to the private sector under concessionor license arrangements. The modernization of the Tunisian banking system and its reorganization, as well as the consolidation of its financial base, will receive special attention so that the system i s able to mobilize additional domestic and external resources for use in financing investments. Strengthening the financial market to make it possible to channel greater amounts of private investment toward the productive sectors will constitute an important focus of government efforts in the years ahead. These are necessary steps in order to make progress toward fully convertibility of the dinar. Progress inthese areas will help make Tunisia a global center for trade and services. Finally, to preserve macroeconomic balances, the Tunisian authorities will endeavor to curb inflation to a maximum of 3 percent and to limit the current deficit to 2.5 percent of GDP by 2009, while continuing to reduce the debt ratio and to implement tight fiscal, monetary, and exchange rate policies. Such measures are essential in order to enhance Tunisia's credibility on international financial markets and attract a greater volume of foreign investment. Theaction program ahead Building on the progress it has made, Tunisia i s now embarking on a critical phase in its economic and social development, marked by far-reaching changes both nationally and internationally and by the aspirations and demandscharacterizing the next development stage. Insodoing, itwill continue itseffortsto intensifyandfurther acceleratethe structuralreforms inrelevant areas such as the financial sector and the investment climate, endeavoring to make the objectives it has set a reality and, in the process, move to a higher growth plane in which the Tunisian economy's integration into the global sphere i s consolidated and its capacity to address ever stiffer competition i s enhanced. - 30 - Building upon the programs implemented to improve the competitiveness of the Tunisian economy, ECDPL IV, the continuation of the three earlier components, will support the Government's efforts inthe following areas: - - Spurring private investment; Strengthening the financial sector; and - Maintaininga stable and responsive macroeconomic framework. Spurringprivateinvestment Increased interest has been shown in private investment in recent years, as reflected in the various measures enacted principally to improve the business climate, build up investment in regional development, support small and medium-sized enterprises, and facilitate business creation and investment in promising sectors while strengthening the upgrading program (programme de mise h niveau), as well as the various programs relating to human resource promotion, improving performance in the Administration, modernizing the banking and financial sector, consolidating infrastructure, establishing technologicalhubs, and continuing the privatization program. The aimis to increase the share of private investment intotal investment to 58.5 percent by the end of the Tenth Plan. This aim i s expected to address the need for diversifying the national production base and meeting the challenges of competition, exports, and especially employment, which now has the highest priority. To this end, as part of this program, the Government plans to carry out the following: - Actively continue efforts to reduce the number of activities requiringprior authorization, either by eliminating such authorizations or by replacing same by codes of duties. This effort will make it possible further to simplify administrative procedures and spur private initiative. It i s important to stress at this juncture that, first, an initial program aimed at reducing prior authorizations has been carried out and covered 60 percent of the activities calling for such authorization, and, second, that the "Tunisia of Tomorrow" programtargets continuing this effort in order to boost this proportion to 90 percent by 2009. The measures to be included under ECDPLIV are aimed at reducingthe number of activities subject to prior authorizations to fewer - than 120 by end-2006; Facilitate business creation and operation by lowering the regulatory requirement of minimum capital neededto createnew firms, whatever their legal form; - Improve the mechanism for immediate reimbursement and refund of proven credits against the value-added tax in order to ease the tax burden on enterprises with audited accounts while guaranteeing adequate collections of tax revenue in light of the progress being made with the program to dismantle customs tariffs and the need to protect the sustainability of fiscal balance. The rate of the "immediate reimbursement" of the VAT, currently set at 15 percent, will be raisedto 35 percent for those enterprises with certified accounts; - Strengthen competition policy through a revision of the legal and institutional framework for competition, aimed largely at consolidating the administrative and financial autonomy of the Competition Council; and - Improve the tax environment for companies by conducting a study focused on evaluating the reforms already implemented and on identifying future approaches to take in light of anticipated developments, in particular the effective introduction,of the free trade area with the European Union. - 31 - Strengthening the financial sector The reform strategy being implemented for the financial sector is aimed at meeting the financing requirements of the economy as best as possible, enhancing the efficiency of financial institutions, and continuing to external financial liberalization. These reforms have focused in particular on modemizing and reorganizing the banking sector to consolidate the financial base of the banks, on enhancing the efficiency of intermediation operations and buildingthe related institutional and organizational capacities, and on improving the quality of services offered and the mobilization of sufficient resourceswhile ensuring optimum resource allocation. In addition, major reforms have been brought to the financial market as regards the role it plays in tapping savings and channeling themtoward the productive sectors. Efforts will continue with a view to deepening and advancing further with these reforms. The major actions to be taken under this program will be focused principally on: - Continuing and speeding up the process of rehabilitating banks' portfolios of classified claims and improving the terms for recovering claims while ensuring that bad debts are not accumulated inthe future. It is important to recall, at this level, that inrecent years, substantial efforts have been made as regards the capitalization and provisioning of banks, improving recovery, and enhancing the flexibility with which loss provisions are treated and the conditions under which classified claims may be written off bank balance sheets. These efforts have been accompanied by operations aimed at cleaning up banks' classified claims by the Government assuming responsibility for the claims on public and quasipublic enterprises; - Strengthening the transparency rules for companies listed on the stock market by promulgating the law on financial security; and - Conducting a study on asset recovery companies and the quality of the provisions for impaired claims, with a view to making appropriate recommendations and identifying actions to be taken. The insurance sector has received close scrutiny since the early 199Os, and has benefited from far- reaching reforms aimed at reorganizing and modernizing the sector. The actions taken have included development of the legal and institutional framework, improving the major insurance arrangements, and starting a program for upgrading insurance companies. These actions should contribute to increasing insurance companies' earnings, bettering the quality of the services rendered, and improving the technical and financial performance of the sector ingeneral. These efforts will be intensified during the period ahead in order to enhance the competitiveness of the sector and prepare it to face foreign competition. The major actions covered by ECDPL IV relate in particular to: - Improving the oversight bodies by reorganizing the General Committee on Insurance so as to make it autonomous; - Continuing the restructuring of some insurance companies by adopting and carrying out restructuring plans for the companies concerned; - Rehabilitatingthe auto insurance sector by continuing to develop the associatedlegislative and regulatory framework and raising auto insurance premia; and - 3 2 - - Eliminating the requirement for prior authorization by the HighCommissionon Investment for majority participation by foreign investors. Maintaininga stable and responsivemacroeconomicframework One of Tunisia's major concerns has been maintaining a stable macroeconomic framework despite the changes and disruptions that have continually affected the national and international environment. Inthis regard, the macroeconomic approach has been focused on the pursuit of rapid growth, making it possible to achieve investment and job creation goals while preserving domestic and external financial balances. Inthiscontext themajoraimsincludedinECDPLIVinclude: - Maintaining the macroeconomic and fiscal framework; - Assessingmacroeconomic performance on the basis of appropriate indicators identified in advance; - Strengthening fiscal managementby formulating a medium-termframework; and - Improving external debt management by more carefully defining external debt management and makingbetter use of the financing instruments available internationally. All of these aims bear witness to Tunisia's determination to continue to strengthen the reformprocess, especially as regardsthe financial and insurance sector, the business climate, and the upgradingprogram. Actions will also be taken with a view to enhancing the dynamism of private investment by boosting the productivity of production factors and enhancing the competitiveness of Tunisian output. Macroeconomic framework The macroeconomic framework of the years ahead will be characterized by the gradual implementation of the policies and objectives set forth inthe presidentialprogram"Tunisia of Tomorrow," which defined the basic directions of future development efforts, delineated Tunisia's economic and social development prospects for 2005-2009, and established specific objectives. Inaddition, the programlaid out a cohesive approach toward meeting these objectives throughout the period covered. This macroeconomic framework i s laid out ina context characterized by changes which are at the root of new challenges arising from the strategic choice to become gradually more integrated in the global economy. The Tunisian economy will have to meet these challenges inthe years ahead, makingthe most of opportunities which can be used to advantage, dealing with new constraints that require additional efforts, and engaging in an ongoing reform process affecting the various core mechanisms of the economy. The challenges for the Tunisian economy include: the phase-out of the Multifiber Agreements and the impact this is expected to have, in particular on the performance of the textile sector confronted by ever harsher competition owing to the admission of new competitor countries into the European Union, our principal market; the possible repercussions of expanding the EU to include ten new countries from Central and Eastern Europe which constitute as many potential competitors; and the continuing opening toward the EUin the context of the Association