Report No. 274-TUN {FUtLL (E1 C)Li The Economic Devedopment , Too of Tunisia WUTt Main Volume -- W- EE Macro-Economic Aspects December 27, 1974 EMENA Region Country Programs Department II Not fovD PubficD˘ Us§e Document of the International Bank for Reconstrjction and Development This report was prepared for official use only by the Bank Croup. It may not be published, quoted or cited without Bank Group authorizatlon. The Bank Group does not a(cept responsibility for the accuracy or completeness ol the report. CURRENCY EQUIVALa1TS Currency Unit = Dinar = 1000 millimes With effect from 1955 US $1.00 - 0.42 Dinar Dinar 1.00 = US $2.381 With effect from September 28, 196h US $1.00 - 0.52 Dinar Dinar 1.00 - US $1.90 With effect from December 20, 1971 US $1.00 - 0.48 Dinar Dinar 1.00 - US $2.08 With effect from February 1973 us $1.00 - o.44 Dinar Dinar 1.00 - US $2.27 UNITS AND WEIGHTS AND MEASURES: MNTRIC British/U.S. Equivalents 1 m 3.28 ft. 1 m ton = 0.981 g. ton = 1.1 US sh. ton 2 = 10.76 sq. ft. 1 kg = 2.2 lb. 1 kmI 0.62 mi. 1 litre = 0.22 gal. 1 kmn2 = 0.366 sq. mi. = 0.26 US liq.gallzn 1 hectare = 2.5 acres 1 m3 = 1.31 cubic yards ECONOMIC DEV1LOPMENT OF TUNISIA TABLE OF CONTENTS MA:IN REPORT THE MACRO-ECONOMIC VIEW MAP PREFACE COUNTRY DATA Page No. SUMMARY AND CONCLUSIONS ...................................... 1. IliE GEOGRAPHICAL SETTING .....................................1 A. Geography and Climate .................................... B. Economic Resource Base ..........................2 (i) Agricultural Resources .............................. 2 (ii) Water Resources .....................................2 (iii) Minerals .............................................3 (iv) Population ..........................................4 2. ECONOMIC TRENDS, 1961-1973 .5 A. The Economic Situation at the End of the 1950's .5 B. Planned Economic Develonment.7 C. The Growth Record .9 D. The Financing of Development ............................. 12 E. Investment Policies ................. .. ................... 17 - Investment in Agriculture ............. .. .............. iS (i) The Role of the Cooperatives ...................... 19 (ii) Land Reform ....................................... 20 (iii) Work Relief Program ............................... 21 - Industrial Investment ............... .. ................ 22 3. POPULATION, EMPLOYMENT AND MANPOWER NEEDS ..................... 26 A. Population and Migration ................................. 26 (i) Population .......................................... 26 (ii) Internal Migration .................................. 29 (iii) External Migration .................................. 31 B. The Labor Force .......................................... 32 (i) Employment by Sector ................................ 33 (ii) Employment by Occupation ............................ 35 (iii) Regional Employment ................................. 36 (iv) Unemployment and Underemployment .37 -2- Page No. C. Government Bodies and Employment Functions and Policies ... 42 (i) General .............................................. 42 (ii) Placement Activities ................................. 42 (iii) Training Activities .................................. 42 (iv) Relief W4ork - The "Chantiers de Lutte Contre le Sous Developpement" .................................... 43 D. Job Creation and Manpower Needs ........................... 45 (i) Job Creation and the Fourth Plan ..................... 45 (ii) Manpower Needs of the Fourth Plan .... ................ 47 4. INCOMES AND INCOME DISTRIBUTION ............................... 51 A. Income Structure and Trends .51 B. Wage Levels .63 C. Income Policy ................. 66 (i) Introduction ......................................... 66 (ii) Fourth Plan Proposals and Outline of an Income Policy .......................................... 67 5. DOMESTIC RESOURCE MOBILIZATION ................................. 71 A. Capital Formation and Sources of Financing .... ............ 71 B. Savings of Enterprises .................................... 73 C. Public Finances .. .................. 79 (i) Taxation ............................................. 80 (ii) Current Expenditures and Transfers .... ............... 85 (iii) Capital Budget Operations ............................ 86 (iv) State Enterprises .................................... 86 D. Deficit Financing and Monetary Policy ..................... 87 F. Fourth Plan Targets and Prospects ....................... SB F. Fiscal Policies ............... ..... . 91 6. FINANCIAL INSTITUTIONS AND POLICIES ............................ 94 A. Banking and Investment Institutions ....................... 94 (i) The Central Bank ..................................... 94 (ii) The Deposit Money Banks .............................. 95 (iii) The Postal Checking System and the National Savings Fund . 96 (iv) Other Financial Institutions ........ ................ 96 (v) The Interbank Money Market ........................... 96 (vi) Societe Tunisienne de Banque ......................... 100 (vii) The Development Institutions ......................... 103 (viii) Credit to Agriculture ................................ 106 (ix) Insurance Companies .................................. 107 (x) The Societe Financiere de Gestion de Portefeuille .... 109 B. The Bourse and Securities Market .......................... 110 C. The Regulatory Framework and the Capital Markets .......... 111 -3- Page No. D. Towards a New Strategy . ................................... 115 (i) Introduction ................ 115 (ii) Monetary and Credit Policy Under the Fourth Plan .... 116 (iii) The Regulatory Framework ............................ 117 (iv) Financial Intermediaries ............................ 119 (v) Investment Finance .................................. 120 7. THE REGULATORY AND INCENTIVE FRAMEWORK ........................ 121 A. The State's Growing Role 1956-1969 .121 B. The New Orientation After 1969 . . .125 (i) Re-evaluation of Institutional and Sector Roles 125 (ii) Liberalization of Trade and Payments .127 (iii) Modification of Price Controls .128 (iv) Relaxation of Investment Controls, Incentives and the New Promotional Framework .129 C. New Perspectives ......................................... 135 8. TIE BALANCE OF PAYMENTS, EXTERNAL RELATIONS AND EXTERNAL DEBT . 140 A. Developments and Institutional Changes 1961-1972 ... 140 (i) General .140 (ii) The Deterioration of Tunisia's External Position, 1961-1964 .143 (iii) The Stabilization Program and Developments During the First Four-Year Plan. 145 (iv) The Structural Imlprovement in Tunisia's External Position During the Second Four-Year Plan, 1969-1972 -.. 148 B. External Relations and Structure of Trade . . .............. 155 (i) The External Relations and Direction of Trade ....... 155 (ii) The Structure of Trade .............................. 160 C. Capital Flows and External Debt ................ .......... 165 (i) Evolution, Structure and Uses of External Capital ... 165 (ii) Official Capital . .................................... 165 (iii) Private Lending ..................................... 171 (iv) Direct Investment .....1.............................. 172 (v) External Debt ....................................... 172 (vi) Aid Coordination .................................... 176 9. THE FOURTH PLAN AND DEVELOPMENT PROSPECTS ..................... 178 A. Introduction ............................................. 178 B. The Underlying Strategy ................................... 179 C. The Economic and Social Policy ........................... 180 -4.- Page No. D. The Conceptual Framework .................... ............. 183 (i) The "Global Prospect" Model ......................... 183 (ii) The Table of Inter-Industrial Flows .... ............. 184 (iii) The "Sectoral Prospects" Model ...................... 184 E. Fourth Plan Objectives ...... ............................. 185 (i) Growth .............................................. 185 (ii) Consumption ......................................... 186 (iii) Investment .......................................... 188 (iv) The Financing of Investment ........................ 191 (v) The Balance of Payments ............................. 193 (vi) Employment .............................. 196 F. The New Prospects ...................... ................. 196 (i) Introduction ........................................ 196 (ii) The Revised Projections ............................. 1 97 (iii) Conclusions .205 ANNEX I - AGRICULTURE 10. THE ROLE AND PERFORMANCE OF AGRICULTURE IN THE 1960'S 1 A. The Place of Agriculture .I B. Recent Production Performance. C. The Factors of Production. 8 D. Imports and Exports .11 E. Agricultural Prices and Incomes .12 11. THE POTENTIAL FOR GROWTH ...................................... 17 A. Overall Demand Prospects ................................. 17 B. Overall Production Prospects ............................. 21 C. Some Individual Commodities .............................. 27 (i) Wheat and Barley ..................... 27 (ii) Olive Oil ........................................... 38 (iii) Livestock ........................................... 47 (iv) Wine .......... ...................................... 50 (v) Other Commodities ...................... 52 (vi) Vegetables .......................................... 52 (vii) Citrus .............................................. 53 (viii) Fisth ................................................ 54 D. Labor and Capital Implications ........................... 55 12. THE ROLE OF GOVF,RNMENT IN AGRICULTURE ......................... 60 A. Government Institutions .................................. 60 B. Public Investment Policies ............................... 64 (i) General ............................................. 64 (ii) Irrigation .......................................... 68 -5- Page No. C. Land Tenure .............................................. 75 (i) State-Owned Lands ................................... 76 (ii) Privately Farmed Lands .............................. 79 (iii) The Collectively-Owned Lands ........................ 81 D. Price and Marketing Policies ............................. 82 E. Policies for Private Investment and Credit .... ........... 85 (i) Short-Term Credit in Kind Campaign .... .............. 89 (ii) A Proposed Integrated Credit Structure .... .......... 90 F. Agricultural Education, Research and Extension ........ ... 94 (i) Education ........................................... 94 (ii) Research ............................................ 96 (iii) Agricultural Extecsion .............................. 97 ANNEX II - INDUSTRY 13. INDUSTRIAL DEVELOPMENT TRENDS ...... ............... . 1 A. Review of 1961-1971 ...................................... 1 B. The Structure of Tunisian Industry ....................... 5 C. Economics and Operation of State Enterprises .... ......... 6 D. The Fourth Plan - A New Deal ............................. 10 E. The Private Manufacturing Sector ......................... 11 14. POSITION AND PROSPECTS IN KEY SECTORS ......................... 12 A. Oil, Natural Gas and Petroleum Refining .... .............. 12 B. Phosphate Mining and Fertilizer Production .... ........... 16 C. Mining, other than Phosphates ............................ 18 D. Sugar .................................................... 20 E. Textiles, Clothing, Leather and Shoes .................... 22 F. Pulp and Paper ........................................... 26 G. Construction Materials (Particularly Cement) .... ......... 28 H. Steel ......... ..................................... 28 I. Metal Manufacturing, Mechanical and Electrical Industries. 31 J. Motor Vehicle Assembly ................................... 33 K. Electric Power ........................................... 36 15. AN INDUSTRIAL DEVELOPMENT STRATEGY ............................ 41 A. Introduction ............................................. 41 B. The Proposals of the Fourth Plan ......................... 41 C. Some Elements of a E'roduction and Investment Strategy 42 (i) Sector Priorities .........................-. 42 (ii) Export Orientat:ion and Liberalization .... ........... 43 (iii) Employment Creation ................................. 43 (iv) Role of Foreign Investors ........................... 44 (v) State Industrial Enterprises ........................ 45 (vi) Small Scale Industrial Enterprises .... .............. 46 -6- Page No. D. The Tools of Industrialization ..... ...................... 47 (i) Project Identification and Development .... .......... 47 (ii) Industrial Licensing and Incentives Framework ....... 49 (iii) Institutional Infrastructure ........................ 50 (iv) Manpower, Productivity and Labor Relations .... ...... 51 ANNEX III - TOURISM AND INFRASTRUCTURE 16. THE TRANSPORT SECTOR: PROBLEMS AND PROSPECTS .... ............. 1 A. The Transport Infrastructure ............................. 1 (i) Ports ............................................... 