Agreement signed with this partner, which calls in short order for the end of the transition period, leading in 2008 to the creation of a free trade area with the EU for industrial products. - 3 3 - The international context for the years ahead also entails a number of difficulties which could arise from: - The strong likelihood that the prices of crude oil, petroleum products, and certain other commodities will remain high and give rise, as they did in 2004, to strong pressures both on the government budget and on inflation and shrinkingpurchasing power; - The increased opening of the economy to the outside, with what this implies as regards the increased penetration of the domestic market by foreign products and the more intense competition resulting from this in view of the commitments made, given that negotiations with the WTO and EU will commence in 2005 with a view to the future liberalization of certain activities inrespect of services and agriculture; and - The possible downturn in domestic economic conditions, principally owing to climatic conditions and their unfavorable impact on the agricultural sector and, as a result, on overall growth. All these events constitute decisive moments for Tunisia, which will have to adequately prepare its economy to cope with the new constraints arising from them inthe years ahead. Inconsequence, the orientations embodied inthe macroeconomic framework are part of a global vision based, on the one hand, on the continuation of the reforms already initiated, inparticular under the three earlier components of the ECDPL (ECAL I-III) on the other hand, on the identification and and, implementation of other reforms which take account of the economic outlook as described in the presidential programcovering 2005-2009. Effectively meeting the objectives set out will require, for the period ahead, achieving increased wealth accumulation rates so as to fulfill national aspirations as regards jobs. This objective, once again boosted to the level of top priority inthe development effort, absolutely must be accompanied by the preservation of the domestic and external macroeconomic and financial balance. Accordingly, efforts will be made to enhance the dynamism of private investment by continuing the reforms initiated with a view to further spurring investment by the private sector. The aim is to further improve the business climate and the general environment in which companies operate and to facilitate and intensify the pace at which businesses are created, this inpursuit of the objective of creating 70,000 enterprises and projects as stipulated by the presidential programfor the next five years. The measures planned to this end are likely to generate opportunities for the private sector through the simplification of administrative procedures, this by continuing the program to reduce the number of activities subject to prior authorization requirements-which will be replaced by codes of duties or eliminated-and by further opening up investment to Tunisian nationals and foreigners. Such measures are likely to help meet the objective for 2009 laid out in the presidential program, namely to reduce the number of activities subject to administrative authorizations, eliminating them for 90 percent of activities in2009 as against the 60 percent achieved to date. The resurgence in economic activity recorded since mid-2003, after the various disruptions that had characterized the international environment and significantly affected the performance of the Tunisian economy, has led to satisfactory outcomes in particular as regards growth, jobs, and the preservation of domestic and external financial balances. Future efforts will focus in particular on new market niches and innovative sectors with high value-added, such as information and communications technologies, which are drivers of economic growth owing to their strong contribution to increasing gross domestic product, loweringthe unemployment rate, and enhancing overall competitiveness. - 34 - Efforts will also be intensified with a view to, first, further promoting exports through more targeted guidance for exporters and increased diversification of the production system and, second, boosting national savings, in particular long-term savings, by continuing the effort to modernize the banking sector, enhancethe dynamism of the financial market, and reform the insurance sector. Other areas in which additional efforts will be made are: the pursuit of a fiscal policy which targets improving the level of domestic revenue, in particular tax revenue, and controlling public expenditure, especially operating expenditure, while continuing the focus on increasing the outlays on infrastructure modernization and human resource development, especially those devoted to scientific research, education and higher education, vocational training, and health. The primary objectives set are aimed at: - Continuing to achieve relatively high levels of GDP growth, with the objective of gradually reaching the higher levels that will create more jobs, respond to increased demand, and reduce the unemployment rate, which currently stands at 13.9 percent; - Reducingthe current account deficit of the balance of payments from 3.6 percent of GDP in2002 to 3 percent in 2007, inkeeping with the objective set forth inthe presidentialprogramto bring it down to 2.5 percent by 2009; - Maintaining foreign exchange reserves at a level sufficient to cover 3.5 months of imports on average; - Limitingthe budget deficit to lessthan 3 percent of GDPby 2007; - Boosting the savings rate in the years ahead to a level compatible with the objective set forth in the presidential program (a rate of 25 percent by 2009), through a substantial increase in the contribution to savings mobilization made by the financial market; and - Achieving higher per capita income, moving gradually toward the objective set forth in the presidentialprogram, namely TD 5,000 in2009 as compared to about TD 3,500 in 2004. The reforms to be implemented are also focused on improving the debt indicators, with the objective of lowering the debt ratio to 45 percent of gross national disposable income by end-2009 as compared to the current level of about 49 percent. Successfully meeting this objective makes it all the more necessary to introduce a dynamic debt management system that will permit the proper formulation of debt strategies and policies and reduce borrowing costs through the more rational use of the new mechanisms offered by the international financial market. Notwithstanding the solid economic performance of recent years, and in light of recent international developments and the constraints resulting from existing commitments and the global situation, Tunisia i s resolved to continue and strengthen the reformprocesses initiated in various areas, particularly in the financial sector and the business environment. Tunisia i s also cognizant of the fact that achieving the objectives set for the years ahead will require, in addition to the national effort, more intensive cooperation with its partners in order to bring that cooperation to a level consistent with the issues at stake as well as the constraints of the stage ahead. In the event of any significant deviations, the Government intends to initiate consultations with donors and lenders and with the IMF in order to take stock of macroeconomic performance on the basis of a periodically updated set of indicators, so as to incorporate the changes that have occurred and ensure the -35 - sustainability of the overall balances. Achievement of all the objectives set forth in this Letter of Development Policy requires, in addition to the national effort, increased support from our partners through the diversification and intensification of international cooperation. For all these reasons, and in view of the importance of ECDPL IV for the Tunisian economy and its future growth, the Tunisian Government requests the support of the World Bank, the African Development Bank, and the European Union in the form of a structural adjustment facility for financing this program, the implementation of which will consolidate the progress already made under the program's three earlier components. - 36 ~ Annex Principal Assumptionsof the ECDPLI V Macroeconomic Framework The macroeconomic framework envisagedfor ECDPL IV covering 2005-2007 reflects the objectives set forth for the forthcoming period, namely higher GDP growth, greater diversification of the productive base, an increased investment effort accompanied by a larger private sector contribution, increasedjob creation which should lead to a reduction in the unemployment rate, a faster pace of export growth, and the consolidation of national savings, all within a framework which ensures the preservation of macroeconomic balances. Inaddition, this framework takes account of the constraints relatingprimarily to: - The international economic environment, which will be characterized above all by the competitive pressures that will have to be addressed invarious sectors, such as the textile sector owing to the phase-out of the Multifiber Agreements and the arrival of new competitor countries, as well as the gradual establishment of the free-trade area with the European Union; - The economic policy measures that will be taken with a view to enhancing the competitiveness of the economy inthe years ahead; and - The measures to strengthen the budgetary framework so as to continue the fiscal consolidation effort and speed the pace of reducingthe public debt. ECDPL IV will help achieve the objectives established and will enable the Tunisian economy not only to address the various constraints, but also to implement the reforms envisaged in various areas, in particular enhancing the dynamismof the private sector and rehabilitatingthe financial sector. The scenario adopted for the macroeconomic framework for 2005-2007 i s based on the following principal assumptions: - GDP growth of 5 percent for 2005, with a trend toward a higher pace in subsequent years with the objective of reaching 6 percent by 2007; - An internationalenvironment that allows for increasing exports despite the constraints affecting certain sectors: - An increase in investment, relating in particular to the measures planned under the ECDPL IV program, which are expected to spur private investment duringthe period under review thanks to, among other things, the easing of administrative formalities; - Greater fiscal consolidationwith a view to offsetting the pressures on government finance; and - The achievement of balanced budgets and, in general, the preservation of the macroeconomic equilibria. - 37 - Key Indicators (2003-07) 2003 2004 2005 2006 2007 GDP Growth 5.6 5.8 5.0 5.5 6.0 NonAgricultural GDP growth 3.6 5.4 6.3 6.0 6.2 Exportsof goods and servicesgrowth 0.3 5.2 3.9 5.2 5.8 (constantprices) Importsof goods and services growth 0.7 3.7 4.9 5.4 5.9 (constantprices) Current account balance (% of GDP) -3.0 -2.1 -2.7 -3.0 -3.0 Investmentgrowth -3.2 2.4 6.5 7.0 8.0 Investmentrate (% of GDP) 23.4 22.9 23.1 23.7 24.0 PrivateInvestment (% of total) 56.5 55.0 55.6 56.5 57.5 SavingsRate (% of GNDI) 21.8 22.4 22.4 22.8 23.7 Per capitaIncome(Dinars) 3286.6 3578.1 3802.9 4096.6 4364.2 Inflation (Consumer PriceIndex) 2.8 3.8 3.0 2.1 2.5 Fiscalbalance (excl. grants & privatizations) -3.2 -2.6 -3.1 -2.9 -2.6 (% of GDP) Primaryfiscal balance (excl.grants & privatizations) -0.5 0.3 -0.4 -0.2 0.0 (% of GDP) Total public debt (% of GDP) 60.3 60.5 59.1 58.7 58.3 Extemaldebt (% of GDP)' 51.6 49.9 47.9 47.5 46.6 Foreignexchangereserves (importsinmonths) 2.9 3.4 3.5 3.5 3.5 ANNEX 1: LETTER OF DEVELOPMENTPOLICY REPUBLIQUETUNISIENNE Monsieur ICPrtsidcnldc In Banquc Mondiale Bonque Mondinle 1 B 1 8 1.1 Street, NW Wnshington DC 20423 LETTKESUR LA POLITIQUE DE DEVELOPPEMENT Monsieur ICPrCsident, L e s pcrformnnccs doliskcs par In 'I`unisic. perticuli&rcmcnt ou coiirs des quinzc dcrnibms anndes, sont le rbsullet du choix do la modemisotion et de I'ouvurlurt fnit dbs la fin des ann& 80, Les rKormos slniciurelles, enysg6os nu Iondamnin dc la crisc de 1986 el snns Ccs% npprolbndies, ont permis dc rronsformcr 1'6coiiomic tunisienne,judis atlministdr CL protCgCu. ci1 iinc koiiomie dynamique, divorsitite, ouvcrte sur I'cxt6rietir. GrSre B ces rdformes, B lo gcstion rigourcuse du cndre mncrobconomiqtie el nux poli1iqucs socinlrs inises en place, In Tunizie n rialisd, RU cotirs de ccdo pdriode, une croiswincc rapide CLratitentie cr a assiih! en indme romps un proybs socinl hnrrnonieux. Plusioursde ccs rSlbrtnes 6tuieiit inilikv Jnns le cadrede la mise en ccuvrc des diffdrcnts Prognmmcs d'Appui B In CoinpCtitivitc! de I'Economio (PACE) appuybr par la Bnnquc Mondiole, la Ranque Africaine dc DCveloppeincnLninsi qua I'Union Europetnne, uti moyen d'uno t'ncilitb d'njustement tirructurel CI qui arrive aujourd'hui h sa quntribmc phase (PACE IV) qui constittie tin instrument erseiitiel contrihiiant A I'amtliorntion do la compdiitivitk de I`dconomie notionnlc. Compte fenu do8 engagcmcnrs pris sur la voie de lo libdriilisution et de I'ouvcrture, IRTunisie est persundlic que I'efforl do r6fomnc doit se poursuivre et s'imcnsifier ah11de relever leu innombmbles dCliu qui se povent h I'tconomic et prtservcr les ncquis Cconomiquoset socinnx, tau! en souvcgordrinr IB solidit6 et la StRbilitk dch 6quilibres mocro-8conomiques. 1.0s performnncos. iiotnmmunt. les plus rdceirtes de I'dconomie, lrs principales rCformcs cngegtes, Ics dblis A relevor et les iixcs rotcnus diins le I'ACE IV Ton1 I'objel des ddvcloppomcnuqui suivenr. Ides rC~ormcslanctes depuis 1986 on; replace I'tconomic tuiiisienno sur unu lraioctoire dc croissnncc CL I'adhbion b I'OMC, on1 concktisd In strategic (I'OiJvofture prograssive A I'bconomie mondiolc. Ce processus 5'0s. pnr In suita, renforcd nvcc I'Accord d'nssocinrion. siynd on 1995. devcint dbhouchcr stir I'instaurotion d'une zone de lihrc-tchanyc avec )`Union europkcnnc h I'liorizon de 2OOR. Ccs rkfomcb: onr permis B IHTunisie d'cnrcgistrcr dcs rkstiliau probonts durant In pbriocle du [x` Plwi (I997-200 I)se rctlktnnt B lrnvon les principaux indicnlcur~~tiivnnt~ : 2 - Unc croismcc mayennodu PlD de 53 % par oil supkrieureA ccllt du Plml pdcCdcnt (1992-96) qtii Ctoit de 4,6 % ; - Une plus yrnndc divorsificstioii du tissu productif nvec le niffrriiiissemenl du poids des indusrrics monuraccuritres portt h 21 K dii PID en 2001 cotitre 19,4 % en 1996 et Nlui dcs ccrviccs doni la canlribulion oux richesses iutionsles est pnsskc do 54.3 57 %. respectivement ; - Un accroissemont des invosrissemenrs globeux nit tnux de II "/u en nioyennf annuelle contrihunnt, ainri, h renforssr ICtnux d'invoatisseriient B 26.1 Yn du Pit3 eiI 2001 conlrc 23.2 YUen 1996, et Io pnrt du secteur privd dans I'~,nbrttl'invcs~issementde 53,4 %. en 1996, b 55,6 `YO, 611 2001, ce qui trnduil I'inipuct posilir des mesurcs d'incilntions octroydes nux investissourspriv6~; - Une ainkliorntion de I`anvironnement des ntiiiires el de I`infnis!mclun de hnse qui o pcrmis d'aliirw (lavantage d'iiivestissemenls tlirecls LSaanyrrs doli1 IQ volume a plus qua doublt eiitre 1996 (306,R MD'I) et 2001 (7lR,3 MDT) induisont le crtnlion de notivelles cntropriscsel des emplois ; - Une hausse des 4chanpes nvec I'exteritur au taux de 7,4 % en inoyeniie pnr an pour les cxponalions yrdcc h tlcs sccceurs tniditionnels milis uussi i\de iiotiveiiii~secleurs, OLde 7,3 % pour les importationsen rdaction, notemtncni, B ladynrrmique de croissonce ; - Une consolidotion de 1'6pargne nationale 8. 23,3 % du reveilti national disponible en 2001 ; - I-n prduervntion des Bqiiilibres mncro-tconomiquus avec lu meitrise do ddlicir cournnl h une moyenne de 3,5 `YO du PIR malgr6 unc con,jonclura intcrnn[ion& d0fnvomhle, du deficit biidgtloirt qui padscl A mnins de 3 % dit PIR contre iiiie moyctine de 3,7 % OLI Plan prtctdci\l, du IBUX d'entlettrment qui s'est stnbilis6 52,3 %I du revcnu nelionitl dispciniblo hrut en 2001. du service de IDdone qui fi 616 mmtnd A 13,6 % des rrcettes counintes en 2001 contre 17,fi %en 1996et de I'inflntion ; - Au plon sociul, 322 000 emplois couvrnnf 91 o/n Jc In rlemnndr nddilionnelle ont ttC crdts c1 le revcnii pur habitant a proyrcsod de 2090 IYl h 2966 Dr entre 1996 et 200 I, le i w x de poiivrett a 6th ratnenf A 4,2 % contre 6.2 % en 1995, I'esphncr de vie s'ost omdliorr5o, ICloux de inortnlitd iiifnntilr B rcculb CI le IROX d'annlphnbCtisiiit 9 ' 2 ~ 1rdduii. La hausse sensible des taux de hrunchenient h I'enu potoble et B I'tlccrrilicntion en milieu rural oinsi que la hsisse de lo proportion des loyemcnts rudinientnires thoigncnt, dgnlement, de l'iimdliorntion des conditions de vie des citoyens et du pnriiige iicjuitnble des fruits de In croissancc, 'l`outes cos r6ulisuhs. autmnt dcanomiquesqiie socioles, oni consolid6 In position Jc lo'riinisie et SG cnpncite d sftircr tlovontngc d`invwisscments &rangers coinme en !diiisigneiit Irs notiitions occordfes pur les instances internatioiialcs sipkisrlis8rs et. de ~ B F O Igtndrnle, ~ si1 position comphliiive globolc qui I'u hissee ou premier rung des pnys dricains pnr le Forum Economiqtie Montlinl de Dnvos. Le x' Plan dc ddveloppcincnl (2002-2006) s'esi inscrit dons la conIinuilC et lo cansolidsiion de I ' h n de rdforme de I'dcononiie en reteiinnt frois priiicipnus uxus. h siivoir le rentorccniciit de la compktitivitb de I'6caiiomir, la consolidodon des acqiiis sociuux et In prbscrvorion des tquilihrcs globatix ti tl'un cadre inacro4conomiquc sotliriiiible, Le sclidmu (le ddveloppemcni relenu pour In pkriodc coiiverte par le XaP h i p&woil la r6nlisation d'un ~auxde croissance rlc 3 I'ordre de 5,7 % en moyenne unnuelle coniputiblo avec une hausse du evenu por tSte de 4,R VU ot s'appuyaiii, en perticulier, stir : - une meillcure contrihution (le Itlproductivkd ylobale des lhcleurs de pioduction se situent B hauteur dc 44 ?4contre 36 % au Plnn pkfdcnl.; - unc progrossion aotilenuc des exponutions mnlyrd un contoxte de plue 811plus coinpdtitif dit fait, elitre nutroB, de I'nrrivk de noiiveiiux coiictiirents sur le morcld etiropdrii ; - lo consolidation de I'invostisaeiIienl privC dont le purt tsr appelie h titigtiienier Lout CII s*nccompegnmil:d'une plus g d e et'fcocitd ; - Inpromotion de 1`8pnrgne grice A I'ndoprion de iiiesures adbquntes visiiiir la poursuite de In muiiriso du dtticit budgbtoire 011vue d'amdliorar les kquilihrch tinouciers el la capacitd de I'dconomic h faire rnce nux chocs axogbnes impr6visibles. Cc Plan a dtinnrd dnns der; conditions dificilos nvdc, en 2007, la persistaiice de IHsdclieresse pour la quotrihie aiinCe consdcutive. des pcmirbatioiis nit nivrnii de I'environnemcnt intemnlional qui oiit iriduit tin rnlentisscmcnt de Is croissfincc Bconomiquz mondiole et unc contrnction des fchongos coiiimerciaux, dui flux tauristiques el des copitanx. Le tourisme. IC tran.spon adrieii, les [imrmncts et 10s invastisscmenrs dtrntigers on1 dtd les secteurs les plus 1ouchCLspar c e i i ~con,jonctttre dificilc. En dipil de cus foctetirs d'instnbilitd, I'bconomie tunisicnnu II rdalist iiiie croissnnc:c positive el les dqiiilibres linuncicrs, internes et extemes, onr 6td pr6servbs grDcr iiux iiiostires et poliriqucs mists en euvrc pour contenir les rdpwciiusionsiitgntivts clc In coii,joncture, ce qui R perinis de gnrder intrick so crddihilitb oiiprks des insliinccs fiiiancikres interiiaiionalcti et des oryrinismcs spkialisds, Ces rdsultnls onl: Ctc` coiisolidds en 2003 er 2004 d la t'eveur de I'amblior#tion des condilions cliinntiques et de In ropriso de I'kconomie mondiwlc. Aiiisi, pnrall&enienl h lo innitrise des Cyuilibros macro-ecoiiomiqiirs, In croissanco enregistde LI did clc 5.8 '% en 2004 mfilgrd la flnmbdo dcs cours des nietibres premieres t r dit ptlrole sur IL'S marches moiidioux el 10s prossioiis gtnerdes, nolnmmenc gtir 10s tinonces puhliquus 31 I'inllation. Pour su pmrr, I'bpnrgne a contiiwd so progression pour olleindrc 22,4 %I du lievenu disponihle, en 9,004, conire 21,9 Yn cn 2002 ti les inveslissements se 6oni accnis de 6.5 u/y en 2004 nprQ la lbiblessr rulalivc enreyislrfo ccs dornibrcs annees w e c tine qund slagnotion en 2002 (0.9%) er In haisre accusde en 2003 (-I%) (le sow que leur part dans le I'll3 [Iregressd h 22.9% en 2004 conirc 23,4`% en 2003 et X,4% ei1 2002. Qunnt nux khnnyos commercinux. iIs on! rcnout evec des rythmes de croiss~nccsatisfaisontsqui oiit permis d'otteintlrc (10s tnux de couveliiire plus dlcvts de 73.7 Vi et 76 %. respectivcmcnl cn 2003 et 2004, ConibinCe ?I lo 1iouss.c des rocetres touristiques, tine telle tvolution du coiiitiierce cxtdriour a limird la dbticit cournnt h 2 % dti PIR en 2004 conire 3 YOunc mndc auparovnnt. En dtfinltive. les performnnces des diffdrenls scclcrirs d'octivitd nnt Bid influcnch tiiiif par I'cnvironnomcnt interiiationnl que par lo coli-joncture interne. Force. rourefois. est de souliyncr que les rCfnrmes inises en euvra ail coiirs des deux dcriiihrcs ddceiuiies oiit cr& les contlirions propiccs b In rkdisntion des RCqUiS grKCC h I'arndliorntion de I'environnemeni des nff'aireset ntix effons que !'Eta[ continue b consentir pow In rorinoiion des ressourccs huiniiines quntifibs ri I'omdliorolion (IC I'inli~siruclrircdo base :ports, otroports, tdseriux routirr ei OiJ1orouticr, rbxeu de tklecomniunicnlion, r b w u dlectrique ci. cl'cnu potable. C o s t dolls un diiviiroiinemont corecterise par I'occdlerntioii de hi mondialisarioii et In construction de I'espnca euro-indditerrnn6eii que I'iconom ie tunisicnnc dvoltic ncrtielli"~t et 4 60 dkvelopperu nu cotiru de la prochaine Ctnpe, Crl unvironnenieni dons leqtlel lo Ttinisir it choisi de s'intkgrer, coinpone doe dtfis qu'il importe dc rzlevcr et prdsriite des opportuniibs B snisir. L o cnpncitk do lo l`unisie h lo faire dtpeiid de su fiicultd d'odnpcntion et des possibililds d'ombliorer so compbtitivitb somptc teiiu, notaminont, du dkinnntblemcnt tnrihire err cotirs engrigd dnns le cadre dc I'Accord de partennriot conch nvrc I'UE el qui entre dnns une phase crucisle pour I`entreprisa tunisienne sans oublior I'dlnrgissrment dc I'UE B 25 mombreu et 111 disporilion des Records multifibres. En outre, le lihre-dchsngc limit6 jusque Ib nux biens onglohcre, Cyrtlenient, les services. A eel Bgnrd, les nCyociationr sont en cotirs IIUniveau de I'OMC et dcwoiii brra bientdt cnpgdes RVZC I'UE et BLI nivenu de lu m i e urohe de lihre-Cchnnge. Par sillcurs, le ddmnntklenicnt dC6 accords multifibrcs riquu de niettre en difticul1d iiiie Iiirge frunyo du lissu industriel nlors quo In noiivolle poliiique de voisiniiyo pourniil consciluer line opportunirt pour donncr tine impulsion nux rdlornies cltijh initidcs. Orientations et cns~ralntrsfuticres dc i'&cnnutnie tunlsiennc Le prograame prtsidenricl (('ILnidc de demain ))ii trnct les objectifs et les orientnlions de 1'6conoinio tunisiennc pour In pdriodc 2005 h 2009. Ce progrmmc ouvrc des perspectives nouvelles pour la Tiinisie 011 idenrifianl, en 2 I points, 10s orientarions thures el les rdnlisutioirs B accotiiplir durnnt I'tttipe 6 vctiir qui prfporeroni IDTunisie do deninis. PlthiscitC pnr l'ensemble des composnnies de lo sociCb! lunisicnnc. ce p r o p " coitfirine In dftcrininntion el la perrCvCrmice dnns Ies r6formcs en vue d'assiirer III p6renniii de Incroissencr Cconomiqtie et dit progrbs social. 