1 (ii) Highways ............................................ I (iii) Railways ............................................ 1 (iv) Airports ............................................ 1 B. Performance ............................................. . 2 (i) Investments ......................................... 2 (ii) Supply and Demand ................................... 3 (iii) Costs and Tariffs ................................... 4 (iv) Employment .......................................... 5 C. Transport Policy ......................................... 5 D. Development Prospects: The Four-Year Plan 1973-1976 ..... 7 17. INLAND TRANSPORT .............................................. 11 A. General .................................................. 11 B. Past Transport Demand and Supply ..... .................... 12 (i) Vehicle Fleet ....................................... 12 (ii) Traffic Increase .................................... 13 (iii) Freight Traffic ..................................... 14 (iv) Passenger Traffic ................................... 15 (v) Urban Transport ..................................... 16 C. Evolution of Inland Transport, 1962-1972 .17 D. Road Transport ........................................... 18 (i) Road Transport Infrastructure ....................... 18 (ii) Road Transport Operation ............................ 19 (iii) Conclusions and Prospects: Infrastructure .... ...... 23 (iv) Conclusions and Prospects: Road Transport Industry . 25 E. Rail Transport ........................................... 28 (i) Railway Investment .................................. 28 (ii) Finances ............................................ 28 (iii) Railway Operation ................................... 29 (iv) Prospects of Rail Transport ......................... 30 7- Page No. 18. AIR AND SEA TRANSPORT .......................................... 31 A. Air Transport ............................................. 31 (i) General .............................................. 31 (ii) Organization ......................................... 31 (iii) Performance .......................................... 31 (iv) Development Prospects ................................ 34 B. Maritime Transport ........................................ 38 (i) General .............................................. 38 (ii) Organization ......................................... 38 (iii) Traffic Performance .................................. 39 (iv) Investments .......................................... 40 (v) Cost and Tariffs ..................................... 41 (vi) Development Prospects ................................ 42 19. TOURISM ........................................................ 43 A. The Sector ................................................ 43 (i) The Growth of Tourism and its Contribution to the Tunisian Economy ................................ 43 (ii) The Nature of Tourism Demand in Tunisia .... .......... 46 (iii) Tourism Accommodat:ion ................................ 50 (iv) Incentive and Institutional Framework .... ............ 55 B. Development Prospects ..................................... 57 (i) Objectives of the Fourth Plan ........................ 57 (ii) Absorptive Capaci:y .................................. 59 (iii) Hotel Development and Financing ...................... 61 (iv) Demand Prospects -- Leisure Activities - Promotion ,and Marketing .................................. 62 (v) Non-Quantifiable Costs of Tourism .................... 65 C. Spa Facilitias in Tunisia ................................. 66 (i) Development of Spa Facilities during the Past Decade.. 66 (ii) Forecascs for the Fourth Plan 1973-1976 .... .......... 67 20. EDUCATION ....................................................... 68 A. Introduction .............................................. 68 B. The School System ......................................... 68 C. The 1959 Targets .................... 73 D. An Appraisal of the System .............. .. ................ 74 (i) Primary Education .................................... 74 (ii) Secondary Education .................................. 75 (iii) Vocational Training .................................. 78 (iv) Higher Education ..................................... 85 (v) Adult Education and Literacy ......................... 86 (vi) Private Education .................................... 87 (vii) Pre-school Education ................................. 87 -8- Page No. E. Cost and Efficiency of Education ......................... 88 F. The Fourth Plan 1973-1976 ................................ 92 G. Elements of a New Orientation ............................ 94 21. SOME OBSERVATIONS ON HEALTH, NUTRITION AND FAMILY PLANNING .... 98 A. Introduction ............................................. 98 B. Health ................................................... 98 C. Nutrition ................................................ 102 D. Family Planning .......................................... 103 ANNEX IV - A LONG TERM PROJECTION MODEL V. STATISTICAL ANNEX Table No. I. POPULATION, MIGRATION, EMPLOYMENT 1.1 Population Growth in Ttnisia, 1956-1973 1.2 Population and Density by Gouvernorat, 1956-1981 1.3 Age Distribution of Population, 1956-1981 1.4 Distribution of Employment by Sector and Sex, 1956-1976 1.5 Employment by Sector, by Gouvernorat in 1966 1.6 Population, Labor Force, and Employment, 1956-1976 II. NIATIONAL ACCOUNTS 2.1 Resources and Uses, 19'50-1961 (1957 Constant Prices) 2.2 Resources and Uses, Percentage Distribution at Constant Prices, 1950-1961 2.3 Major Aggregates and Savings, 1961-1973 (Current Prices) 2.4 Major Aggregates and Savings, 1961-1973 (1966 Constant Prices) 2.5 Gross Domestic Product by Origin, 1961-1973 (Current Prices) 2.6 Gross Domestic Product by Origin, Percentage Distribution at Current Prices, 1961-1973 2.7 Gross Domestic Product by Origin, 1961-1973 (1966 Constant Prices) 2.8 Resources and Uses, 1961-1973 (Current Prices) 2.9 Resources and Uses, Percentage Distribution at Current Prices, 1961-1973 2.10 Resources and Uses, 1961-1973 (1966 Constant Prices) 2.11 Gross Investment by Sector and its Financing, 1961-1973 (Current Prices) 2.12 Gross Investment bv Sec:tor and its Financing, Percentage Distribution, 1961-1973 2.13 Planned and Actual Investment and its Financing, 1962-1972 (Current Prices) III. BALANCE OF PAYMENTS 3.1 Balance of Payments, 1950-1961 3.2 Balance of Payments, 1961-1973 3.3 Value of Exports, 1961-1973 3.4 Volume of Exports of Principal Commodities, 1961-1973 3.5 Value of Imports, 1961-1973 3.6 Index Numbers of Price and Volume of T.nports and Exports Terms of Trade (1961=100), 1961-1973 3.7 Direction of Trade, 1961-1973 3.8 Breakdown of Services Receipts and Payments, 1961-1973 3.9 Foreign Grants, 1961-1973 3.10 Disbursements of Public Loans, 1961-1973 3.11 Breakdown of Public Loans and Private Credits, Disbursements, 1961-1973 3.12 Direct Investment by Sector, 1961-1973 3.13 Service Payments on Foreign Debt, 1961-1973 3.14 Foreign Assets and Liabilities, 1961-1972 3.15 Rate of Exchange, 1950-1973 - 10 - Table No. IV. EXTERNAL DEBT 4.1 External Public Debt Outstanding as of December 31, 1973 _ 4.2 Projections of External Public Debt as of December 31, 1973 4.3 External Debt Outstanding by Origin, 1964-1973 4.4 Average Terms of Borrowing by Type of Credit and Creditor Country, 1967-1972 4.5 Commitments by Economic Sector, 1967-1972 4.6 Commitments Received by Origin, 1965-1972 V. PUBLIC FINANCE 5.1 General Government Current Accounts, 1961-1973 5.2 General Government Capital Accounts, 1961-1973 5.3 General Government Accounts, as compared to GDP, 1961-1973 5.4 Central Government Accounts, 1961-1973 5.5 Central Government Current Receipts, 1961-1973 5.6 Central Government Current Expenditure, 1961-1973 5.7 Local Government: Sources and Uses, 1961-1973 5.8 Social Security: Sources and Uses, 1961-1973 VI. MONEY AND CREDIT 6.1 Monetary Survey, 1962-1973 6.2 Composition of Money and Quasi-Money; Money and Quasi-Money as compared to GDP, 1962-1973 6.3 Balance Sheet of the Central Bank, 1962-1973 6.4 Balance Sheet of the Commercial Banks, 1962-1973 6.5 Medium and Long-term Resources and Uses of Comnercial Banks, 1962-1973 6.6 Distribution of Bank Credit by Economic Sector and Term, 1962-1973 6.7 Instruments of Credit Control of the Central Bank, 1961-1973 6.8 Interest Rates, 1961-1973 6.9 STAR: Distribution of Premium Income VII. AGRICULTURE 7.1 Volume of Agricultural Production, 1961-1973 7.2 Value of Agricultural Production, 1961-1973 7.3 Wholesale Prices of Agricultural Commodities, 1962-1973 7.4 Foreign Trade in Agricultural Products, 1961-1973, in Value 7.5 Foreign Trade in Agricultural Products, 1961-1973, in Volume 7.6 Major Agricultural Inputs, 1962-1973 7.7 Main Features of Land-Tenure, 1955 and 1970 Table No. VIII. INDUSTRY 8.1 Value of Main Industrial Products, 1961-1972 8.2 Volume of Main Industria]L Products, 1961-1972 8.3 Industrial Production Index, 1966-1973 8.4 Manufacturing Exports, In Value, 1962-1976 8.5 Gross Fixed Capital Formation in Industry, 1961-1973 (at current prices) 8.6 Investment Projects in Manufacturing Industries Approved by the Ministry of National Economy, 1970-1973 8.7 Turnover, Purchases of Inputs and Investments by Industry and Size of Factories, 1969 8.8 Main Characteristics of Industry by Branch in 1969 8.9 Capital Output Ratios and Capital Employment Ratios in Manufacturing Industries, 1961-1971 8.10 Financial Results of Public Enterprises, 1970-1972 8.11 Sources and Allocation of- Funds for Major Private Enterprises, 1970 8.12 1973-1976 Plan Perspective on Manufacturing, Investments and Growth in Value Added and Employment, by Subsector IX.. MISCELLANEOUS 9.1.. Prices and Wages 9.1.1 Wholesale Price Index (1961=100), 1950-1972 9.1.2 Retail Price Index (1950=100), 1950-1962 9.1.3 Cost of Living Index (1902=100), 1962-1973 9.1.4 Household Consumption in 1968 9.2. Construction 9.2 Construction: Building Permits and Consumption of Cement, 1962-1973 9.3. Transport 9.3.1 Sea Transport, 1961-1973 9.3.2 Rail Transport, 1961-1973 9.3.3 Rail Transport, Main Freight, 1967-1973 9.3.4 Air Transport, 1961-1973 9.3.5 Road and Traffic, 1961-1973 9.3.6 Actual and Planned Invest:ment by Mode, 1962-1976 (at current prices) 9.3.7 Planned Investment in Inland Transport by Type of Projects, 1973-1976 (at current prices) 9.3.8 Planned Investment in Maritime Transport by Type of Projects, 1973-1976 (at current prices) 9.3.9 Planned Investment in Air Transport by Type of Projects, 1973-1976 - 12 - Table No. 9.4. Tourism 9.4.1 Main Data and Plan Projections, 1962-1976 9.4.2 Visitor Arrivals and Region of Permanent Residence, 1962-1972 9.4.3 Seasonal Distribution of Arrivals and Bednights, 1963-1972 9.4.4 Regional Distribution of Visitor Bednights and Accommodation Capacity, 1963-1972 9.4.5 Theoretical Capacity and Occupancy Rates by Category of Accommodation, 1963-1972 9.5. Registration of Companies 9.5.1 Registration of Companies by Sector, 1961-1972 9.5.2 Registration of Companies by Sector and by Type, 1962, 1967, and 1972 9.5.3 Registration of Companies by Type and Company Capital, 1950-1972 9.6. Petroleum and Energy 9.6.1 Petroleum Production and Refinery Products, 1961-1972 9.6.2 Gas and Natural Gas Statistics, 1962-1973 9.6.3 Installed Electric Generating Capacity, 1961-1973 9.6.4 Electricitv Generated, 1961-1973 9.6.5 Number of Customers by Region, and Average Price of Electricity by Voltage, 1962-1973 9.6.6 Electricitv Consumption by Industrial Use, 1961-1973 9.6.7 Gas, Electricity: Basic Statistics and Personnel, 1961-1973 9.7. Education 9.7.1 Enrollment by Sex and Educational Level, 1956-57 to 1971-72, 1976-77 9.7.2 Output of Primary Enrollment, 1957/58 - 1971/72 9.7.3 Enrollment and Output of Secondary Education, 1957/58 - 1971/72 9.7.4 University of Tunis: Enrollment and Output of Higher Education, 1961/62 - 1971/72 9.7.5 Number of Teachers, 1959-60 - 1971-72 9.7.6 Teachers Salary Scales, in 1966 9.7.7 Education Expenditures, 1962-1972 X. 1973-1976 PLAN OBJECTIVES 10.1 1973-1976 Plan: Gross Domestic Product by Origin (1966 Constant Prices) 10.2 1973-1976 Plan: Gross Domestic Product by Origin (Current Prices) 10.3 1973-1976 Plan: Resources and Uses (1966 Constant Prices) 10.4 1973-1976 Plan: Resources and Uses (Current Prices) 10.5 Planned and Actual Investment bv Sector, 1962-1976 (Current Prices) 10.6 Planned and Actual Investment and its Financing, 1969-1976 (Current Prices) 10.7 1973-1976 Plan: Gross Fixed Capital Formation by Sector and Category of Project 10.8 1973-1976 Plan: Balance of Payments 10.9 1973-1976 Plan: External Resources and Uses - 13 - Table No. 10.10 1973-1976 Plan: Main Exports of Goods and Services 10.11 1973-1976 Plan: Main Imports of Goods and Services 10.12 1973-1976 Plan: Disbursements of Public Loans by Origin 10.13 1973-1976 Plan: Breakdown of Public Loans and Private Credit, Disbursements 10.14 1973-1976 Plan: Evolution of Monetary Position 10.15 1973-1976 Plan: Medium and Long-Term Resources and Uses of Commercial Banks 10.16 1973-1976 Plan: General Government Accounts 10.17 1973-1976 Plan: General Government Accounts, as Compared to GDP - 14 - L I S T O F M A P S Maps No. 10792 Administrative Boundaries ............................. Main Report 10518 Rainfall and Irrigated Areas .......................... Annex I 10519 Soil Suitability for Crops ............................ Annex I 10004 Location of Main Crops, I ............................. Annex I 10005 Location of Main Crops, II ............................ Annex I 10003 Mining, Manufacturing, Power .......................... Annex II 10001 Transportation Network .............................. Annex III 10697 Tourism Areas ................................... .. Annex III 3151 Proportional Distribution of the Population by Province Annex III 3153R1 Maternity Facilities and M.C.H. Network ...... .. Annex III L I S T O F G R A P H S Graph No. Page No. 2.1 GDP and Sectors Growth, 1961-1973 .... ................. Main Report, Chapter 2 2.2 National Savings and Investment Financing, 1961-1973 .. 8.1 Balance of Payments, 1960-1973 ........................ Main Report, Chapter 8 8.2 Export and Import Growth, 1961-1973 ................... 8.3 Foreign Exchange Earnings ..... ........................ 8.4 Geographical Distribution of Trade .................... 8.5 Export and Import Structure ........................... 10.1 Agricultural Output, In Value - Cereals .... ........... Annex I, Chapter 10 10.2 Agricultural Output, In Value - Other Products .... .... " 11.1 Tunisia - Areas of Bread Wheat and Durum in Hectares', Annex I, 1949-1969 ... .Chapter 11 11.2 Average Yields in Quintals Per Hectare of Bread Wheat and Durum, 1949-1969 . 11.3 Production of Bread Wheat and Durum in 1000 Quintals, 1949-1969 ........................................ " 11.4 Olive Oil Production Since 1949/1950 .................. " 12.1 Organization of the Ministry of Agriculture .... ....... Annex I, Chapter 12 20.1 Growth in Enrollments, 1956-1976 ...................... Annex III, Chapter 20 20.2 Educational Pyramid, 1958 and 1972 . 20.3 Organization of the Office of Vocational Training and Employment. 20.4 Agricultural Formation System ..... .................... IBRD 10792 NOVEMBER 1973 TUNIS I A MEf D I rERRANEAN SEA ADMINISTRATIVE BOUNDARIE:S F i o r u r WtOOF rI ftAIIs 2 < t 9 ,~~~a,-- Ab. , 'CAP BON ro 20o -, o , io , Jc ,> Dendo b - X/ / 8+A > t/'Sfo N ISL 0 10 C 40T 0IERID MILES A S Ini.rn.t.cna Bound.... ,, 2X IS 4. /1 DN E .SOUS S ~~ B.RAdo d8o -- 4 In.ontrOnaI Ar'po.-n - V ~ ~~~~~~~~~~ ! -- Go,n,n Bound.- J ; I ~~~~~~~~~o,p' y Sfkomnrocneu &, 'lAND A.ord o K ,dI fioe /~ N,// A; ' / _ ~ o l X c-N- ,/-~~~~~g 0v \/ / _.- ,,~~~~ __IE IA 5 0 xfzif . w 8 8 G~~~ A E E A KERKENNAs fZ ~ ~ T.- bes H ^lsa oun ,t S-h 9 4R } C ~~~~~A B Ew / / _ _ r X w mrf I souncadn \~~~Made a f //~~~~~~p / 3 a ne bsr~~~~~~~~~~~(in P- o hsmrsd w N e r d UN SI m C ,. ^ y tr n m r r c G :r e b l X 2 W orl S* m dwsr E Nrlarx s g / e PREFACE This report is based on the findings of an economic mission which visited Tunisia in February/March 1973 and February 1974. The first mission consisted of the following: Messrs. G. C. Billington (Chief), F. L. Laporte (General Economist), E. de Gaiffier (General Economist), K. Bulutoglu (Fiscal Economist), J. F. Chevallier (Plan Organization Specialist), N. L. Hicks (Economist, Long-Term Projections), W. Delaney (Mlanpower Economist), J. Sinmons (Human Resources Economist), E. P. Riezebos (Agricultural Economist), it. L. H. Schutz (Agronomist) and P. Bourcier (Transportation Economist). Messrs. M. Lenot (General Economist) and 11. J. van Wersch (Agricultural Economist) assisted in preparation of the report in Washington. The chapter on financial institutions is based on the report of an earlier mission by Mr. A. Allawi (I.F.C.). MIs Betty Dow (Economic Analysis and Projections Depart- ment) contributed to the long term projection model. Mr. C. H. Davies assisted in the editorial stages. The mission secretary in Tunisia was Miss Jacqueline Bonneau and, in Washington, Mliss Susan Chen. This report is presente6 in one main volume and five annex volumes. The main volume contains a summary of the principal arguments and an analysis of the macro-economic aspects. The annex volumes deal respectively wFith Agriculture, Industry and in Annex III, Transport, Tourism, Education and Healtlh. Annex IV contains Technical noce on the lon-term projections. Annex V contains a Statistical Appendix. Page I of 2 pages COUNTRY DATA TUNISIA AREA: 164,150 tK2 POPULATION: 5.46 millioc (.id 1973) DENSITY: 33.3 per KS2 Natural Growth rate; 2.6 (1961-1972) 102.4 per Ks2 of arable land - Real Growth rate: 2.0 (1961-1972) POPULATION CHARACTERISTICS (1970) DISTRIDUTION OF LAND OWNERSRIP (1970) Crude Blrth Rare (per 1,000) 38 7. owned by top 10% of owners 53 2/ Crude Death Rate (per 1,000) 14 7. owned by smallest 10% of owners 0.5 Infr-nt MortalIty (per 1,000 live birtha) 106 INCOME DISTRIBUTION ACCESS TO ELECTRICITY % of national inctsa, higheat quintile .. Peroentage of housing units with electric ligh,ing 24 (1966) lowest quintile .. Eleotric power con...aption (Kwh per capita) 248 (1973) NUTRITION (1964-1966) ACCESS TO PIPED WATER Pee capita calorie aupply 00 2 of requirements 94 Percent of .ocupied unite with piped water 40 (1966) Per capita protein supply, total (gra per day) 63 llEALTH (1971) EDUCATION population per Phyaiulin 6,486 Adult Literacy rate 7. SS -(1972) population per hospitol hed 400 Adjusted primary -chool enrollment rotio 107 (1968) GQP PER CAPITA in 1973: - US$ 403 CROSS NATIONAL PRODUCT IN 1973 ANNUAL RATE OF GROWTH (%, constant prioeu) Us$ MlI. . 1961-66 1966-71 1972 1973 CGN at Markot Price- 2,409 100.0 3.9 6.2 15.6 3.3 Gr000 Dooa-tic 1nvesto,57t 547 2:.7 10.6 1.1 51.6 5.7 Grse Natioa 1 S-ving - 420 1.,4 13.3 11.2 61.1 -12.7 Correct Account Balonc -127 -!5.3 Exports of Goods. NFS _' 604 2V.,1 3.5 13.4 29.6 -2.3 Imports of Gooda. NFS 724 30.0 3.3 6.9 24.5 12.5 OUTPUT. LABOR FORCE AND PRODUCTIVITY IN 1972 Volue Added (at factor cost) Labor Forcu V. A. Per Worker 0S$ Min. 7. Min. X Ur$ ARric-ltor- 405 22.0 0.800 -/ 52.6 506 41.7 Indastry 471 25.6 0.255 16.8 1,847 152.3 Servlces 967 5!.4 0.332 21.8 2,913 240.4 Unemployed - 0.133 7/ 8.8 Totol Average 1,843 10:1.0 1.520 100.0 1.213 100.0 GOVERNMENT FINANCE lenses r C-vernme--t Central Covernment (Dinser Mi.) X. of GDP (Diner MIn.) 7. of GDP 1973 19:3 1970-72 1973 1973 1970-72 Current Receipts 298.8 28.0 25.3 255.2 23.9 21.5 Current Expenditure 26326 21.8 21.5 188.2 17.6 17.3 Current Sueplut 66.2 6.2 3.8 67.0 6.3 4.2 Capital Expenditureo 92.2 8.6 8.2 78.3 7.3 5.8 Externml Assiataoce (net) 29.2 2.7 3.5 29.2 2.7 3.5 1/ IBRD estimate, eycluding pasturee and forests. 2/ Covering 4.5 million ha of private land, excluding 0.8 million ha in pablic ownership, and 2.1 eillion ha of collective land. 3/ Over 15 years old. 4/ The Per Capita GNP estiate is at current market priues, calculated by the same cosversio. as the World Bank Atlas. All other conversions to dollare in this table are at the average exchange rate preoailing during the period covered. 5/ Including terms of trade adjustuent 6/ Residual, equivalent to approoisately 420 thousand in full-time employnent, the balance represents underemployment. 7/ Male only Page 2 of 2 pages COUNTRY DATA TUNISIA MONEY, CREDIT and PRICES 1966 1968 1970 1971 1972 1973 (Million Dinara outstanding end period) Money and Quasi Mosey 186.6 224.0 259.4 314.4 368.2 418.9 Book credit to Public mstor 85.4 87.4 93.2 86.9 74.5 61.6 Bank credit to Private Sector 178.9 223.1 255.7 285.6 331.6 376.1 (Percentages or Indes Nubhera) coop and Qoast Mose as 7 of GOP 33.7 35.8 34.7 36.5 36.2 39.2 Geceral Price loden 1/ 100.0 105.0 112.0 118.4 119.7 122.4 Retail Price Iden 100.0 105.5 111.0 117.4 119.8 125.4 Ancuai potcentage changes it: General Price Index 1.7 0.7 3.3 5.7 1.1 2.3 Retoil Price loden 3.9 2.5 1.1 5.7 2.1 4.4 bank credit to Public Secit- 6.6 3.2 -0.9 -6.3 -12.4 -12.9 Bock credit to Private Sector 29.2 24.2 20.9 29.9 46.0 44.5 BALANCE OF PAYMENTS MERChANOISE EXPORTS (AVERAGE 1971-73) 1971 1972 1973 US$ Mln. % (Millions us$) Expornt of Goods, NFS 405 563 604 Olive Oil 68.3 22.8 Imports of Goods, NFS 439 588 724 Other sgric. and foodstuffs 45.5 15.2 Resource Gap (deficit e -) -34 -25 -120 Crude Oil 77.2 25.7 Rock phosphate 22.0 7.3 Slperphosphate 21.2 7.1 Icterest Paynct.n (oet) -17 -19 -20 Other =ining *nd raw materials 30.8 10.3 Workers' Reittances 43 62 79 Manofacctred prodocis 35.2 11.6 Other Pector Paynents (set) -48 -66 -75 Total 300.2 100.0 Not Tron.fers 16 6 9 Balanco on C-rrent Account -40 -42 -127 EXTE.RNAL DEBT. DECEMBER 31. 1973 Dcrect Foreign Investment 24 32 64 US$ MIn. Net MLT Bcrroving 74 65 61 Dishbrnecents 123 139 129 Public Dehb, i.fl. goarsoteed -/ 1,296 Aoortieutioo 49 74 68 Bon-oGeranteed Private Debt SIubtotl 98 97 125 Total outstanding and diabhrsed 3/ 836 Capital Gronto 35 37 48 Ocher Capital (net) -3 -14 - Increose in Reserves ( +) 90 78 46 DEBT SERVICE RATIO FOR 1973 Croon Deserves (end year) 156 V 249 5/ 322 6/ Set serves (end year) 105 / 193 -/ 254 - Io % of Exports of Goods, NFS 16.2 Dn 7 of Esports of Goods, NFS, and Workers Reritta-cea 14.3 RATE OF EXCRANGE IBRD/IDA LENDING, Octoher 31. 1974 (Milli.o US$): Through Leceher 20, 1971 IBRD IDA US 1. 0. ' 525 Dinar Dinac 1.00 1US 1.905 O.tstondiog and Disbhrsed 82.3 36.9 Undisbarsed 122.7 28.7 Through Febrcarv, 1973 Since Fehruary 1973 Outstanding incl. Undisbhrsed 205.0 65.6 US$ 1.01 0.48 Dinar US$ 1.00 u 0.44 Dinar DScor 1.00 = US$ 2.08 Dinac 1.00 . US$ 2.27 Dinor 1/ GDP price deflator 2/ Including ondiabhrsed 3/ E-cluding undisbursed 4/ Calculated at the rate of 1.905 5/ Calculated at the rate of 2.08 6/ Calculated at the rate of 2.27 .. oot available .not applicahbl October 31, 1974 Europe, Middle EBat and North Africa Region THE ECONOMIC DEVELOPMENT OF TUNISIA SUMMARY AND CONCLUSIONS I. Introduction i. Tunisia marked the beginning of its second decade of planned devel- opment with its Fourth Development Plan (1973-1976). While considerable resources were invested, the growth and employment objectives of the first decade, 1962-1971 were not fully realized. At the end of 1969 and in the following years the Government clecided on a major reorientation of its econo- mic policies. The previous attempt to group farmers into government-organized cooperatives was abandoned; new incentives were given and a greater role for the private sector was foreseen;: and emphasis was put on export promotion and a new external market orientation. The Fourth Plan, which is based essentially on the new orientation was preceded by a reassessment of past plan.iing policies, achievements and shortcomings. The new policy orientation coincided with [strongly favorable agricultural and export developments. ii. In its main part, this report reviews Tunisia's economic and social development over the 1960's with the purpose of identifying underlying struc- tural characteristics and long-t;erm development trends. The report is however primarily concerned with the analysis of the processes and policies which can determine the growth of the procluctive capacity of the economy and its employ- ment potential. The treatment i.s selective, focussing on principal issues and obstacles to future development. iii. The report examines some characteristic features of the development strategy followed in the 1960's such as the role of cooperatives, the work relief program, public investmernt policy and a number of its special problems, such as employment and income distribution, resource mobilization and alloca- tion, trade, investment and price controls and incentives, and the balance of payments. Finally, the Fourth P lan is reviewed and longer term development prospects are assessed, taking into account the recent changes in export com- modity prices and in other external developments. Sectoral problems are anal- yzed in varying depth for key sectors - agriculture, industry, transport, tour- ism and education - in separate annexes to the main report. II. Major Developmens during the period 1962-1973 iv. Following Independence in 1956, and after a period of experimentation under the system of Government and policies inherited from the past, Tunisia embarked on a series of development plans conceived and executed within the framework of the "Ten-Year Perspectives" 1962-1971 published in 1962. The aim was to modernize the economy and society rapidly. The strategy was to accelerate investment in social services, infrastructure and import-substitut- ing industry through central planning of investment and resource allocation. The public sector played a majoor direct role in production as well as provided - ii - substantial infrastructure and services, particularly in education. The system of official price determination and administrative controls was extended to meet foreign exchange shortages and