11 ~IHCC I'ciiiploi en lbte des priolitCs naiionnles compte teiiu de lo prcusion parsistanie sur le mtircht du trnvoil et dc 1'~ugmenlariande le propordoti dcs dipl6mCs du sup6rieur piirmi les primo ddmnndeurs d'eniplai. Les nxes proposts pur cc progrninme, doiit in concritisntion n 6t6 eniilm6r depuis le ddbut de cctte nnnte, touchent iitixdivers domaiiies permcttant de consolider ICposicionnsinent de I'tconomie notionole. Idasprincipnlos orientaiions. de nnlttrc 6conomique. portsni sur I'emploi. qui figure HU premier mng de9 prioriids, In nkccssii6 d'assurcr la plukfonne oddquare pout lu constructiori de I`Cconomir du savoir, la realisaiion d'un ryihirir plus tlevt de crdntions d'entreprisas dl de prqjefs, Line plus yralide impulsion atix exportationb, un pelier supbrieur pour la croissuncc 6conoiniquc A trnvers uiio intkyrstion plus pc~us.u& dnits I'eiivironnenrent intcniotionnl, 14 modernisation du RyfltCnie blrncaire et linuncier. tins uclion himi da IOrCyioti uti pdlc wlif de dbveloppment, I'nmdlioretion do:, coirditians de vie I\ triivers, tioinmmenl, i t t i niveau de rrvetiu plus Clevt el urie prokciion occrue des coiiionimsrcurs, Forte des ncquis rhlids. lo Tunisio est ddcidfc B progresser delis IAvoic du ddvcloppement lout en knanc compte (lcs contrninles, ocrualles el futures, de In proclinine ftape. en pnrticulier, In plnce de choix wcordke 11 I'umploi stir I'lchclle des priorirts. L o prdservslion tlc ccs acquis ct la pdrennitk de I'muvre de ddvzloppemeni deiiieurent, cependunl, iributuires du degrd d'achbvement dcu rCfornies cnytiykes compte icnu des tiombrauses conrr~inlesqui iincndent I'dconomic cn 2005 el Ics atriifes suivnntcs doiit nomhreuser soni iinposdes R lo Tunisie par un environnemenl international cn ploine mutation d'ouont que ccrinines Cchfonces re concrftiseront di?s le ddhut de celir mnCe. en porticulier. le dliiiimtilemeni des nccords inultitibres. Ainsi, IR Tunisie csl uppclbc b f a i n hcc A de niuliiplcs contruintcs et dCfis donr le plus important resle 10 corisolidation des fondemms d'une croissaiice soulcn&lc stisceptible d'attaindre les ob-jactifs en nintibrc, notnmment, d'omploi t't(ntvurs In rknlisiiiion. d'une fopn durable, de tnux dc croissnnce de I'ordra de 6 o/n au nioins. I`occdltrulioii dcs rdtormes 5 structurellus, la promotion du climat des nflnircs et I'ossainisscnient du syabnie financier 011vile de dynaniiscr dnvnntnge I'wlivit6 6conoiiiiquo du poys. CrCatlnne d'emplulr Lu prumibru do ces coiitrnintds demeure, ccpcndant, I'einploi qtii B toi!jours IigurC purmi le5 prioritbs dc I'nuvre de ddveloppement. Le twix dc clibiiingc, estimt ti 13,9 % en 2004, est.juB6 relntirement Jlcvd m6ine s'il s'in~rritdons tiiic lcndniice vers la boirse iiiois la structure de IP popirlHlion active noii employbe change CI incltit. ninintennnt, des d i p l t " de I'etiseiyncmoiit supdrieor. En rtiison d'un cennin rroinhre de hcteiirs d~mogrsp~iiqves don1 iiilz plus uriiiidc intbgration de la femme dnns le marchd de I'emploi, I'otJverture cotitintic vers I'axldricur et le de concurrence iit de cem ouvorture, le5 prcsaionssur le rntirch6de I'rinploi peseronrencore sur I'efforl de ddveloppement de sorb qu'uii rythme stipkrieur d`ticcroissement ilcs richesscs devrn &e clumbloneiit rtnlisC pour nrfronter cetk prcssion et juyulcr uno demandc d'cinploi sans CCMO croissnnte. Prnmntion Jc I'lnvcstlsscmcnr prlvC 1.e d6fi de I'cmploi ost tgnlemem rributairo d'une plus grnnde pnrticipolion dit seclcur privd B I'eITon d'invoslissenienl jugd encore itisuffisontu CI cn depl des Ot+CKifS du XpIYtm rl'eutonl que le poids de I'iiivestissement priv6 dnns le totd ilus itweslissetnenrs devla nugmcnier davantago pour ntteintlrc I'objoctit'de 58,s % b IDfin du Plun acluel (2006) el 60 % oil 1009 tel quc fix6 por le Progrmme '* 'I'unisie de demuin 'I, Plusieurs t'ucteurs ciinlribuont h expliquer cettc iiisul'tisnnce dc I'investisseinen~priv6, entre autres, le pussiiyu du programme de mise B niveoii (PMN) des grnndeseiitrepriscs OLIX iiioyennes at petites eiitrepriscs, co qtii, ntcessuiremcrit, a pour ere1 (le r6dtiin le volumc gl0b01 d'invoslisscment : In rtructuro do I'dconomie qui s'eat rliversitike dovclntage ott profil des services qui constilnent des ectivitds ne nCcessilnntpns tlc yratids investissomcnts ; leu grnndes opdralioiis de privetismion et In diniinuf.ion des investissement:, dons le socicur agricole en pdriodc de sbcheressc. Exucerbotlon de lo concurrcnee Le3 rtfornies enlrcpriscs Jeptris 20 oils atit mflcrmi la conip6titivitd (IC I'rSconoiiiie iunisiennc ei consolid6 son pitionnemenl, en particulier, h In suile de I'Accord d'ossocitiiion avec I'Unioii europkenne et I'ndhc'sionti I'OMC, Unr plus yratide insertion dims I'bconomic internutionale cst prdvue avac la lihirttlisntion de cenoines nctivitds des sec~rttrsde I'ngriculturc el des servicesde sone que I'Cconoinir tunisienne est tippelbe B dvoluer dnns tin environncniont de plus en plus compcliitil'. Cc nouveou contexte o cdC pour la `I'unisic des contruinles suppldmantaires qu'olle a m A affroiiter duns les m d c s 21 vanir pnrmi lesqitellts la i1isp;lrition des AMF e%scs implications, notnmment, pour le srcicur des rexriles, hiit au nivenu de Is production que des exporwions. En parallblc. cctte nouvelle donne clttrrtdes relombdcs stir le inarchd de I'emploi ct 9tir le toux de ch6nitlye. 6 Les objcctifs de ddvcloppcmcnl de lo Tunisie pour Ics prochxiinos nnn6oa s'instreiit dnns IC Progranirne prdsidenticl (( `hnisie dc clcmoin qui o identiti6 les rkformes d ppprolbndir et les H politiqiies h angager pour ntteindre les objectifs Rrret6scoiiiptc Iaiiu des ddlis b rcluvar dans une dconomio mondialiske. Dnnsce cndre. ilest envisage de renforcer le prirlcnnrioi avec I'Union europiennc, de consolider In coopdrarion evcc lee ~ E Y ambes et ofriceins nux nivenux bilordrel. multilat6rnl e l lripnrlire et R de stimiilcr lcs perspectivesde In coopemtion nvec Irs puys d'Amc`riqiic 21d'Aslr. Cettc ouverturc plus grotide sur I'extirieur, ndcessiiiru mnis pkinc de Jitis. sctnblc SLre Itiseulo voic pour IC progrhs OK In prosfArit6, Iille exige de renrorcer les mdcanisnies du mnrchb, de proiiiouvoir I'initiotive pride et de consolitlcr le campdtitivitd de I'dconomie Lou[ en poursuivant I'ddificntion d'une sociktt lihre el pluralisle A tmvcrs io renforcemenl des instiiuiioiis de I'EW dl du rblo de lo socittk civile Hfin de yorotilk la participolion de tous les sitoyens h I'errorr de dCwcloppemcnt. L'nmdlioration dc la compdtitivitd de I'dconomie reposesur trois iixes , - 1-0 stimulntiondoI'iiiveslissement privb; - La poiirstiite de In iiiodemisotion et de In coiisolidrrl.ioii du sysrbmc hanceireet tinnncier ; - La maintien d'un codre macro dconomiclue s M c susceptible de gornntir le ddveloppcmcnt durable : Pour stiinulcr I'iiivestissemeiit privk, tunisien et dtruiiger, les autoritds tunisicnnrs s t proposant de continuer IH rCformc de I'&dminislralionnfin dc In metfre DLI diopnsotide I'konoinic nouvclle et d'nm81iorer 10s presbtions ndniinistrntives mix entmpriscs tan1 pnr Io suppression des outorisntions 01 lour romplaccinont par dcs cohiers de chnrges que pur ID fixation de d61ois CcourtCs de rdponse nux requ&tesndresshs h I'Administratioii. L'nnitliorotioii de I'inkiis~r~~ttirede transpon el de cotniiiunication. la reduction du collt des sorvices publics, la cr6ntion do nouvelles zones industriclles c! ile centres d'nt'fnires. le retiforceinent des s1ructitres tl'appcii, l'rncotrruyumoni de I'innovrih el de In recherche sciantit7que et tochnologique A laquelle Aero d s e d 1,25 % tlu 6113 B I'lioriroci 2009, font Cgalement partie du progrninincd'action etivisogt pour slinittler I'invc~iisbementprivb, Convaincues que le ddveloppenient ne depend plirs iini~luumcntde I'wccutnuletion du capital et fait de plus en plus oppel h In moiirise de lo technologic el iili1 ciiinpdlcncc dm trovailleurs et des entrepreneurs el lciir cnpnciil A s'odoptcr aux inucntions. b adopter des comporteiiienu d'innovation et de crCaliviJ el h hire preuvc d'initiarive, lcs airtoritis ruiiisiennes poursuivroiit I'ddification d'une Ccoiromio du savoir en occordant plus de tlexibilitd uti system dducciiir pcir IH divcrsificoiion der; lilibres CI des spScialiiLLs CL cti miirRrii uiie nieilleure complkiiientnritd nvec Iri forinnrion professionnelle, In recherche scientiliquc et la production. Dans ce cadre, oum le renforcumcnl des noynux de recherche IiCrs, noiwmmcnt, sur: sccteurs porteurs et tl'livenir duns le d r e de Iii politiqtie de crkution de phlr, iuchnoloyiqucs er tlc pdpinibrrs d'cntreprises, I'instauration progrossivc d'uir parrcnarint eiitre Ics institutions de reclicrche et le sectcur privb est envisayfe en vue de soutenir I ' e f f m public en la molic\re. Parallblcmcnt, I'Elnl poursuivra sn polilique de ddsengugrmeni des secteurs produciirs CI commercinlemenl rentables pour concetitrer ses efforts sur le mise en plnce, d'ttne pnn, d'une infrnstructure da base nioderne et d'uii Jysttnie db forniotion odtqirut et, d'oulre part. d'un cndra 7 juridiquo ot instittitionnel de notiire d fnvariser le foiictionnement addquai dcs rkples du inrirchd oinsi qua 1'Climinotion des obstnclcP I'invcsiissomeiit privk nntionul ei diranger. En outre, l~ nuloriles 1unisiennc8envisagent d'encouroger I'invostisscnient privC dims Its secletin rociaux coinme l`dducnlion, I'cnscignometit supkrietrr, In (ormarion professioiinelle 0t1 la santb suis oublier les services publics muiiicipaux. Bieii plus. it esi prtvu de proposer duvfintnyc de prqiets d'infrastructure oil sectcur privCdnns IC chdra de lo concession011dc IHlicence. I,u modernisitlion tlu systbme bntrcaire tunisien CI sn regtrimuration ninsi qtic le cotlsolidntion des ses ossises bdnificieront d'unc attention pnrticulidre pour lui pormattre de mobiliscr dovontaye de Tcssourccg, intbicures et extdrietires, pour le financemei\l des investisscmenls. 1.0 renforcement du iniirchk financier, pour pouvoir inobiliser plue d'invostissemenl privC vcrs Ics socteurg prodtictit's. constittiern un w e imponnnt de I'action gouvemrmcnralz ALI cottrs des prochaincs sniidos. C'esl B c8 prix que des progres vcrs la coiivertibilitC totulc du dinar seroiit rbalists. Cos progrbscontrihueront b fiiirc de la Tuiii8ie un cenlre niondial pour le commerce et les services. ISnfiii, pour preserver les Cquilibres macro-c`conomiques, les niitoritbs tunisienncs oetivreront pour maicriscr I'inflation dnns lo limite de 3 YUel limiier It:dCficil couront b 2.5 26 du PIR, en 2009, tout en poursuivani. Is rkducrion du raux d'endettement et 111iiiise en w v r e de politiquas rigoureuscs on matiere l)tidg&nire, mondtnire et de nux do chnngc. De telles mestires snnt indirpensiibles pour am6liorcr la crddibilit6 du pays sur les iiitirclvis financiers inrcrnntionoux et pour attircr un volume occru d'investissements Clrungers. Forre des ncqirir enregislds, la `runiuic eninme une phose cruchle de son d6veloppeniunl 6coiioiirique et social portunt I'enipreinte des mutations profondes OIJ dotihle plan national et internnrionnl et des a&pirorionsct oxigoncos de Io prochsine elope de diveloppemenl. A cot egard, 10s efforts 9e pourruivront en vue d'iniensilier CI d'accC1drer davnntage 12s rdl`ormcs siructurelles dons dos donlainas aussi pefliiients que le sectcur linuncicr et I'environnement de I*iiivts!is6cmcnl, ftwarisnnt IAconcrdtisolion des oqiectifs fix& et, pnnnnt, le passoge h uii pnlier supdrieur de croissnnce h m h c de consolitlcr I'intlyrotion de I'dconomie tunisicnnc dans la sphPrc mondialc et de rcnforcer so copocitk h fnire hce h tine concurrence de plus en plus nrdue. Dons In continuit6 des progrommer niis en cuvrr en vtiu d'ambliorcr IA coinpCtitivit6 de I'bconomic tunisicnnc. ICPACE IV, qui s'inscrit dniis le prolongement des lrois coniposunrrs ptCckdenles,ilppuieru lei efforts dit Gouvememenr dnns les tlomnincs suivmts : --- I-Hclynnmisnriontlc I'invusrisscmcnt priv6; Le tenforcement du xcteur finntrcier ;et Le maintien d'un codre nrncrokonomiqne stoblc er reilctir. Dynnmlsndonde I'lnvcsrlsscmcnt prlvC L'invostisaziiidirt priv6 n hhdhcid u s ricrnibrss onndos ci'ttninibr61 act" niaidrinlisd B trnvers IUSdivcrses mestires iirr&Ces en vue, notnmment, d'umilionr I'cnvironncmcnt. des nffaires, renforcer les invcstissenients en mntihrc de ddveloppemetii rdyionril, uppuycr les pctiius ut moyennes entreprises. fociliter In cdntion d'entreprises et I'investisszmznt dnns les secteurs promottaurs et rcnlbrccr ICprogramme tlc miso B nivenu, outre Ics dil`fbrcnis progrnmmes nyont trait h In promotion des rossourcos humrrincs, I'omdliorotion du randomonl de I'Administntion, 8 In modernisation du secteur biincnire et linnncicr, IA cowdidation de I'inrrar;trucrure, I'implantatioir de pdles tecliiiologiques ainsi que la poursuite du progrniniiw de privrrlisntion. 