restrain inflation. Other important fea- tures of the decade were an ambitious experiment in cooperativization, and a sustained program of relief work for the unemployed. A limited resource base, dependence on a small domestic market and an unusually long series of poor crop years (with severe drought in 1959-62 and 1965-1968), seriously handi- capped and delayed growth. The contribution to growth from the large invest- ment program, which emphasized social and administrative infrastructure and which was strongly supported by foreign aid was relatively slow and generally indirect. Several investments in public enterprises did not prove to be economic, and industrial productivity was low. Private initiative was en- couraged only in tourism and petroleum exploration. v. Tunisia has made considerable social gains since Independence. Primary school enrollment increased from 29 to 73 percent, secondary school enrollment rose from 11 to 42 percent and university enrollment from 0.1 to 3 percent of the relevant age groups. Education is free. Public capital and current expenditures on social services per head more than doubled between 1962 and 1971 and represented 11.4 percent of GDP in the latter year. With population growing at 2.5 percent a year, family planning has been pursued vigorously. Free health services were also expanded particularly in the urban centers. However, about 18 percent of the labor force in the non- agricultural sector was unemployed in 1972 despite substantial emigration; underemployment remained serious, particularly in agriculture, and the response of the education system to specific economic needs remained weak (see paras 18-24). Also, while incomes and living standards of the growing urban popula- tion improved tangibly, those of outlying rural regions did so to a lesser extent. vi. In 1961, at the beginning of the first decade of planned develop- ment, per capita GNP was estimated at $205 per head in current prices, and in 1971 at $310. In real terms per capita GlP rose by 2.5 percent a year. Over the period, the average real growth in GDP was 4.7 percent, compared with the target figure of 6 percent, and the investment rate averaged 23 percent of GDP. At the same time domestic savings rose from 7.6 percent of GDP to 19 percent, reducing Tunisia's dependence on external borrowing from 52 percent of investment to 12 percent. The balance of payments, which had been under pressure, has improved steadily since 1967 thanks to the growth of tourism, workers' remittances and exports of petroleum and olive oil. A net foreign exchange liability was reversed in 1970, and at the end of 1971 net holdings amounted to $105 million covering 4 months of commodity imports. The change in policy orientation introduced in 1969 was associated in subsequent years with rapid growth, higher incomes and improved balance of payments prospects. vii. GDP grew in real terms by 9 percent in 1971, and 17 percent in 1972. This improvement can be attributed in part to exogenous factors such as good weather, leading to record cereal crops and a three-fold increase in olive pro- duction, in part to important successes in several areas (tourism, petroleum - iii - and emigrant workers' remittances) which previous policies had fostered, and in part to the new Government policies, which renewed confidence and initia- tive in the private sector. For 1973, the growth rate is estimated at 2.8 percent despite a drop in agricultural output of 11.6 percent below the record of the previous year. Unfavorable tendencies emerging in 1973 in tourism may be expected to continue in 1974 and perhaps longer, depending on develop- ments in Europe, but other developments, including price increases in pe- troleum, phosphate and olive oil, are expected to result in an overall growth which would substantially exceed the previous forecast of 9 percent in 1974. At the end of 1973 net foreign exchange reserves amounted to $256 million covering 5.5 months of commodity imports and a substantial increase is ex- pected in 1974. III. Sectoral Analysis viii. The sectoral analysis in the report aims at identifying the struc- tural characteristics and past trends in order to assess the potential for growth, and to identify the conditions under which it can be realized. ix. Agriculture. The dorinant sector in the economy, agriculture pro- vides nearly half of total employment, 38 percent of merchandise exports and 20 percent of GDP (average 1971-1973). Food processing industries account for another 4 percent of GDP and cver a third of value added in manufacturing. Production of the principal crops, cereals, olives, winegrapes, fruits and vegetables, showed negligible growth during the 1960's, but jumped to record levels in 1971 and 1972, largely as a result of favorable weather and revived initiative of private enterprise. There is considerable potential for further growth in the sector. x. The sector's low performance in the sixties derives, first, from the inadequate and variable rainfall and limited water resources; second, from the limited allocations to raising productivity in rainfed agriculture and to the introduction of new cultivatiorL techniques (emphasis being put on irrigation works, tree planting and other infrastructure); and, third, from the combina- tion of a rigid pattern of land tenure and slowly changing technology on the one hand with a growing population on the other. Unemployment, underemployment, income concentration and rural--urban migration are closely linked with the failure of the agrarian system to provide an adequate socio-economic environ- ment. xi. While large infrastructure investments were made during the last decade, little progress was madle in land reform or the improvement of land and water management or in raising overall productivity. The Fourth Plan and current policy emphasize investment in projects that make a rapid and di- rect contribution to production, but plans at the same time to invest heavily in large infrastructural projects. The Government also recognizes various constraints on agricultural development: absentee ownership and insecurity of tenure, inadequate access to agricultural credit, the need to devote more resources to extension services and agricultural training and education, and is preparing measures to deal with them. - iv - xii. If production is to continue to rise, greater efforts and the neces- sary allocations would be needed to spread intensive production techniques more widely; to improve land use through more energetic application of exist- ing land reform legislation and through land reallocation to small-scale farmers; to expand livestock and forage production; to improve marketing institutions and the quality and availability of the extension services; and to accelerate rural development. Such an orientation would imply greater current budget outlays, expansion of agricultural credit, greater care in the choice of incentives, and more attention to the role of prices. Agricul- tural price controls generally and price supports for cereals, in particular, may have an important impact on small farm incomes and welfare but their continued use in commercial agriculture does not encourage increased produc- tion at competitive prices and should be critically re-examined. xiii. Industry and Mining. The problems and prospects of the industrial sector differ greatly from one industry to another. The outlook for petroleum is tied closely to the course of world market prices and the possibility of new discoveries. Tunisia is only a small-scale producer with a peak output of 4.5 million tons and net exports of some 3-3.5 million tons per year to be reached in 1974/1975. Export earnings from petroleum are projected to rise from $110 million in 1973 to some $350 million in 1974 and 1975. About 55 percent of the value of other mining exports, $41 million in 1973, is ac- counted for by phosphate rock, with iron ore and lead-zinc concentrates each accounting for a further 30 percent. Tunisia accounts for about 4 percent of world production of phosphate rock. The ore is generally of low to medium quality compared with that sold by competitors. Output of phosphate and its products stagnated after 1966, and its share in exports declined from 28 per- cent to 14 percent of the total between 1967 and 1973 partly due to a 20 per- cent decline in prices. Exports are, however, expected to increase sharply in 1974 and stay high as a result of both a tripling of prices in 1974 and a build-up of production capacity of rock phosphate, acid and fertilizers. Phosphate reserves are adequate and there is good potential for future devel- opment, with numerous investment possibilities. xiv. From 1961 to 1971, manufacturing production increased by an average annual growth rate of 8 percent, and by 30 percent in 1972 due in part to a record year for the olive oil processing industry. Except for the last three years, the thrust of industrialization was supplied by large projects in the state sector and based on import substitution. Production for a small domestic market, capital intensive investments and shortage of experienced staff and management resulted in high costs and relatively little employment. The new policies introduced in 1970 encourage the development of export industries and industrial employment in the private sector. Under the Fourth Plan, private manufacturing investment, particularly in textiles and fertilizers, is expected to average D 25 million per year, and to account for two-thirds of total in- vestment in manufacturing. The Government has provided, starting in 1972, special incentives and the institutional framework to assist export-oriented investment, both domestic and foreign. The current renegotiation of Tunisia's agreement with the EEC may help in expanding the potential for marketing and joint finance. xv. The Fourth Plan places major emphasis on the careful identification, preparation, execution and management of industrial projects. It anticipates strengthening the semi-public National Center for Industrial Studies, and the planning sections of the ministries concerned. Large scale public sector proj- ects will continue in selected sectors but the private sector is expected to become the principal source of industrial growth. To achieve the latter, the Government will need to support it with technical assistance and preinvestment work and should consider divesting itself of small and medium sized industrial establishments which could be run efficiently by private enterprise. Financial rehabilitation and restructuring are also of high priority in most state enter- prises and in the metal manufacturing sector as a whole, where the potential for exports and employment may be greater than in textiles. Recent increases in international market prices fcr petroleum and phosphates products underline the potential of petroleum-based industries as well as of fertilizers and other phosphate derivatives. xvi. Transport. In addition to infrastructural development, the public sector is responsible in whole or part for rail, road, and air services. The transport infrastructure is well developed and does not seem to have been an obstacle to development up to the present. The major needs are to improve coordination, efficiency of operations, and investment planning, and to ra- tionalize pricing policies. There have been encouraging developments in a number of subsectors since 1970, particularly in respect of port reorganiza- tion, and a start has also been made on resolving some of the urban transport problems of Tunis. Still, coordination among sectoral agencies requires im- provement, and a number of pricing issues are still outstanding (although a decision has been made to revise railway freight charges in 1974). More know- ledge is required of demand for the various modes of transport than is at pres- ent available, including an analysis of the costs and benefits of alternative investment programs, and decisiors are required on what operations should be undertaken by the state and what by private enterprise. xvii. Tourism. The development of tourism is a recent phenomenon. Between 1961 and 1972 gross earnings clinmbed from US$3 million to US$140 million and became the most important source of foreign exchange for Tunisia. The prospects for continued expansion are bright, despite a temporary slowdown due to the energy crisis and related developments in Europe, and plans have been made to increase hotel capacity accordingly. The Government actively supports such expansion through incentives to private hotel promoters and has recently em- barked on a long term tourism infrastructure program. The major constraints to the sector's expansion are the speed at which marketing and leisure services can be developed and an adequate, trained labor force can be made available to the industry. The industry a]so offers considerable employment opportunities, and indirectly supports various handicrafts