1,'ob.iectif fixt est de porter In pnrl de I'invcstisscmcnt priv6 daiis I'investisscmenl global h 58,s % B la tin du X` Plan. Cet objectif devre rkpondrr A hi ntccssild de diversilier lo hose de prodticlion nniionnle CI rulcvor Io d61i de lo concurrence, de I'exporkhi CI surtout de I'eiiiploi, hisd au preniiar rniig des prioritts. A cel effel, IC Gouvernemcnl: unvisage, dans 12 cadre de ce yrogranimc, dc rCnliser Izs actions siiiwnnres : Poursuivrc. activeinenl la rdduction du iiombn d'iiclivitds soumises A ciulorisation prhinble, soit R lrwcre lo supprcssionde ces autorisntions soi! pnr leur rsmplaceinerlt per des cnliiers de chrirges. Celle aciioii permeltra de siiiiplifier devantiiye ICs pracddurce otlministralivus cf d'impiilsur I'iniiintive privde. II iiiiporle de rclcvw, d'uire part, qu'ttii preinier progrtimme dc r4uction dus miorisations prhlnbles n 61.4 entrepris et n conccriid 60 "/o des octiviths souniiscs ir outorirtition el, d'uutre purl, quo IC!progrnninie (4 I'tinisie de demaiti ))pr6voit do poursuivre cene nction en vue de poricr ccnc proportion A 90 YUe11 2009. Ides nieRures qui interviendront dans le ciulre du PACE IV Ruront pour ob,iectil`de rnmeiier le namhre des oclivildb:snumise6 B nutorisations b moins de 120 h fin 2006; - Fecilitcr la crCalion CY ICI`onctionnoinent de I'entreprise h trtlvers In rdtluciion tlu copirnl social minimum rtglementaire pour la crbntioii des notiveilus scxi6lds quelle que soil sn formejuridique ; - Amdliorer ICmbcenismc do remboursoment immkdiot et de restiltition tlcs crbtlils nvCrCs de la taxe sur lo valeur ajoutte atin d'nsrurrr un till&yernenl ~lcscharges firceler der cnircpriscs disposRtrt de comptcs vSrili0s tout en veillanl h gmiilir uiic inobilisation addquntc des ressources fiscdes compte Lenu du I'avnncciwir du progrnniiiie de dt5mnntblementdes Lnril'Sdouanierset la n6czssitt de pi.kserver Itr pCrenniiCdes Cqtiilihrcs tinrtnciers, Le tnux d'avance stir le ((reinboursenient iminddiiil )iLIUTVA. acliiclleiiiei~t de iS%, scrfi port6 Q 35?4 pour les entreprises ayunr des coinptes ccrrilids: - Rcnforccr In puliiique ile lu ConciJrrunw hovels lu r*&isioii du cadre 16yrrl CI institutionnol de lo concurrencedons le sens. ncmmmenr. dc lo consolidation de I'outonomic adininistrotive at tiiioiicikre du Conseil de Io coiicurreiice ; - Amtliorer l'etivrr~~ntienietit fiscal de J'etitreprise h trtivers JRr0disntion tl'une tlude qui so focaliscro sur I'bvnluwion dcs rtl`ormos mists en cctivre oinsi que sur l'identilicorion dcs orientations tiittires suivre eu 4gord nux 6cliricinccs tillcnducs, peniculilrenient, I'iii~itaaratioiieA`eclive de lo miie de librc 6change nvec I'Union europkennc. Renforcemcnt du sucteur flnunclcr La rrrritdgie tlc rCrormc enyq$c uu niveiiu du sectetir finmcirr Y pour objcclif (ICrdpwlrc au mieux nux hesoiiis de tinancoment de 1'6cononiie. accroitre I'cflicieiice des institiitions finoncibrts ei poursuivre Its liblriilisntion finnncibre extcrne I-cs rdfbrnies on1 pond, nOIammcnlsur In modornisulion e l IH rc~lriicItif~tiOri Becleiir bailcoire dtr dons I'objcctif de consolider I'ossise IinnnciCrc des bnnques. de telcvcr I'erficiencc des opdratioris d'intcrmtnintion et de rtnlbrccr lcurs crrpacilds institutioniielles et organisationnelles, outre I'rimCiiorti!ion (IC In qualitb de, services OfknS: UI la inohilisatioil de ressourcesiidCguetes tout en rissurunt I'optiniisation de Irur ullocntion. 9 De mC.mc,cl'import:nn@fir6lbrmes oiit kt6 iiitroduilcc sur ICinorcliJ finnncier IIU4ynrd tlu rbla qui lui osc ddvolu don9 le droiiiage de I'epnrpne el sn ctlnulisniion vers Ies secleurs productifs. Les tfTot~sse poursuivronr en vue d'approfoiidir et de poursuivre diivantaga les r&t!ormcs entreprises. Les principalcs 8ccion9 B meiier dens le cndre de ce programme se focnliscroiil, principalenient, sur : - Ln poursuite et I'nccCICmtion du prwassus d'nssoinissement des porlcfetiilles de crkiinccs clnssLts des bnnques et I'nmdlionition der conditions dti recouvreiiieiit des crdances tout en vaillnnt B &iter, dons It fiitur, I'nccumulatiim dcs crdances douteuses. II iinportc do rnppeler, h cc iiivcnu. quc durnnt les deriiibres oiinkes, des c~lbnssubstontiels ont 616 dCployds en iiintikre de copilnlisorion 01 do provisioniiemenl des hrtnqiros. d'amdliarolisii du rccouvrenieiit ninsi qu'en mriiiere tl`tiscouplisseii,aiit du Lrnitemenl des provisioiis et des conditions pour la radia! ion defi citances clnssdes des hilans des hanques, Cer etTorts obit &e ncconipagtiBs pur des opthitions d'flss8inissmeiit dcs crtances bnnceires closadrs d trtivers In prisr eii charge pnr I'Etat des crkances des enircprises puhliqties et parnpuhliques ; - Le renl`orcement dcs dglcs do transparence de9 sociCl4s cotCes h truvers la proniulgrrtioii da In loi SUI' la sdctcritt! finnncikre ; - Lo rdolisntiaii d'une ftude sur Ics socidtds de recouvrenienl CI I6 qualire du provisionncmoiil des cr6nncas coinpromises I'eFTet de tlByuycr des recoiiinieiidolioiis ndbquntes et tlcs actions Icntreprendre. S'nyissanr tlu scclciir des assurancc9, iID hkntficid d'uiie titlention paniculidre des le dkbut des oiinkes 90 el de rdlbrrnes d`cnvaryurc visant la rtstnictnrntion c i la inodcrnisotion du secleur. Ler nctions nien6es ant port@,nolnmment, sur le d6veloppement du rcidrs 16gislntiP et institutionnot, I'amtliorntion des priticipnux dyimus d'nssurunce et l'ainorce d'un proyrammo de mise niveuu tlcs compagnios d'usurancc, Ces d o n s devroiii contribuer A relever le rmdemont dos compognies d'murnnce, accroirre 1u quolitlf des prestntions rendtier CI imdliorer les rfsullnts lechniqucs ot fitiaiicicrs du sectetir en gkiidrol. I,cs oll'orls s'intensifieroiit duraiit lo pCriode li venir cn VLICclc reiit`orcer Io coinpktitivili du sectcur cr de ICprfparcr A affronter la concurrence ttrunykrr. Idesprincipales nctions qu'cnglobe le PACE IV coiiceriieiil, pndculi&remenl: - L'am6lioralion des orgnnes de contrdlc A irovcrs In r6organisatioii du ComilC CihCrd des Assuriinces d i n dc Id doter dc I'autonomie ; - I,n poursuilc dc la restructurotion de certniiies coinpugnies d'ossuraiice 21 trovers l'ndoption et I`cxdciilion dcs plans dc rcstructiirntioii der compoynics conccrndcs ; - I.'ssssinissumonl. du aectcur de I'nswrntice riuloinobile h tr~ivers la poiirsuite du ddveloppeinent du cadre ICyislniir CI r6gldmeiitnire y ollerent et Iii poiirstih Ju relbvemdntdes tnrifs pour I'assurnnce automobile ;el - L'Cliinination de I'nutorisation prhlnble h In parlisipalioir majoritoire des investissctirs dtrlinycrs pnr 10 Commission Supbriaure de I'lnvestissemen~ Mnintien de b atuhllltQot do la rOactivitd dii wlrc mncrofconomiqiie Le maintien d'un cndrc mmo6conomique nnble conslittic! pour In `I'iinisie H tint pr6occupation mamicureen d6pit des intitations et ptnurbatioiis qui n'onr pas cess& cl'alltkcter I'environneintiit nnrional at inrarnationul, A cet kgnrd, les orientdons macrodconoiiiiquas se son! focnlisbas stir In poursuite d'unrr croissoiice rnpide. permettanl. le rdalisnrion des objectirs en matidre d'inveslissrment et de crdatioirs d'ainplois totit en prbsewonl. Ics 6quilibres fiiinnciers internes or exlerncs. Dons cc cadre, Ics prirlcipoux oxes retenusdRns ICI'AC13 IV coiicerneiir riOfniiinient -- Le muintirn titi ct-drr mncro6canoniique et budgimire : L'exRmon clc la prrt'orinance iiincro=fconomique stir hi biisc il'inrlicnteurs approprids fixes OLI prdolublr ; - Le renforcemenr de In gustion budidmire h ~ r i l v ~ tlas foriinilution chin cadre B iiioyen terme ; - L'nmCliorntion de lo yestion de la tlstlc exterieiire h trnvtrs uti8 formiilnlion plus judicieuse de tu gcstion (IC la det~csxtkrieure el tine meilleure utilisntion des iiistniiiieiits dc linniicoiiient disponibles B I'bchelle intenintionale. 'I'oiim CCB pcrspoctives t6moigiteni de la Mcrminatioii de In Tunisic b poiiiwiivre et h rcnl`orcer le processusde rCfortno, plus pnrticuIi&reinent, [IU nivtau du secteiir linnncicr et des nssurnncas, I'environnemcnl, des fifliircs 01 lo prograiiiiiie de inise B iiiveaii, Des nctions woiit. bgalenrenl, mises en oeuvre en vue tl`insufllcr uno dynnmique plus nyissunir h I'iiiveslissciiici\t privk. pnr I'am6lloratioii de In produciiviid des facteiirs de produclion et le reiiiorccinont de In compCritivi16du produit ttiiiisizii. L o cadre macro-econoinique dea anndos h veiiir sera ccmtcidrist pnr I`exCctiiion progressive des politiquas et objectilk Lrricds pur le prograniiiie prdsidenliel N `rirnisie de deiiinin qui a esquissle )) ]as orieiitritions fondernantales de I'muvre de tlkvoloppeiiieiit future. hiilisd ICSperspeclives de dtveloppement tconomique et social de la 'I`unisic pour In periode 2005 A 2009 et orrOtf des objcctil`s prdcis. II n, tgnlemeiit, trncb un chemiiiement cohdrenl pcrii\ettniit de cancr&ristrces objectifs lotii uti longdo le p6riode retentit. Ce cudre mncro6conomiqtie s'inscril duns un wrilcxtd iiinr-quipur des mularioiis qui seronl h I'origine de iiotiveoux dCfis d&coulRilt du clioix stroligiquc de s'intdgrer, davnnlage et prograssivemcnt. dons I'bconomie mondialc. L'6conomie tunirirnnc iluvro Iss nffroiiier nu COU~S des procliiiiiies nnnCus nvcc dcs opportuiiiths qti'il y H Iicu do iiizt~rzh profil ci de nouvelles contrninras qui reqiiikrent des rrrorls suppl6mcntaires et un proccsstis continu de rkl`ormr: IN nivcaudes divers rounges de I'dconomic, L'nbolition des A c c d o miiltitibres et les reioinhdcs aneiiducs, notunimenl. $iir 10s perforinaiices du secieiir dcs icxlilcs aflionrt B titieconctiiwncc clc plus en plus rude en ruison do I'arrivte de iiotiventix pnys concurrcn[s stir I'Unioii eiiropeeniit, notre priiicipal mnrchb ;les r6percuc;sionb:pokhlcs de 1'8largisstmenr de celte m i c B dix iiotivenux priys d'l3trropo caiitrnle et orientole reprd9anun1sutant de concurrents poleiihls ;niiisi qtie la poursiiile dr I'oiivomire vers I'UE diiiis le ciidre tic I'hccord d'Associetion siyiic! iivcc ce pni-leiinire qui prdvoit la fin prochainc de Iri piriodc do transition dcvont dkboucher, d I'hurixoii 2008. sur IHcrinlion d`unc zone de libre4chunyc bvcc ccrie zono pour les produits inrltislri&, soiit autent de delis pour 1'6co nomio tunisienne. Le contexlc inrcrnationol des prochines nniikes prkvoir, r5gnlumoiil. cmaines nutres dificirllds potivont nnitre du fiiir : - Du inainticn, fort proboblc, des prix dti petrole hrut, das produiis pblroliers el ila csnaines motihres de bnse t\ des niveniix encore <vCs pouvnnt &re, coinme CII 2004. B I'origine de tbnes pressions ront stir le hudyei (le I`Etat que stir I'inflnlion er I'anienuiseinent du pouvoir d'nchat ; - De I'ouvcflurc w r u c de I'dcononiie stir I'exlhieur iivec cc qir'elle impliqoe commc p0nttrntion nccrue des produirs klnnyors sur le iiiorchd iiit4rieur el I`iichornement de lo coiicurreirca qui en ddcoulern compic tenu des eiigngzmeiils pis, d'nuianr que I'aniiCc: 2005 vcrro le ddinarroge des ntgocintions uvcc I'OMC ei I'UE en vtie d'iiiie fiiturc - tibCrolislitioii de ccrtninos nctivitOsdo services et de I'tlgrictiliurc ; Du re"wmcn1. possihlo de lo conjoncture inldrieurc, principolemenl. iiu niveuu des conditions climniiquts OL lcur impact dtfovornhle stir IC secictir (IC I'egricultwe et, portnnt. stir lo croissuncc ylohile. Taus cos bvbnomonl?lsoil1 atilniit d'tclikonces dbcisives pour In Turrisiz qui devru prdpurcr de innnitre adtquote son iconomie a h de fnirc face nux nouvelles coiitriiinies qui en ddcouleront durant las prochoiaes niin15es. Dc co hit, Ics oriziitarinns retenucs dnns ICciidw inncro-6coliomique s'inskrent dims tine vision globule sc hastant, d'unc pan, stir lo conlititiitk des rdformeb:cUih cnynydes, iit~t~iii~i~ztit,lors des trois prdcbdentescomposnntos (lu PACE (PACE I d Ill)el. d'trulre pnrl, sur I'identitication et lo r4alisatioti d'autres rel'ormes qui tiennenl compte tlos perspectives de I'kconomir ~ellesqu'allas ressortcnt du programmeprCsideiitiel couvrunl 111pdriotlr 20M.2009. 