and services. xviii. Social Sectors. Tunisia's population, estimated at 5.4 million in 1973, has been experiencing a high natural growth rate of about 2.6 percent per year, but after emigration the real growth has been about 2 percent only. Family planning has strong Goverment support, but the National Office of - vi - Family Planning and Population has yet to function very effectively. Emig- ration from rural to urban areas is high. Nearly 50 percent of Tunisia's pop- ulation was living in towns and villages of 2,000 persons or more in 1966 and this proportion has almost certainly increased since. Tunis is growing rapid- ly and accounts for about one-third of the urban population. Other major urban concentrations are on the eastern coastal area, in Sousse, Sfax, and Gabes. Increasing the attractiveness of smaller centers relative to Tunis through regional development programs and other measures is a major challenge. xix. Provision of water for household consumption and improvements in sewage disposal have been handicapped by financial constraints, but the most important future constraint is likely to be the total supply of water avail- able. Consequently, the national water development strategy and the alloca- tion of Tunisia's limited water resources among competing uses--irrigation, industrial use and human consumption--need to be kept under review and greater coordination at the policy levels needs to be assured. xx. One of the country's most difficult problems to resolve today is the rationalization of the education system and its gearing to the economy's manpower needs and financial resources. Since independence, the Tunisian education system has expanded rapidly at all levels (see para. 5). The fi- nancial resources required for this expansion were substantial, especially if compared wtih the limited economic resources of a country still at an early stage of development. Tunisia currently allocates to education about 6.5 per- cent of its GDP and over 30 percent of recurrent public expenditures. xxi. Partly as a result of the emphasis on rapid expansion, the quality of education has suffered, particularly at the primary level. Completion rates are very low at all levels (47 percent in primary schools, 19 percent for general secondary education). Curricula include material irrelevant to Tunisian conditions, education facilities are poor and overcrowded, the teacher-student ratios are high and teaching methods are somewhat outdated. As a result of this and of the high proportion of expatriate teachers (over 50 percent in secondary and higher education), unit costs per graduate and the foreign exchange component of costs are very high. The distribution and level of educational services vary by regions, sexes and income groups due to the lower cost and attractiveness of urban concentration and to the greater preparedness of higher income groups to continue higher education. University and vocational schools are producing more graduates than can find jobs with the formal training they obtained, and yet, skilled manpower shortages are reported in several sectors of the economy, such as tourism, construction, mining, manufacturing, education and public health. xxii. Renewed efforts were made in 1973 to meet these problems. An inter- ministerial steering committee on educational reform was established at the Cabinet level in April 1973, and a number of studies are being undertaken within the framework of the Plan, on past pedagogical experience and educa- tional needs. Some immediate measures are being considered, such as pre- vocational courses at the primary level, channelling more students toward science and technology streams at the secondary level, and reinforcement of science teacher training, medicine and engineering at the third level. - vii xxiii. To ensure a closer correspondence between formal education and the economy's manpower needs, a slowdown in the rate of output of secondary and higher education would seem justified, at the same time as a reform of tech- nical education, and of teacher training in science and mathematics. More studies in depth are needed of specific manpower supply and demand in the future. At present there seems to be a justification for an expansion of professional and para-professional training in education, management, en- gineering, public health and veterinary medicine. xxiv. There has been impressive progress in providing health services, and current public expenditure per capita for this purpose, at current prices, has increased from D 1.4 in 1961 to D 2.8 in 1974. State capital expenditures on hospitals and other health facilities have more than doubled during the decade. The improvement in health is reflected in the fall in the gross death rate from 19 per thousand in 1961 to 14 in 1971 and in the infant death rates from 140 to 115 per 1,000 live births. Between the mid-fifties and 1970 life ex- pectancy increased from 38 to 56 years. Malaria and typhus have been virtually eliminated. All health services are handicapped by a shortage of doctors, and the regional distribution of services is not even. IV. Medium-Term Prospects xxv. Tunisia has reached an important turning point in its development. The new policy orientations after 1969'and the improved general economic and balance of payments situations which have emerged since then, have brought with them new opportunities and rnew challenges. The unaccustomed financial liquidity and the new capacitv for growth call for an adaptation of economic management methods and of the institutional infrastructure if the desired social and economic aims are to be achieved. Policies that can have a greater impact than in the past on employment, income distribution and economic well- being of the individual can now be practically pursued. xxvi. In preparing the Four-Year Plan 1973-1976, the Government established as the principal objectives of the 1972-1981 decade: (a) accelerating growth, based on export industries; (b) clealing with the country's unemployment problem by creating new jobs (largely in industry), by encouraging worker emigration, by reducing population grwoth ancl by improving education; and (c) continued maintenance of internal and external financial stability. The Fourth Plan for 1973-1976 aims at attaining a rate of growth in GDP of 6.6 percent or more allowing a 5.4 percent rate of growth in per capita private consumption, while holding the debt service ratio and limiting external financing of investments to 23.5 percent. In framing its strategy, the Government has placed overriding emphasis on the non-agricultural sectors as the primary sources of growth and the principal instruments of employment creation; it has given the private sector an important role and increased the share of investment going to di- rectly productive projects. The investment totals are projected to increase from D 718 million under the Third Plan to D 1235 million under the Fourth, an increase of 72 percent in real. terms. National savings are to account for D 945 million. This would represent an increase over the Third Plan in na- tional savings of almost 65 perce!nt while an increase in net external capital - viii - flows of 55 percent would be required. About 119,000 new jobs are to be created primarily as a result of investment in the non-agricultural sectors. xxvii. The Plan projections were made before the recent rises in oil and other commodity prices that have affected trade prospects and growth in de- veloped as well as developing countries. A more rapid rate of growth than the 6.6 percent target of the Fourth Plan seems easily attainable now, but changed emphasis in investment will be needed if the desired impact on the level of unemployment and on regional development is to be made. xxviii. Employment Creation. The Plan relies heavily on employment creation through export-oriented investment but recognizes that some 15,000 workers will still be added to the labor force each year for whom no full time employment is expected to be available. While emigration to France absorbed a large part of this surplus in the past, a substantial drop in such movement is expected in the medium term. The transitional equilibrium sought by the emigration of this number of workers may thus not be reached and would depend strongly on the extent of worker emigration to Libya. In addition, the Government's ex- pectations concerning the employment effects of an export-oriented policy and of industrialization in general also seem optimistic in relation to experience in other countries. It would seem therefore that the acceleration of planned efforts in regional development and implementation of projects that create agricultural emplovment and employment in the poorer areas slhould be given a high priority, particularly if the risk of widening disparities between high and low productivity sectors is to be minimized. xxix. Regional and Rural Development. The Government has already initiated a number of measures designed to provicle for regional dispersion of economic activity to help the more disadvantaged groups, and to offset or prevent fur- ther increases in income disparity. Programs being implemented include a rural development fund and investment program for the governorates and an in- dustrial fund for regionalization and technical assistance to medium and small scale industry. Moreover, the Government is studying changes in the regional organization to provide the appropriate administrative base. Other measures are being studied to increase the effectiveness of the tax system, improve and generalize the system of social security, and provide incentives to en- courage labor intensive techniques, emplovment creation and regional disper- sion of activity. In agriculture measures are being devised to reallocate and redistribute underutilized irrigable land and other publicly-owned land; the necessary investments and service needed for the utilization of existing irrigation infrastructure are to be increased; and a program is being slowly implemented for the transfer into private hands of public and collectively owned land. Consideration is now being given to providing entrepreneurs who wish to invest in the outlying regions an appropriate package of incentives and promotion facilities. xxx. Economic Policies. The report supports the Government's proposals to give the private sector a stronger role in the economy and for eliminating a wide range of controls. While arguing in favor of incentives and particular- ly price signals as an appropriate way of guiding investment decisions and stimulating fair competition, it suggests at the same time that to meet the - ix - immediate constraints to development the Government's role should be extended in specific fields including short term fiscal and monetary management (in contrast to investment planning), the provision of greatly expanded technical assistance services to industry zmd agriculture, labor training and the under- taking of pre-investment, market and sector studies. xxxi. As a result of the remarkable improvement in the balance of payments, rationing of domestic resources and foreign exchange no longer appears neces- sary, and a program of relaxation of import and investment controls is com- patible with high growth and could well result both in an upsurge of private activity and a rationalization of cost structures. Measures of this type in- clude the abandonment of stringent price controls, the limitation of investment approval procedures only to projects involving access to incentives, the eli- mination of the bulk of quantitative controls on imports and the reduction in the degree of domestic protection. A staged program of decontrol over a period of years would allay doubts about: the continuation of Tunisia's new balance of payments strength as well as cushion the possibly adverse repercussions of some measures on domestic manufacturers and domestic prices. V. Long Term Prospects xxxii. In revising their strat:egy from import substitution to export-oriented investment and in view of the limited resource base and small domestic market, the Tunisian policy makers have chosen a practical base for long term develop- ment. This strategy depends largely on Tunisia's ability to use its reservoir of cheap and underemployed labor and benefit from proximity to the EEC market. The Government has allotted the private sector, supported by foreign private investment, a key role in following this policy, but its success will depend on competitiveness in export industries. Consequently, the importance of pro- viding an environment in which investment decisions and resource allocations can reflect market forces has been stressed in the report. Considerable progress has already been made inI implementing the new policies and this has coincided with a remarkable upsurge in growth. This has, in turn, brought to the fore the problems of unemployment and regional underdevelopment, particu- larly in the outlying rural areas, to which the Government's attention is being increasingly directed. xxxiii. The evaluation of long term prospects summarized in the last chapter of the main report seeks to bring out the implications of various strategies on various macroeconomic variables in the coming decade. Within the frame- work of a macroeconomic model, (described in Annex IV), a series of projections are made up to 1985, on varying assumptions about the rate and structure of growth and the use of various policy instruments. xxxiv. In the medium term Tuni.sia will benefit from developments related to recent increases in world commodi.ty prices. On the one hand petroleum and phosphate prices have increased atbout threefold since 1973, olive oil prices have also substantially increased in 1973 and 1974. Commodity export earnings are thus estimated to riLse from D 179 million in 1973 to about D 335 million in 1974 and about D 408 million in 1976 with conservative pro- duction assumptions. On the other hand the high increases in import prices experienced in 1974 and the further increases expected in the coming years will cause payments on import to grow rapidly - Tunisia's terms of trade advantage is expected to disappear by 1978, but the net effect for the medium term is still better terms of trade than assumed previously. Growth of tourism earnings and workers remittances is also likely to be adversely affected by the effects of the energy crisis in Europe. xxxv. The present improvement in the terms of trade will have one major effect on the economy. From 1974, increased export earnings should lead to higher domestic demand which, in turn, should generate higher level of output in some domestically oriented sectors. The rate of GDP growth and savings, as a consequence, would be higher than previously projected. In addition, the influx of larger resources would offer the opportunity of somewhat increasing investments from 1976 and this also would raise the overall growth rate in subsequent years. Tunisia can thus seize opportunities to develop various manufacturing industries, particularly chemical industries based on petroleum and phosphate and other export oriented industries. xxxvi. Having overcome the chronic balance of payments deficits of the past, and with an adequate savings level, the Tunisian economy has the financial re- sources that should enable it to attain growth rates ranging from 7.5 to 9 per- cent per annum. However, aiming at the higher rates of growth would require, after 1980, substantially higher external aid than in the past which would probably have to be obtained at harder terms. Tunisia should therefore con- tinue to seek part of its external needs oni concessionary terms so as to pre- vent the debt service ratio from rising rapidly in the long term. The level of future growth would also depend to an important extent on the ability of Tunisia to stimulate private investment, and to sustain it with public in- vestments, at the necessary levels and in the appropriate sectors. There is no constraint due to the size of the labor force. The upper range of the growth alternatives could bring with it employment opportunities sufficient to solve one of Tunisia's most important problems. The high growth alterna- tive would be expected, however, to strain the administrative and technical capacity of the country. It would therefore require that the necessary sup- porting policies be adopted, and that institutional development and adequate training programs be accelerated. 1. THE GEOGRAPlhICAL SETTlING A. Geography and Climate 1.1 Tunisia, with an area of some 164,000 km2, comparable with that of Greece and Guatemala, is the smallest and the least rich in natural resources of the four North African countries (Algeria, Libya, Morocco and Tunisia) whichi together form the geographical entity known as the "Maghreb." Its irregular coastline extends some 1,200 kms.; on it are situated five of the largest towns, Tunis (the capital), Sfax, Sousse, Bizerte, and Gabes. Good roads lead east to Libya and west to Algeria, where they connect with ancient trans-Saharan trade routes. The Mediterraniean separates Tunisia from Southern Italy by a distance of less than 90 miles. 1.2 There are four main mountain ranges in Tunisia, three of which form the eastern end of the Atlas system, wlhich extends westward into Algeria and Miorocco. The Northern Chain is a continuation of the "Atlas Mlaritime" along the north coast of Tunisia, and receives the highest rainfall in the country, the annual average rising high as 1,000 nim. The Great Dorsal Chain, an ex- tension of the Saharan Atlas, stretches in a north-easterly direction from the region of Kasserine on the Algerian border towards the Gulf of Tunisia and Cap Bon. It is an important barrier between north and south and protects the North against the sirocco winds in summer. One hundred kms south of the Dorsal Chain is another branch of the Saharan Atlas stretching due east from Gafsa. This Gafsa Range, which contains extensive deposits of phosphate, separates the Sahara, which lies to the south, from the rest of the country. The Matmata Chain stretches south from the Gafsa Range to the Libyan border, and is about 50 to 70 kms. from the coast. 1.3 Northern Tunisia comprises the area to the north of the Dorsal Chain, and fonrs about 20 percent of the country's total area. With an an- nual rainfall mostly above 400 mm., it contains the most fertile land and the country's only year-round water-way. Northern Tunisia, the home of 70 percent of the population and the chlief area of economic activity, produces about 70 percent of the country's cereals, practically all the grapes and citrus fruits, more thani two-thirds of all vegetables and milk, and about one-third of livestock and fish. The center is the steppe-like region be- tween the Dorsal Chain to the north and the Gafsa Range to the south. It covers about 20 percent of the country's total area, and has an annual aver- age rainfall varying between 200 wim. in the interior and south and 400 mm. in the north. Towards the coast the climate is more temperate; rainfall is generally above 200 mm., and settled farming, based mainly on the olive, predominates. In the interior grazing is the main form of agricultural activity, cereals, olives and alfa playing only a secondary role. The south, comprising the rest of the country, covers about 60 percent of the total land area. Outside the thinly populated coastal area, where rainfall approaches 200 mm., and the irrigated oases where some cultivation and grazing is pos- sible, the south consists mostly of a desert, covering about 60,000 km2, and bounded by the Gafsa Range to the north and the Matmata Chain to the east. -2- 1.4 The rainy season extends from September to April. Rainfall varies considerably from one region to another and from one season to the next; rain- fall can be twice the average in one season and less than half the next. Most of the rainfall in any one season can also be concentrated within such a very short period as to be of little value for cultivation. Heavy rains at the beginning or the end of the rainy season, when the soil is dried and loose, can cause widespread damage and land erosion, as in the disastrous floods of October 1969 and March 1973. Over the 25 year period 1945-1970 there were six serious periods of drought, three of them lasting for three years: 1945- 1948, 1959-1962 and 1965-1968. Over the last decade the average rainfall has been some 30 percent lower than in the previous decade. 1.5 In general, Tunisia has long, hot and dry summers and short mild winters. As a result of their topographical features and differences in rainfall, the three main regions have distinctive climates. North of the mountain ranges and along the central coast, the climate, influenced by winds from the Mediterranean, is relatively temperate, and summer and win- ter are distinguishable; the former, from May through September, is marked by warm, dry weather and the latter, from October through April, by cooler weather, high winds and frequent rains. The inland area south of the moun- tains is hot and dry throughout the year; seasonal changes are not clearly discernible, temperatures are generally over 100°F, and there are frequent sandstorms and duststorms. B. Economic Resource Base (i) Agricultural Resources 1.6 37 percent of the land area (60,000 km2) is desert, and another 10 percent (18,000 km2) unuseable; of the remainder, almost 20 percent (38,000 km2) consists of natural or unimproved pastures and forest and marginal land unsuitable for crops. The remaining 53,000 km2 (one-third of the total) is arable land which constitutes Tunisia's most important natural resource. In addition to the products already mentioned, vegetables and sugar beet are grown in the North. Livestock, in the form of camels, sheep and goats, are important in many areas, although the combined breeding of camels and goats destroys the sparse vegetation and contributes to soil erosion. Forestry re- sources consist primarily of 250,000 acres of government-owned cork oak trees, which annually produce 7,000-8,000 tons of cork, most of which is exported unprocessed. Whilst offshore fish resources are plentiful, the total catch is only about 40,000 tons per year. (ii) Water Resources 1.7 The difficulties faced by Tunisian agriculture as a result of the highly erratic but in general low rainfall can be mitigated only to a limited extent by irrigation, which at present covers about 100,000 hectares, or about 2.5 percent of the cultivated area. The availability of water for irrigation is limited by the level and seasonal distribution of rainfall, and by private and industrial consumption needs. - 3 - 1.8 There are two main surface water basins. The more important is in the North between the Dorsal arnd Maritime Ranges, and is drained by the only year-round river in the country the Medjerda. During the winter months, the river flow averages about 400 Dl, while in summer it generally falls below 10 m3 per second. The other batsin, comprising the Zouroud and its tribu- taries, lies to the south of th!e Dorsal Chain, from which it obtains most of its running water. The syst:em is dry most of the time, but during pe- riods of heavy rain there can be dangerous floods. The city of Kairouan, which is situated in the delta of this system, is isolated by floods at least once a year, and during the floods of October 1969 the flow of water at Kairouan rose to more than 14,000 m3 per second. 1.9 Besides containing most of the country's mobilizable surface water, the North is also relatively rich in suitable underground water, and the area irrigated from wells is still nmuch in excess of that irrigated from surface sources. In some of the areas heavily irrigated by wells, notably in the governorate of Nabeul, the water table is falling and salinity is rising. The underground water resources in most parts of the center and the south are either insufficient, or unsuitable for irrigation because of their salinity. The main exceptions are found in the cases of the governorates of Gafsa and Gabes, and along the main watercourses of the Zouround and its tributaries, particularly in the plain of Kairouan. 1.10 The maximum area that. could be irrigated in Tunisia is probably of the order of 150,000-200,000 hectares, of which more than 75 percent is in the North. Consequently, urLless the underground water resources of the Sahara can be commercially exploited, dry farming dependent on the low and erratic rainfall will continue to predominate in the center and south. A recently completed study 1/ concludes that the Algerian-Tunisian Sahara has sufficient water to guarantee I:he hydro-agricultural development of the present 15,000 hectares of oases in Tunisia, which require some 150 million cubic meters of water a year. The study holds that an additional 10,000 hectares or so could be irrigated in Southern Tunisia by utilizing the latent groundwater resources of the Northern Sahara. 