1-n concrbtisolioir dos ob.iectifs tracks reqtiieri, pour In p3rioclo I`uiurt. In rtnlisntion d'un nivrnu mpCriettr de croiswnce des richesses pcrmctt~ntd'atteindrc les aspiraiions iiatioiisles en inotibrz d'empioi. Cet obiectil: hius4 encore uiie fois nu rnng de prioritt nbsolue (le I'ituvtc de ddveloppemunt, devro imptrotivemoiit s'nccompngner d'une prfsrrvcir.ion de3 tquilibres niiicro- Cconomiqiics el financiers, iiitcrlieR et cxttrries Ainsi, dos oll`orts m w t dtployts en vue d'insulllcr ulie PIUS grsnds dynnmiqtie A I'invcshsomcnl privd b trovers lo poursuite des rdformes inili6ce efin do stiiiwler dnvtintuge I'investissemenr do secieiir privd. Le brit esi d'rlmdlioror dnvnntnge le clirnril dcs iinbircs or I'anviroimcmont g6iikrel dans lequel tvolue I'enrreprise et tlc fncilitcr ci iiilensifier. le tythme de crdation d'cnvepriscs cn concr&isntion do I'objectif de crdelion de 70 niillc enrreprises et prqicts tcl que stipuld pur le progroinme prdsidenticl pour Ics cinq prodwinas nnnees. I-cs mesures prtvues h cet ere1 seront susceptiblcs dc gCn6rer des opponunitds au profit tlu becteur p r i d por lu simplithion des procdduros admiiristmtives h truvrrs Is poursuite (lit programme de rtductian dii nombre d'ticlivilCs sotiii1iai.s h das sutorisations qui seront rcmplacc`cs par tlcs caliicrfi de charge ou 6limiiibes aiiisi qti'a Lmvzrs une p l t i ~groiidc otiverlure de I'investissement pour les nutionnux et Ics Btrongcrs. Dc rcllos iuosures yont de iititurc h s`approcher de I'objectif trncC poor I'onnCz 2009 dnns le ccidre cltiprogritinmu pr6sidonliol qui ninhitionne de r8tluire le namhra des iiclivitds soumities B winrisatioiis ndiiiinistrntives de 90 % en 2009 conire uii ltiut de 60 YOitcruellemcnt. Lo reprise de I'nctivitd dconomiquo cnrogiatrdo dopiiis le milieu dc I'annde 2003, fobisant suite nux diverse3 perturhntions nynnt caractiris6 I'onvironrieinent international et qui oiit larpeiiient affect& les performances de I`Cconomic ~iini~ic~iiie, n ghdrd des rbsulcats sotisfaisonts, riotomimit. eii 1iiotibi.e de croissonce, d'umploi ot de prdservntion des dquilibres tiiionciers intdricurs et oxtCrieurs. L'effort portern, en pcinictilicr, sur Ics notivatix crdnenux et Its SCC~~UCS innovanrs et B valcur qjoutce Blevkt h l'instnr de celui tlcs lcchnoloyias de I'inrorniation et de la cominuiiicatioii qui constituent dcs nioteurs de In croissbnce dcanomiques compte tenti dc lour forlo conlriburion B I'augmenialion du Produit IntCrieur hrut, I It1rdtluction du tnux de chbninyd ot h Inconsolirlulicrn(ICla compdtitivitd globole. Les effoitr seront, Cyulument, intensiti69 611 vue, d'tine pen, de promouvoir dovantnge Ies exponations A travcrs LIII ciicodremeiit plus poussd des exponnrcurs ct i.iiiediversificrrtion uccrtic du syst&mc produclif el, tl'itutrc part, d'iinpulstr I'tpergne nntionole, en pnrtici.ilier I'eporgne longue, par lo poursuile de lo modernisfirion du saotour bailcarre, In dynnmis;ition du mnrchd finnncicr et lo rChrme du socteur des aswaiices, Lo poursuite d'une politique budyClnire cihlanr lo consolidotion des rcccttcd proprea. notamment, fiscdes e l la nieitrise des ddpenses publiques, swIoiic ccllcs de fonctioiincment, lout en veillnnl B consolidor I'oricnlation vcrs le reiiforcemenl des dkpcnses de moderiiisation de I'infrastructurc et de vnlorisntiori des ressottrces humaincs. notniniiittit celles ullou~csA IR rccherche scientitique, I'dducation et I'enseiynement sup6rieur. Io forinnlion professioniielle el In snntk, constiluenr, niissi, dcs domaincs dons lesquels des erroris siippldmwtaires seront t'ournir. Lesprincipoux objdctifa arrBlts visent d : - Continuor d nssurer des niveutix relntivement (51evSs(le croiesoiioe du 1'18 UYCC I'ob.jtciir de pnsser, yreducllumcrrt, B des iriveaux superieurs susceptihles de crJer tlavaiilage de posrcs d`uinplois. tlc rdpondro A la dcinoiide ndditionnclle et de ridtiire IC hux de ch6mnge. nctuellement de 13.9% ; - Porter la ddficit courant de lo bolnncc des pniemeirtsde 3.6 % tlu PIB eii 2002 21 3 %I en 2007 compie rciiu do I'ohjeclif du programme prbsideiitiel de It:siltier b limiletir (IC 2.5 % en 2009 ; - Mhinlenir 10s rdsorvas rlc chnnye un nivcau perriietioiit.de couvrir tilie moyenne de trois ii mois et demi d'iiiiportation ; - Limiter le ddlicit hurlg&aire h tin niucau infdricur I\ 3% tlu PIBen 2007 ; - Hisser le luiix d'dparyne durtint les procheinrs nnnCes B un niventi compatible nvec I'obiectif du progroinme prbsideiitiel le tixaiit 8 25 %I en 2009, moyeiinanl tiiiu augmciilcilion suhsitintiellc de lu conlributioii du murchi fiiiuiicier A lu mobilisnhn de I'dpargne ; - Assurer uii reveiiu par r610 plus dlcvd el s'orienler, yrtiduellement, vers I'objocrif retenn par ICproyraniine prdsidenticl fix6 A hotitcur de 5000 dinan e11 2009 contra 3500 diners environ en 2004. Ides rbformes A mettre en oetivre seront ceiitdes, 6golrmcnt, siir I'i"inr~iion des intlicnteurs (le I'endetcement dons lo mesure oh I'objoctil` wlenu seru de limiter le tilux d'endettement nu niuenu de 45 "/n du rtvcnii nnlionel tlisponible brut 21 liii 2009 contre enviroii 49 % nctucllemriii. L a concrdtisotioii dc CCI oh.jrctif met eii exergtie lo nCcersii6 d'euvrcr h I'inslaurulion d'un systkme de gastion dynnmiquc do hi dette perniettrant tilie Ibrmuloiion aclCquatcrim sirwtiyies ei politiques d'ctrdenernent ct une rdductiondes coilts do I'ciideltemenc grke h ttnc ucilisntion plus rotioiincllc dog nouveniix mdcanistnesolf`crts por le much6 liiinncicr iritarnntionrtl. Malgrd les bonncs purforiiiniices rdnlishs ces dcrnikres nnnbs et comple tciiu des Cvcdutioiis rdccntes sur In scbne intemntionnlc, des contmintes rbstiluint des en&~gctnentspris et de In situotion mondinlc, la Tunisic est dCterniinCc A poursuivrc et A renforcer le proccssus des rkformes initides dnns divers domnincs, particulibrcmetit nu nivoau du secicur financier cr de l'environiiement des affaires, Comma dla est consciente, nussi, que la dnlisation des objuctifs poursitivis pour Ics prochaitiesonnees rcquiert,en plus de I'effofort nationd, I'intcnsificntion (le la coophiion nvec ses parleri~iresnfin dc la hisser h tin nivenii conipci~ihlenvec Ics ei$eux et les controintesde In prochuineCtnpc. Eli cas d'kcart significntif, ICGouveriiement a I'intention d'initier des consultnlions wec les bailleitrs dc fonds et le FMI Rlin d'oxaminer Ics rkolisntions macro=bcononiiquessur In base d'un schtma pdriodiqueinent octunlis0 on vue d'inldgror les changcmants ~nlorvfmuset do veillcr b. assurer hi pfrcnnit6 des Bquilibres globoux. L a concrdtistdon de I'ensemhlc dos objectifs mentiontiis doni cede lettre sur In poliliqua do ddvcloppcment requicrt, en plus dc I'ciTort notional, uti renforccmont du souticti de no6 partenairash mvers la diversiticnlion ct I'ii\tensificntion de Io coopdration inrcmarionde, Pour toutes ces raisoiis et comptc tcnu de I'imporinnce que rcprdsentc le PACE 1V pour I'Cconoinis tunisiennc et mi ddveloppemenr fulur, le Gotivcmctnctit ttitiisicn sollicite I'nppui do le Bnnquc Moiidiale, de Irr Banque Africninc dc Dtvcloppeiiienr Hiiisi que celui do I'Union Europ6enne. nu tiioycn d'uno facilitd d`@stelnctit structurel, pour le finonccment de ce progreninie doni la rknlisntion consol idern Ics ptogrbs d6jb rdnlisfs dans lo cndrc des trois precidciiies coniposuntcs du prograininc, 14 Princlpulca hyporhbes clu codre mecrobmnomiquctlu PACE IV 1-12 cndre macrudwnomiqua oiivisagd pour It PACE IV coiivrtint Its niiiiCes ZOOS 2007 rel'l& les objcciirs WUCCS pour la prochaino ptriode, h snvoir iiotamnieiil line rroiasnnce plus CtevCe du I'roduii intbrieur brut, unc plus grandc diversification du tissu produciif, line ouginenlution de I'cfforr d'investisseineiit nccompflgndd'unc contribution plus Blevdedii sccteur privd, dnvnntnge de cdetions de postes d'tmplois devnni indriirc unc dductioti du tnux de chbmugc. un qllinie d'nccroissement ficcrii des: rxporr[iriond, iiiie consolidntioii de I'dpiiryne nelionale. le lout s'inscrivanl dans un cnd1.e gnrontissniit In prdservation des Cquilihres iiinc.ro-economiques. Enoutra, c6 cndre tieiit compte des conlminres rdlnfivcs iiotfttiiiiient h : - L'environnrmunl dconomiquo iiiternatioiinl donr I'tvoluiion se ciimcrfrisdi% surtout, per des prossiotis coi~ctirrenliellesqu'nnrclnl h suhir les diR2retits secteurs d'activiti, b I'inaar du secieur textile du tnit de I'obolition des Accord3 inilltifibres et I'nrriv6r de nouvcwx pnys concurrents, sinsi que par I'occomplissemeni progrussil`tlc lo zoiiz de libre-dchanye avec I'Union europbcnnc , - 1.~6 mosuros de politiqirs Cconomique qui seroiii priscs eii vile de renforcer lu comp&ilivild de I'hnoinie au coim des prochnines u i d s ;et - Les iiiesures dc renlbrcemcnt tlu ctjclre budg6tnire qui seront mises en phcc cn vue de poursuivre I'et'fort de consolidation budyhirc et d'RccCltrer lu rkductioii de la tletlc puhliqtie. Le PACE IV aidera A lo concrhtisation de5 objeciirs fix& CI pcrrilcrtraA I'dcononiie tunisienne, d'uiie pin, de lkiru I'aca aux diverses coiitrnintes et, d'nubv p~n,de mettro en teuvre les rdfonnes envisog6es duns dilTdrents domaines. cn perticulier. Is dynrrmisnlion tlu sccieur privd et I'ossainissoinentdu secteur finnncier. Le scLLnorio reI.oiiupour le codre niocroaCcononiiqiie des prochilines oiinCzs. ZOOS d 2007. se fondc sur lcs priricipnlcs Iiypothbses suivontes : - Uno croissniice du Prodtiit intirieur brut nu uux dc 5 YOpour I'annbe 200.5 el tine iendnncc vcrs la consolidntion do cette cadence pour les nnnCes suivanles nvec I'obiectif d'nneindre 6 "/o en 2007 ; - Un eiivironiiement interiiotionnl pennetttiill tl'augrnciilcr Ics exportntioiis iiinlgr6 les conlrnintcs de cerlitins scclourb ; - I,n hausse des irivcsiisscrncnrs on relation, notomineiit, nvcc les iiiesures prdvues dons le codre du progriimme PACE IV doni it est nttendu qti'cllus dynniniscronl I'investissement privC nu cours dc le ptrioda coirsidCrCe yriice, entre aii1res, 8 diivantiige dc rticiliinrion des formulitds ndtninislrurives ; - Una plus gronde coiisolidatioii fi.Pcn1o qui sera nienCe dims I'objectif de compensur Its pressions srir les finnnces publiques ; Principnuxlndlcetcurs(ZUO34UU7) . ..