1.11 The maximum potential. of irrigation, whether in the north or in the center and south, may never be reached because of the expected growth of demand for water outside the agricultural sector. The shortage of drink- ing water is already acute in the south, while over the country as a whole the growth of population, urbantization, and industry should rapidly lead to an increase of water consumption for non-agricultural uses. (iii) Minerals 1.12 Tunisia's known non-agricultural natural resources are not great. There are substantial deposits of low grade phosphate rock in an area of about 1,000 km2 in central Tunisia. About 18 million tons of low grade iron ore 1/ Etude des ressources en eau du Sahara septentrional, UNDP-UNESCO, Paris, April 1972. deposits are found in the North and Center. These iron ore deposits comprise some 3.8 million tons of hematite, grading only 55 percent Fe, with barely five to six years of additional life, and 14 million tons of iron carbonate, grading 40 percent Fe, of doubtful technical and economic feasibility. Lead, zinc, silver, manganese and fluorspar are mined in small quantities. Salt is produced along the coast by the evaporation of seawater. After many years of exploration, oil was discovered in mid-1964 at El Borma in south-western Tunisia near the Algerian border. Output from recoverable deposits levelled to 4.0 million tons in 1972. Four more discoveries have been made following intensive exploration, but three of these are expected to provide only about 0.5 million tons per year. The fourth discovery, at Ashtart, off-shore in the Gulf of Gabes, is expected to provide between I and 1.5 million tons a year, beginning at the end of 1974. A natural gas deposit whiclh reached a peak out- put of 9.5 mm. m3 in 1968 now provides less than 1 mm. m3 annuall, and has been surpassed as a potential source of gas by the El Borma oil fields which, although providing only 1.2 million m3 of gas in 1971, will in future be able to use the new gas pipeline to Gabes, with a capacity of 300 million m3 a year, which came illto service in 1973. (iv) Population 1.13 Tunisia had a total population of 5.4 million people at the end of 1972, including some 50,000 Europeans. Between 1956 and 1966 (census years), an estimated 200,000 Europeans and 50,000 Tunisian Jews emigrated. Yearly average emigration of the Tunisian population has increased from 10,000 for 1960-1968 to 25,000 for 1969-1973. The population is Arabic-speaking, with widespread use of French as a second language. Forty-five percent of the population lives in the four northeastern coastal provinces of Tunis, Sousse, Sfax and Bizerte, where population density approaches 100 per km2 as opposed to fewer than 20 inhabitants per km2 in the southwestern interior. The rate of natural growth of population increased from less than 2 percent in 1930 to about 2.6 percent since 1956. The real population growth rate (taking into account emigration) from 1956 to 1972 was 1.9 percent. - 5 - 2. ECONOMIC TRENDS, 1961-1973 A. The Economic Situation at the End of the 1950s 2.1 When Tunisia became independent in 1956, the economy consisted of a large traditional subsistence sector side by side with a small modern sector. The traditional sector comprised some 75 percent of the working population, but accounted for only about 20 percent of GDP. While average GDP per capita for the country was roughly $15Q, incomes of most people in the traditional sector, especially in the south and west, were much below this average. Under- employment was widespread in the countryside, and the resulting migration to the urban areas aggravated the problems there of unemployment and urban planning. On the other hand, the modern sector, which was essentially an offshoot of the French economy, concentrated in the northern part of the country, had for many years accounted for practically aLl the growth registered by the Tunisian economy. 1/ 2.2 In the months preceding and following independence, the departure of a large number of Europeans, coupled with considerable repatriation of private capital, caused a further slowdown in investment. This movement not only re- duced the level of private investment, but also contributed to a severe short- age of skilled manpower, particularly in the middle levels of administration and in many technical fields. Moreover, in 1957 the French Government sus- pended its financial assistance. In that year, gross fixed investment fell to an all-time low, and GDP declined by 4.1 percent in real terms, whereas it had increased by 6.6 percent in 1956 and an average 3.3 percent a year from 1950 to 1956 (Statistical Annex, Tables 2.1 and 2.2). 2.3 The excellent harvests in 1958 and 1959 facilitated the upturn of economic activity. Moreover, the increase in public investment, facilitated by the granting ot crediLs under an agreement with the United States signed in March 1957, more than offset t.he reduction of investment by the private sector. Accordingly, the ratio cif gross fixed investment to GDP, which had declined to less than 10 percent in 1957, increased to nearly 16 percent in 1960 and to 19 percent in 1961. GDP rose at an annual rate of 4.1 percent in real terms during the period 195i'-1961. This represented an improvement over the rate of growth achieved between 1950 and 1956, but it meant only a modest increase in the standard of living and the level of employment. 1/ A detailed analysis of the state of the Tunisian economy at the time of independence and of developments during the period 1956-1961 is provided by Moncef Guen, La Tunisie Lndependante face a son economie (Paris, Presses Universitaires de France, 1961). Some background information is also provided in "Project FAO de developpement mediterraneen, Tunisie: Rapport National (Rome, 1959). 2.4 Whereas during the period 1951-1955 trade deficits averaged abouL D 21 million annuaily and were generally offset by receipts from Lhe French Government for civil and militaxy expenditures in Tunisia and by Lhe inflow of capital, in Lhe first years after independence the trade deficit was cut sharply by the slowdown of invesLment aLnd exceptionally high agricultural exports. lit spite of the substantial volume of capital repatriated to Franice (D 48 million in 1958), there were nIO payments problems during those years. UnLited StaLes aid, miainly in Lhe form of gifLs of surplus food distributed to the unemaployed and to refugees from Algeria or of genleral economic aid, played an ever greater role, rising froum D 2.4 million in 1957 to D 9.4 million in 1958, D 13.4 million in 1959 aLLd D 1o million in 1960. TunLisia's foreign ex- change reserves rose subsLantially up to 19G6. TLhe reappearanice of large trade deficiLb in 1960 and 1961, as a result of stepped-up investwent and a fall in agricultural exports, marked a return to a more noromal situation for a developing counLtry. The main features of the balanice of payments structure in 1960-1961 (trade deficit, current account deficit, large inflows of official capital) were to continue to characterize Tunisia's extcrnal position during Lhe 1960s. 2.5 At the institutional level, during the period 1956-60 the Government ucgan to take economic planrinLg measures. Nonetheless, most economic activity continued to be governed by ad hoc decisions aimcd at reconciling the national objectives born of independence with the legacy of the former regime. A Planning Office was set up in 1956 and a National Planning Council in 1957. In 1958 the Covernment launched a vast program of rclief-work projects to combat unemployment and undercmployment. The workers were employed on hill- slope preparation for terracc farming, on tree planting and on other agricul- tural tasks. 2.6 In November 1958 the Government created a Central Bank and replaced the Tunisian franc with the dinar, equal to 1,000 francs. The introduction of this new monetary unit left intact the parity then existing with the French franc. However, when the latter was devalued by 17.5 percent in December 1958, Tunisia decided to maintain the value of the dinar at US$2.38. In order to halt the speculative flights of capital Lhat had led to the devaluation of the French franc, in January 1959 the Government extended the controls on capital transfers to remittances to the franc area. In late 1959 it terminated the Franco-Tunlisian Customs Union, introduced an independent tariff, and concluded a new financial and trade agreement with France. In this way Tunisia was able to obtain far-reaching autonomy in managing its trade and payments system while remaining closely associated with France and with the franc area. 2.7 The Government also extended its influence over the banking sector by setting up, in 1958, the Societe Tunisienne de Banque (STB), which took over the commercial banking activity of the former Banque de l'Algerie et de la Tunisie and rapidly became the most important commercial bank. The Banque Nationale Agricole (BNA), created the same year, was to specialize in crop and medium-term agricultural equipment loans. The Tunisian branch of the French Caisse d'Epargne was replaced by a national institution. Five im- portant branches of foreign banks remained to share commercial banking with STB. - 7- B. Planned Economic Development 2.8 In 1961 the Government decided to undertake a long-range program of economic and social development. In order to coordinate the development effort, the Planning Office was combined with the Ministries of Finance and Industry and Commerce to form a new Department (Secretariat d'Etat) of Planning and Finance. 2.9 In August 1961 the new Department completed a study entitled "Perspective Decennales de Developpement, 1962-1971", 1/ which afterwards served as the broad framework of economic planning. This study made clear that the Government would assume responsibility for the direction of future development, although it affirmed that private enterprise would also have an important role in the economy. According to the "Perspective", the fundamental objectives of planning were: (a) "Tunisitication" of the economy through the transfer to Tunisian professionals of the management of key enterprises and of foreign-owned farms; (b) the promotion of equal access to education for all citizens, improvement of living standards, development of the health and social services, equitable distribution of income, full employment, and re- moval of the imbalances between the different sectors of the economy and regions of the country; (c) struct:ural reforms, involving an overhaul of in- stitutions, the introduction into agriculture and certain other sectors (such as trade and handicrafts) of a system of cooperative ownership and management, and the assignment to the State oi special responsibilities in economic devel- opment through the creation of publicly owned enterprises in the production sectors; and (d) the attainment of self-sustained growth by 1973. For a period of six months the "Perspectives" were discussed by a number of sectoral commit- tees composed of representatives of the Government, the Party, the employers' associations, the trade uniotns and Lhe universities. 2.10 The "Perspectives" projected a growth of GNP of 6 percent per year during the period 1962-1971 and a volume of investment amounting to D 1.2 billion at 1957 prices. Investment was projected to increase from 19 per- cent of GDP in 1961 to 26 percent in 1962, the first year of the Plan, and to reach the high rate of 32 to 33 percent in 1971. Virtually the whole of the increase in investment was to be publicly financed. The "Perspectives" assumed that gross domestic savings would increase from 11 percent of GNP in 1961 to 20 percent in 1965 and 26 percent in 1971. Export growth was projected at 4.8 percent per year and import growth at 3.8 percent per year. It was also ex- pected that foreign grants and loans would total nearly half a billion dinars during the period and would finance about half of net investment. Most of the growth was to come from manufacturing and construction (9 percent per year), with an increase of 3 percent per year in agriculture and mining. 1/ Republique Tunisienne, Secretariat d'Etat au Plan et aux Finances, Perspectives decennales de developpement, 1962-1971 (Tunis: Imprimerie Officielle, 1961). - 8 - 2.11 The "Perspectives" focused more on objectives, and needs, and on general and sectoral policies, than on ways and means. More precise attention was to be given to the identification and preparation of projects, as the means by which the target increases in production were to be achieved, in successive plans. The first Three-Year Plan (1962-1964) was drafted at the same time as the "Perspectives"; it was followed by two Four-Year Plans (1965-1968 and 1969-1972), formulated within the broad framework given by the "Perspectives". 2.12 In the First Plan the planned increase in investment, 13 percent per annum, was very high, and was more than could be financed by domestic savings and external aid. The heavy claims of government for both investment and current expenditure led to expansion of the money supply, rising prices, and a deterioration of the balance of payments culminating in devaluation in September 1964. The Second Plan was one of stabilization. The investment program was more realistic, and in 1966 provision was made for short-term adjustments through the medium of annual economic budgets. In the preparation of the Third Plan, the choice of projects began to receive greater attention, and total investment was itemized project by project. The lessons of the first two plans led the Government to frame the Third Plan with more concern for balance of payments constraints and for the need for a large expansion of foreign exchange earnings which would permit a relaxation of direct controls on trade and payments and clear the way for the convertibility of the dinar. Table 10.5, Statistical Annex, shows the investment-program goals and achieve- ments for each plan. Whereas the goals of the First Plan were not attained, those of the two succeeding plans were substantially exceeded. 