-. ri0 -_.__ I.. Irrdicnreurs I 20115 I -- - - " . . ZUW '1 - 2uos 3006 2007 ......"_._. . . . . .-_-- .-_ 5.8 5.0 5.5 --.._ _-___._-___.-...._._... . . . -........-.. . Croissance du PIB non nyricolc I ........ 3.6 1 ...... 6.3 6.0 2 ....... ._. . . . . . . ._.-.._.-....- .5.4 ... .-. . . ...-"..6 ...... Croissnnoedes exponarioiis R et (prix conrrunw) s 5.2 I[ 5.1 ........... --.*---.. I IJa3 I S.2 ..3.9 -.--.. I....-.-,.. ...... -.Croissoncede5 importntibns R ai S (prix constonu) - 1I 0.7 i 3,7 4.Y s.4 ii - 1.7 - 3,O--. __ -.......-.........-....-....I .. .-..._.._.. . . . . ....- ..-- -....5.9. Solde du compre courunt(% du PIE!) -2.1 -3.0 _.--_..,..,,-. 1I . . .--.- --.__.I ...-....... . . . iI -3.0 Cmissoncd de I'invesrissemenc (FRCF) 6.5 8.0 . - - . I [. ' .-3,2. . . . .2.4. . . . . .7.0. . . . . . .I.. l'nux d'investissament(% ~ PIU) I I 23.4 I1 22.9 23.1' 23.7 ..I..- ........ .-._. I ."._.._..24.0 "___ lnvcvtinscmcnt privdPA dii rotnl) 56.5 - ....I -.- i! 55.0. ' r---55.6 I 56S III11 - 57.5 ' --I,-,---- _-.-..I-. ,I--' r -...-- -.- Toux d'kpargne (% du R'NDU) 21.8 -- -- - .---- .- !....22.4 '-*I .-------.- 22.4 ?3,7 ............. -.-..-,"...---- ........... !I 22.H I II ....... ' i "'-" Revenu pur UItc (Dinurr) i3286.6 -.... . 3578.1 3801,9 .. ............-..-.- .- . '1 d ' ' i " * . . . . Intlatlon t 2.8 3.8 3.0 2.7 2.S '1I Solde budy&drc (hurs dons er privntisntioni) 1 - 3 2 -2.6 -3.1 -2.9 1 -2.6 (YO du 1'113) I,-.---___ ....... 0.0 priv~tlsationj(%I du PIR) I........ ,--- ............ .-..- r-r -. ............ Solde budgdtoire pritiinire (hors dons extdricurs CI I -05 0.3 -0,4 -02 . .-.._.._. .., 1I ................. 'i II -.-. .. ---.....-... i Dcttc publlquc totulc (%I dn RNDU) 1 j I ........... _.-_-.-_._... ...... 60.3 60,s 59. I 58.3 . . . . . . j 8 a 7 ....-.-.. .-_.. Draaurrbrie'uro(% du lJ113) 1 51.6 1 49,3 47.9 46.6 .--.^_-.-.--.--.---..._ ....... ........--......-... I_.47.5 - j - _.-_ RSservzsde chnngo (nrois d'impoiliirion) r i 2.5, 1 3.4 i 3.s 3.s 's5 I .-E n e X cd Y 8 I I I IC, IC, I .I .I B Y I - 61 - ANNEX 3: FUND RELATIONS NOTE Public Information Notice (PIN) No. 041- IinternationalMonetaryFund FOR IMMEDIATE RELEASE 700 lgthStreet, NW Washington, D. C. 20431 USA IMF Concludes2004 Article IV Consultationwith Tunisia On October 27, 2004, the E2ecutive Boardof the InternationalMonetary Fund(IMF) concludedthe Article IV consultationwith Tunisia. Background Over the past decade, Tunisia's economic performance has been one of the strongest in the region, reflecting gradual but continuous structural reforms, well targeted social policies, and prudent macroeconomic policies. Tunisia signed an AssociationAgreement with the EU (AAEU) in 1995, marking the beginning of a significantopeningto trade with the EU. Fiscal and monetary discipline has contributed to macroeconomic stability, in the context of a real effective exchange rate (REER) targeting framework with controls on capitalflows. The strength of the Tunisian economy continued in 2003 and the short-term outlook is favorable. Favorable agriculture production and robust nonenergy exports contributed to high growth and a narrowing of the external current account deficit in 2003. A rebound in tourism, a pick up in European demand, and continued real depreciation of the dinar is projected to sustain this strength in 2004. Monetary policy remains prudent and inflation under control. Greater exchange rate flexibility and the appreciation of the euro vis-a-vis the US dollar have led to a depreciation of the dinar in real effective terms. This flexibility has improvedTunisia's competitivenessand helpedstrengthen its external position. On the fiscal front, a low tax buoyancy did not permit further consolidation in 2003, despite the recovery in economic activity. The central government deficit remained at 3.5 percent of GDP in 2003 (excluding grants and privatization receipts), about 0.8 percentage points higher than the budget target. Nevertheless, this allowed for a reduction in the public debt by 0.7 percentage points of GDP, to 61 percent. The 2004 budget deficit target of 2.8 percent of GDP is within reach thanks to measures on the VAT and on subsidies expenditures and higher-than-expected profit transfers from state-owned enterprises. Bankingsector indicatorsdeterioratedfurther in 2003, in part due to difficult economic conditions in certain sectors such as tourism, as well as competitive pressures, which Tunisia is facing in the context of Under Article IV of the IMF's Articles of Agreement, the IMF holds bilateral discussions with members, usually every year. A staff team visits the country, collects economic and financial information, and discusses with officials the country's economic developments and policies. On return to headquarters, the staff prepares a report, which forms the basis for discussion by the Executive Board. At the conclusion of the discussion, the Managing Director, as Chairman of the Board, summarizes the views of Executive Directors, and this summary is transmitted to the country's authorities. This PIN summarizes the views of the Executive Board as expressed during the October 27, 2004 Executive Board discussion based on the staff report. - 62 - growing openness. NPLs as a share of bank assets increased by three percentage points to 24 percent in 2003. While these weaknesses do not pose systemic risks in the near term, current lending practices dampen Tunisia's growth potential by increasingthe cost of capital. Despite Tunisia's favorable economic performance, its objective of approaching lower-tier OECD income levels has not been met and unemployment remains high. Meeting this challenge will require strengthening the macroeconomic policy framework and accelerating structural change. Regarding the former, the authorities are preparing to gradually open up the external capital account. To maintain a measure of monetary policy independence, the authorities have begun a gradual transition toward a floating exchange rate regime. They are also in the process of developing a new monetary policy framework, which should be implementedshortly. On the structural side, the authorities are implementing reform supported by the World Bank, the African Development Bank, and the EU, under the Economic Competitiveness Adjustment Loan. Aside from banking sector weaknesses, impediments include a still restrictivetrade regime (especiallyvis-a-vis non- EU countries), labor market rigidities, and a business climate not yet fully conducive to private sector dynamism. On trade, measures were taken in 2004 to lower and simplify MFN tariffs and streamline customs procedures. 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 2004 Article IV Staff Report and Selected Issues papers. Executive Board Assessment Executive Directors commended the Tunisian authorities for the success in maintaining the economy's resilience and strength, notwithstanding recent shocks and sluggish growth in Europe-Tunisia's main export market. Directorsnotedthat forward-looking and outward-orientedstructural policies, in conjunction with prudent macroeconomicmanagement and well-targetedsocial policies, have put Tunisia among the leaders in the region in terms of growth and market-oriented reforms. They praised the authorities for maintainingclose and productivedialogue with the Fund. Directors noted that, while the economic outlook for 2005 remains favorable-underpinned by a rebound in tourism, agriculture, and exports-the main challenge for Tunisia is to solidify conditions for strong, sustainable growth to attain lower-tier OECD income levels and reduce unemployment. They therefore encouraged the authorities to take advantage of the current environment to accelerate reforms aimed at raising the economy's potential and creating a business environment conducive to private investment. Appropriate sequencing of these reforms while maintainingsocial cohesion will be key to the success of such efforts. Directors welcomed the fact that the mix of monetary policy and gradual increase in exchange rate flexibility has helped improve external competitiveness and strengthen the external position. They agreed that the current monetary policy stance is appropriate, but encouraged the authorities to remain vigilant against price pressures as the economy expands, in order to safeguard the competitive gains that have been achievedthus far. Directors endorsed the authorities' phased approach to liberalizing capital flows and plan to eventually float the dinar. They underlinedthe need to lay the groundwork for such a transition by strengthening the banking sector, reducing public debt, and deepening the development of money and foreign exchange markets. Directors welcomed the recent steps to increase the role of market forces in determining the exchange rate-including the decisions to reduce the surrender requirement and to eliminate the requirement for banks to transfer foreign exchange balances to the central bank on a daily basis, the "nivellement"-and encouraged the authorities to discontinue posting bid/ask spreads for the exchange rate. They noted the considerable progress that has been made in developing a monetary framework aimed at pricestability, which is a prerequisite for a floating exchange rate. Directors expressed concern that banking sector weaknesses, especially the high level of nonperforming loans (NPLs) could potentially constitute a major vulnerability.They welcomed the steps taken recentlyto - 63 - strengthen supervision and accounting standards, reduce NPLs, and increase provisioning. However, Directors noted that additional measures are needed and urged the authorities to adopt stricter provisioning rules, enforce sanctions against bankswith insufficient provisioningor capital, and reduce the government's role in the financial sector. They also encouraged the authorities to broaden the banking sector reform agenda in line with the FSAP recommendations.In this connection, Directorswelcomed the authorities' intention to request an update to the 2002 FSAP. They underscored the importance of consolidating the banking sector before any substantial progress is made toward an exchange rate float and capital account liberalization. Directors commended the authorities' efforts to contain the negative impact of high oil prices on the 2004 budget and supported their intention to carry out a broad reform of the tax system, with technical assistance from the Fund. They stressed the needto adopt a budget for 2005 consistentwith the objective of reducing the public debt-to-GDP ratio, especially external debt, over the medium term. This, together with prudent debt management, will help strengthen confidence in the currency. Directors urged the authorities to redouble their revenue-enhancing efforts, through improving tax collection and administration, phasing out tax exemptions, and widening the tax base. They also encouraged the authorities to undertake a reform of the subsidies system and to consider a broad-based civil service reform to enhance the efficiency of the public administration and contain the wage bill, while protecting allocations for health and education. In this regard, the planned introduction of a performance-based budgetingsystem should help guide budget decisions. Directors commended the authorities' structural reform efforts and noted that emphasis should remain on enhancing the business climate, attracting foreign direct investment, and improving the regulatory framework. They welcomed, in particular, the progress in integrating trade with the European Union and the continued efforts to enhance regional integration within the Maghreb region. Directors nevertheless highlighted the benefits of accelerating trade liberalization on a multilateral basis, in terms of improved productivity and greater trade opportunities. To this end, they encouraged the authorities to continue lowering most-favored-nationtariffs within the 2005 budget law, and to reduce nontariff barriers, including by pursuing further reforms in customs administration, and liberalizing the distribution and transportation sectors. Directorswelcomed the decisionto study options for dismantling state import monopolies. Directors notedthat the recent measures to enhance labor market flexibility are importantsteps to reduce unemployment and support labor reallocation in response to changes in the economic structure. They encouragedthe authoritiesto streamline labor regulations,continue to pursue active labor market policies, and explore further ways to enhance labor market flexibility, with a view to ensuring that growth translates into reduced unemployment. Directors commended the authorities' record of transparency. They welcomed the ongoing efforts to improve the quality and dissemination of statisticswithin the framework of the Special Data Dissemination Standard (SDDS), as well as the intentionto updatethe 1999 data ROSC. Directors welcomed the recent creation of a Financial Intelligence Unit and the adoption of a law on anti- money laundering and combating the financing of terrorism (AMUCFT). They looked forward to the full implementationof the law, which is expected to contribute to a significant improvement in the country's AMUCFT regime. Public information Notices (PINS)form part of the IMF's efforts to promote transparency of the IMF'sviews and analysis of economic developments and policies. With the consent of the country (or countries) concerned, PlNs are issued after Executive Board discussions of Article IV consultations with member countries, of its surveillance of developments at the regional level, of post-program monitoring, and of ex post assessments of member countries with longer-term program engagements. PlNs are also issued after Executive Board discussions of general policy matters, unless otherwise decided by the Executive Board in a particular case. - 64 - Table 1. Tunisia: Selected Economic Indicators -Est. Proi. 2000 2001 2002 2003 2004 Production and income (percent change) Nominal GDP 8.2 7.7 4.0 7.9 9.3 Real GDP 4.7 4.9 1.7 5.6 5.6 GDP deflator 3.3 2.7 2.3 2.2 3.5 Consumer price index (CPI), average 3.0 1.9 2.8 2.8 3.4 Gross national savings (in percent of GDP) 23.1 23.5 21.6 22.2 22.0 Gross investment (in percent of GDP) 27.3 27.8 25.2 25.1 24.5 External sector (percent change) Exports of goods, f.0.b. (in $) -0.4 13.2 3.8 17.1 11.0 Imports of goods, f.0.b. (in $) 1.o 11.2 -0.2 14.7 9.8 Exports of goods, f.0.b. (volume) 7.3 15.7 1.9 7.2 0.9 Import of goods, f.0.b. (volume) 6.5 13.6 -2.4 3.4 0.6 Trade balance (in percent of GDP) -11.6 -12.0 -10.1 -9.1 -8.5 Current account, excl. grants (in percent of GDP) -4.2 -4.3 -3.5 -2.9 -2.5 Terms of trade (deterioration -) -2.1 -0.2 -0.4 -1.5 ... Real effective exchange rate (depreciation -) 1/ -1.7 -2.4 -1.1 -4.1 ... Central government (percent of GDP) 2/ Total revenue, excluding grants and privatization 24.0 24.0 24.4 23.7 23.4 Total expenditure and net lending 27.9 27.8 27.9 27.1 26.2 Central government balance, excl. grants and privatization -3.9 -3.8 -3.5 -3.5 -2.8 Central government balance, incl. grants, excl. privatization -3.7 -3.5 -3.1 -3.2 -2.6 Total government debt (foreign and domestic) 60.8 62.8 61.6 60.9 59.2 Money and credit (percent change) Credit to the economy 24.2 11.5 6.5 6.2 7.7 Broad money (M3) 3/ 14.7 10.3 4.5 6.8 9.3 Velocity of circulation (GDP/M3) 1.882 1.839 1.830 1.849 1.849 Interest rate (money market rate, in percent, e.0.p) 5.88 5.94 5.91 5.00 ... Official reserves Gross official reserves (US$ billions, e.0.p) 1.8 2.0 2.3 3.0 3.2 In months of imports of goods & services, c.i.f. 2.4 2.3 2.7 3.0 2.9 Total external debt External debt (US$ billions) 4/ 11.4 11.6 13.7 16.1 16.2 External debt (in percent of GDP) 4/ 58.4 58.1 65.2 64.4 57.4 Debt service ratio (percent of exports of GNFS) 22.6 15.6 17.2 15.1 19.0 Financial market indicators Stock market index 51 1443 1267 1119 1250 1332 Memorandum items: 26,68 28,74 29,89 32,26 35,25 GDP at current prices (TD millions) 5 1 0 1 5 GDP at current prices (US$ billions) 19.5 20.0 21.3 25.0 28.2 GDP per capita (US$) 2,036 2,068 2,181 2,535 2,822 Population (millions) 9.6 9.7 9.8 9.9 10.0 Exchange rate: dinar/US$ (average) 1.37 1.44 1.42 1.29 ... Sources: Tunisianauthoritiesand staff estimates and projections 1/ InformationNoticeSystem. 2/ Excludes the social security accounts. 3/ Deposit money banks 4/ Short-termexternal debt includes nonresidentsdeposits and excludes commercial debt. 5/ TUNINDEX. (1000 = 4/1/1998). 2004 is for September 10, 2004. - 65 - ANNEX 4: COUNTRYAT A GLANCE(includescountry map) Tunisia at a glance 9/23/04 M. East Lower- POVERTY and SOCIAL & North mlddle- ~ Tunisia Africa Income Developmentdiamond. 2003 Population,mid-year(millions) 9 9 312 2,655 Lifeexpectancy GNI percapita (Atlas method, US$) 2,240 2,210 1,480 GNI (Atlas method, US$billions) 22 2 689 3,934 T Average annual growth, 1997-03 Population(%) 1 2 1 9 0 9 Laborforce (%) 2 3 2 9 1 2 GNI Gross per primary Most recent estlmate (latest year available, 1997-03) capita nrollment Poverty (% ofpopulationbelownationalpovertyline) Urbanpopulation("7 of totalpopulation) 84 58 50 Life expectancyat birth (years) 73 69 69 -L Infant mortality(per 7,000live births) 21 44 32 Child malnutrition(% of children under5) 4 11 Accessto improvedwater source Access to an improved water source (% of population) 80 88 81 Illiteracy(% ofpopulation age 15+) 27 31 10 Gross pnmaryenrollment (% of school-agepopulation) - 112 96 112 Tunisia Male 114 100 113 Lower-middle-incomegroup ~ Female 109 92 111 KEY ECONOMICRATIOSand LONG-TERMTRENDS 1983 1993 2002 2003 1 Economicratios. GDP (US$billions) 8.4 146 21 0 25 0 Grossdomestic InvestmenUGDP 33.5 29 2 25 2 25 1 Exports of goods and serviceslGDP 34.4 40 4 448 43 1 i Trade Grossdomestic savings/GDP 25.1 21 7 21 0 21 0 I T Gross nationalsavings/GDP 26.6 20 0 21 6 21 8 Current account balance/GDP -6.9 -8 8 -35 -2 9 Interestpayments/GDP 2.5 2 9 2 4 2 3 Total debffGDP 48.6 59 5 61 5 61 8 Total debtservice/exports 19.2 20 8 135 130 Presentvalue of debUGDP 59 8 I Presentvalue of debUexports 1055 Indebtedness 1983-93 1993-03 2002 2003 2003-07 (average annualgrowth) GDP 3.8 4.8 1 7 5 6 5 2 - Tunisia GDP percapita 1.5 3.4 0 6 4 4 4 0 - Lower-middle-incomegroup Exports of goods and services 7.3 5.2 -2 1 03 4 4 STRUCTUREof the ECONOMY 1983 1993 2002 2003 1Growth of Investmentand GDP (Ye) (% of GDP) Agriculture 12.4 14.7 10.3 12.1 I 10T I Industry 32.5 28.0 29.3 26.1 5 Manufacturing 14.2 17.1 18.6 17.8 0 Services 55.1 57.3 60.4 59.8 Private consumption 57.9 62.0 62.6 62.4 General government consumption 16.9 16.3 16.5 16.6 imports of goods and services 42.7 48.0 49.1 47.2 1983-93 1993-03 2002 2003 (average annualgrowth) Growth of exports and Imports ( O h ) Agriculture 5.3 2.8 -11.o 21.5 Industry 3.7 4.7 3.2 0.9 Manufacturing 1.7 5.3 1.9 0.7 Services 3.4 5.3 3.6 5.0 Privateconsumption 2.8 4.8 3.9 4.8 General government consumption 3.0 4.3 4.3 4.6 Gross domestic investment 2.6 4.3 -6.1 7.3 Imports of goods and services 4.1 4.8 -2.4 0.1 Note: 2003 data are preliminaryestimates. * The diamonds show four key indicatorsin the country(in bold) compared with its income-groupaverage. if data are missing, the diamondwill be incomplete. - 66 - Tunisia PRICES and GOVERNMENTFINANCE 1983 1993 2002 2003 I Domesticprices `i Inflation (%) ("hchange) I Consumer prices 4.1 2.7 2.7 ImplicitGDP deflator 12.7 4.7 2.3 2.2 Governmentfinance ("9 of GDP, includescurrentgrants) Currentrevenue 30.3 27.6 24.8 23.8 98 99 00 01 02 Currentbudgetbalance 5.7 4.8 4.7 4.3 Overall surplusldeficit -4.2 -2.8 -3.1 -3.2 -GDP deflator -CPI TRADE 1983 1993 2002 2003 (US$ millions) Exportand Import levels(US$ mill.) Totalexports (fob) 1,860 3,746 8,857 8,027 12,500 Fuel 832 454 641 801 5 Agriculture 82 436 489 827 10,wO Manufactures 908 2,387 5,057 5,836 7,500 Total imports (cif) 3,103 6,149 9,504 10,896 Food 434 417 798 694 5,wO Fueland energy 347 455 846 1,130 2,500 Capitalgoods 795 1,515 2,086 2,224 0 Export price index (1995=100) 82 154 165 97 98 9s 00 01 02 03 Import price index (1995=100) 95 109 117 Exports Imports Terms of trade (1995=100) 86 141 141 BALANCEof PAYMENTS 1983 1993 2002 2003 (US$ millions) 1 Currentaccountbalanceto GDP (56) Exportsof goods and services 2,869 5,789 9,539 10,911 Importsof goods and services 3,567 6,678 10,431 11,098 Resource balance -698 -909 -893 -987 Net income -267 -971 -984 -1,046 Net current transfers 387 597 1,130 1,295 Currentaccount balance -578 -1,283 -746 -738 Financingitems (net) 583 1,322 895 1,146 Changes in net reserves 15 -39 -149 -408 Memo: Reserves includinggold (US$ millions) 574 864 2,301 2,957 Conversionrate (DEC,local/US$) 0.7 1.o 1.4 1.3 EXTERNAL DEBT and RESOURCE FLOWS 1983 1993 2002 2003 (US$ millions) Composltlonof 2003 debt (US$ mill.) Total debtoutstandingand disbursed 4,058 8,693 12,923 15,473 IBRD 434 1,595 1,464 1,779 IDA 67 54 35 33 *I2 A: 1,779 Total debt service 638 1,352 1,445 1,594 IBRD 65 263 233 286 IDA 1 2 2 2 Compositionof net resourceflows Officialgrants 28 103 114 56 Officialcreditors 238 375 242 233 Privatecreditors 263 -98 867 771 Foreigndirect investment 184 562 795 575 Portfolioequity 0 20 6 E: 3,092 World Bank program Commitments 144 189 112 0 A - IBRD E - Bilateral Disbursements 90 248 117 251 B. IDA D Other multilateral - F. Private Principalrepayments 32 149 156 207 C . IMF G - Sholt-term Net flows 57 99 -39 44 Interestpayments 34 117 79 82 Net transfers 24 -18 -118 -38 DevelopmentEconomics 9/23/04 IBRD 33500 38°N 8°E 10°E 12°E Sicily This map was produced by the Map Design Unit of The World Bank. Mediterranean Sea The boundaries, colors, denominations and any other information (ITALY) shown on this map do not imply, on the part of The World Bank Group, any judgment on the legal status of any territory, or any endorsement or acceptance of such boundaries. La Galite S t r a i t Bizerte o f BIZERTE Gulf of Tunis S i c i l y Tabarka Mts.. Mts ARIANA To Atla lass L'Ariana Algiers Beja TUNIS NABEUL Pantelleria JENDOUBA Ben Arous (ITALY) BEJA BEN AROUS To Jendouba Sétif Nabeul Zaghouan Mellegue ZAGHOUAN SILIANA Gulf of Hammamet 36°N Le Kef Siliana LE KEF 36°N SOUSSE Sousse To Sétif Kairouan Monasir Isole Pelagie Thala KAIROUAN MONASTIR (ITALY) KASSERINE Mahdia A L G E R I A El M A H D I A Hateb Zeroud El Djem Jabal ash Shanabi (1544 m) Kasserine Sidi Bou Zid SIDI BOU S F A X ZID Sfax Mediterranean Kerkenna G A F S A Islands Sea Gafsa Maharès Skhira Gulf of 34°N Gabes 34°N Tozeur Gabes Houmt Souk T O Z E U R El Hamma Djerba Island To Chott el Jerid Kebili G A B E S Touggourt Zarzis MEDENINE K E B I L I Medemine Tataouine 0 25 50 75 100 Kilometers Al-Jifarah To Tripoli T A T A O U I N E Plain L I B Y A 0 25 50 75 Miles Remada Erg 32°N To 8°E Great Eastern Dehibat Mizdah El Borma TUNISIA To Dirj SELECTED CITIES AND TOWNS GOVERNORATE CAPITALS NATIONAL CAPITAL RIVERS TUNISIA MAIN ROADS RAILROADS GOVERNORATE BOUNDARIES INTERNATIONAL BOUNDARIES 30°N 10°E OCTOBER 2004