2.13 The Third Plan was originally designed to provide a basis for an intensive effort to extend the role of the cooperative system to all parts of the agricultural sector as well as to parts of wholesale and retail distribu- tion. Toward the end of 1969 this policy had to be abandoned and the dis- mantling of the cooperative system was followed by a radical reassessment and revision of Tunisia's development policy. In the light of the too slow econ- omic growth achieved during the preceding decade, a new strategy was formulated which aimed at accelerating growth, exports and job creation; direct government intervention in the economy was to be reduced, administrative controls relaxed, and incentives strengthened in order to support the private sector. In agri- culture, because of the large infrastructure investments made in the past, more efforts were to be put into providing support to production. In industry, because of the small domestic market, further expansion was to be oriented primarily toward export; private investment, both domestic and foreign, was to be encouraged. 2.14 Thus, many measures have been taken or prepared since 1970 to promote private investment, relax administrative and legal controls on imports, trade and prices, improve the mobilization and allocation of financial resources and increase the general competitiveness of the economy. The policy of State inter- vention in economic activity during the decade and the measures taken within the framework of this new orientation are examined in Chapter VII. -9- C. The Growth Record 2.15 Over the decade 1962 to 1971, gross domestic product 1/ grew at an annual rate of 4.7 percent. This resuit falls short of the target of 6 percent for the ten-year period; moreover, it is partly to be attributed to the change in economic policy since 1969 and the good crop in 1971. By way of comparison, the average growth rate of most African countries in the same period was about 3.5 percent, that of the underdeveloped countries in Latin America about 4.2 percent and that of North America about 6.7 percent. National income grew by 3.9 percent, equivalent to a rise in per capita income of 1.9 percent. (Income distribution is reviewed in Chapter 4). Table 2.1: SECTORAL AND GDP GROWTGh TRENDS, 1961-71 AID 1971-73 Rate of Growth of Percentage Distribution Value Added At of Value Added At Constant Prices Current Prices 1961-1971 1971-1973 1961 1971 1973 Sector Agriculture and Fisheries 1.5 7.8 23.7 20.3 19.5 Industry 8.1 12.2 18.2 25.5 26.8 Ulining 1.6 5.2 2.1 1.3 1.3 Petroleum 31.0/1 4.8 - 5.4 4.9 Energy and Water 13.4 12.1 1.2 2.0 1.9 atnufacturing 7.9 14.4 7.7 9.6 10.7 Construction and PUblic Works 3.4 14.9 7.2 7.2 8.0 Services 4.0 9.3 43.4 39.3 38.7 Transport and Communications 7.2 12.9 6.5 6.5 6.7 Hlousing 1.6 2.0 11.4 7.2 6.1 Tourism 28.3 8.4 0.4 3.9 4.1 Trade 2.6 12.4 15.3 13.2 13.9 Other Services 2.0 7.8 9.8 8.5 7.9 Government Services 5.8 8.0 14.7 14.9 15.0 GDP at Factor Cost 4.7 9.6 100.0 100.0 100.0 Indirect Taxes and Duties 4.6 9.2 14.7 15.3 16.9 GDP at Market Prices 4.7 9.5 114.7 115.3 1t6.0 /1 1966-71. Source: Ministry of the Plan (Statistical Annex, Tables 2.6 and 2.7). 1/ The analysis that follows is based on the new national accounts series published in April 1974. Since the basic mission in March 1973 national accounts series (1961-1971) have been revised twice. Graph. 2.1 TUNSIA GDP AND SECTOR GROWTH (at 1966 Constant Prices) 800 _ _ _ 700 600 __ __ _ __ _ __ _ __ _ 500 G D P _ __ _ __ 5> 00 00" SERVICE z 0 L1L o0 _~_ _/ _ ;__ ___ _M I_ N _ -PT _LEUM SP, z 0 300 _______ 200 ___ . . ~CONSTRUCTION - 'I .*100 .- ~ MINING - PETROLEUM - ENERGY ______ T ~~~~~~~~AGRICULTURE 1961 1962 1963 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 YEARS World Bank-8803 - 11 - 2.16 The main sectors where performance fell short of the Ten-Year Plan targets were agriculture, trade, construction and public works and, to a less degree, manufacturing. In contrast, petroleum and tourism grew faster than projected. There was some slight change in the structure of GDP over the decade. The shares of agriculture and services declined, while that of in- dustry rose from 18.2 percent in 1961 to 25.5 percent in 1971--largely as a result of the appearance of petroleum and of the increased share of manufac- turing, which rose from 7.7 to 9.6 percent. 2.17 During the period 1961-1965, agricultural output grew by 5.6 percent a year, while the rest of the economy grew by 5.1 percent, giving an overall growth of 5.2 percent. In 1966-1969, as the result of the unfavorable weather of 1966 and 1967, followed in 1969 by severe floods, together with the problem created by cooperativization, agricultural output fell by 3 percent per annum, while output in the rest of the economy increased during the same period by 5.4 percent per annum, giving an overall annual growth rate of only 4 percent. In 1970-1971, agriculture grew by 15 percent, and the economy as a whole by close to 8 percent per-annum. Ihese figures emphasize the overriding importance of agricultural output for the averall growth of the economy. 2.18 Mining production as a, whole grew until 1966 then, after a fall due to the decline of certain secondary ores, was also affected by the 1969 floods; phosphate production did not regain its previous level until 1971. The ex- pansion of manufacturing, in spite of the substantial production growth rates (nearly 8 percent), is not impressive in comparison with the high investment made in the sector over the decEde, mainly in the public enterprises; the in- cremental capital-output ratio of manufacturing for the period 1961-1971 comes out at 4.2 (Statistical Annex, Table 8.9). The factors that affected the performances of agriculture and industry are examined in Part E of this chapter. These sectors are also reviewed in detail in Annexes I and II to the report. The incremental capital-output ratio for the economy as a whole for the decade 1961-1971 was 5.7; however, the ratio was only 4.7 for the econ- omy excluding agriculcure, in which substantial infrastructure investments have been made that have not yielded immediate returns. This relatively high figure is explained partly by the low rate of return of the productive invest- ments made but also partly by the fact that substantial investments have been made for development of the infr-astructure of the economic sectors, public infrastructures and social services; thus, public infrastructures and social services alone absorbed nearly 18 percent of total investment made from 1961 to 1970, i.e. D 212 million out of D 1,206 million. 2.19 The rate of growth of the economy has risen sharply since 1970. GDP in real terms grew by 9 percent in 1971 and nearly 17 percent in 1972. This improvement was due to a combination of several favorable factors. First, the exceptional olive oil and cereals harvests of 1971 and, particularly, 1972 were accompanied by a very rapid growth of tourism and a steady increase in remittances from emigrant workers. Second, the new orientation of economic policy initiated in 1970 has generated a resurgence of confidence and initia- tive in the private sector and thereby speeded up economic growth, particularly in agriculture, manufacturing, construction and trade. In 1973, GDP rose by - 12 - only 2.8 percent (on the basis of provisional statistics) because of a decline in olive oil production to a more normal, though still high, level and stabil- ization of services activity, particularly of tourism. IHowever, taking the two years 1972 and 1973 together, the average annual growth of GDP was 9.5 percent (Table 2.1); the sectors which showed the fastest growth over those two years were industry (12.2 percent g year), particularly manufacturing (14.4 percent) and construction (15 percent), transportation (12.9 percent) and trade (12.4 percent). 2.20 The Economic Budget for 1974, published in 1973, forecast a growth of 9 percent. However, the growth of GDP for 1974 might well substantially exceed this initial forecast in view of the improvement in terms of trade due to the substantial rise in world prices of petroleum, phosphates and olive oil and its effect on the economy as a whole. These aspects are examined in Chapter 9. D. The Financing of Development 2.21 Over the ten years 1962-1971, gross capital formation rose to almost D 1.4 billion at current prices (Table 2.2), with annual investment rising from D 89 million in 1962 to D 182 million in 1971. Investment as a ratio of GDP climbdd from 23.8 percent in 1962 to a peak of 27.6 percent in 1965, then de- clined steadily to 21 percent in 1970-71. The rate of investment for the decade as a whole averaged 23.5 percent; that for gross fixed capital forma- tion alone was 22.4 percent. Although this result was less than the target set in the Perspectives Decennales, it is nonetheless a remarkable performance. Until 1968, national savings and net foreign capital inflow were insufficient to finance investment and the deficit had to met by drawing on reserves; there- after, the slowdown of investment, combined with the increase in national sav- ings and the continuous growth of external capital inflow, made it possible to correct the country's financial situation (Graph 2.2). The trend of na- tional savings as a ratio of GNP was rather irregular, with a low of 12.6 percent in 1965 and peaks of 18.3 percent in 1968 and 18.9 percent in 1971; the average for the decade 1962-1971 was 15 percent (Statistical Annex, Table 2.3). National savings were supplemented by large foreign capital transfers and loans, mostly from public sources; national savings financed 62 percent, and external capital 38 percent, of investment over the decade as a whole. Graph. 2. 2 TUNSIA NATIONAL SAVINGS AND INVESTMENT FINANCING (at 1966 Constant Prices) 300 _ _ _ 2 . . . . . . ; z~~~~~~~~~~~~~~~~~~~~~~~~~~ '~~~~~~~~ ~ . ;' . . .: . . '.:. . : . . . -.:. ; . . , . . . . . . , . <. . . . ., -~~~~~~~~~~~~~~~ '- ,' . . . . . .' . _, . . . . ... .. . ...... 4i, . @...-5 - r. - . . ;~~~~~~ . . . . .vr .ra s- .,rs . . . --: .. . .. . .. . . T ,--- 25 _ ~ _200 300100/ \ 100 0 _ l0 - T tl El .l lDl lb llt 196 1 62 63 64 65 66 67 68 69 70 7172 -125 1960 1961 1962 1963 1964 1965 1966 1967 1966 1969 1970 1971 1972 1973 400 - o.t,t., d.nq~~~~~~~~~~~~~~~~~~~~~~~~Wol Bn-68 - 151 - level. In 1972 phosphoric acid was exported for the first time. Exports of manufactured goods, particularly textiles and clothing, expanded further. In 1972 crude oil exports reached D 39 million, i.e., 24 percent of total commodity exports. The rise in receipts from petroleum in 1972 was mostly due to increases in world market prices, but there was also a further expan- sion of production in 1972 to 3.7 million metric tons (compared to an average of 3 million per year during 196.9-71). 8.29 During the same period commodity impQrts also rose rapidly, although more slowly than commodity exports. The high level of domestic investment, particularly in petroleum, the chemical and manufacturing industries and trans- portation, and the relaxation of of the official approval of industrial invest- ments, resulted in a 37 percent increase in 1971 and 24 percent in 1972 in im- ports of equipment. Imports of raw materials and semi-finished goods decreased in 1971, but the relaxation of import regulations for spare parts, raw materials and semi-finished goods resulted in an increase of 15 percent in 1972. However, imports of raw materials and semi-finished goods did not grow at the same pace as the whole economic activity, in 1971 and in 1972, since growth occurred mostly in sectors, e.g. olive oil, tourism and petroleum, which use only a small pro- portion of imported intermediate goods. On the other hand, there were increased imports of crude oil in 1972, to be transformed into fuel oil in Tunisia, Tunisian orude oil being too light. Imports of foodstuffs other than cereals increased considerably - from Ei 16.5 million in 1970 to D 31 millioni in 1972 -- to meet the rising demand, partly due to the growth of tourism and partly to the increase in private income. Less stringent import licensing also allowed con- sumer goods imports to increase. Table 8.5: EXPORTS AS PERCENTAGE OF DIPORTS NET INVISIBLES (DEFICIT OR SURPLUS) AS PERCENTAGE OF TRADE DEFICIT 1961-62 1963-64 1965 1966-67 1968 1969-70 1971-72 Exports as % of Imports 54.4 56.7 51.8 59.2 72.6 64.7 70.3 Net Invisibles (deficit or surplus) as % of Trade Deficit 6.9 -20.8 -36.5 -27.9 -21.4 3.3 64.6 8.30 The trade deficits in 1971 and 1972 remained close to the 1969-1970 level in absolute value. Nevertheless they decreased appreciably in relative value, amounting to only 6.8 percent of GDP in 1971 and 5.7 percent in 1972, compared with 7.2 in 1969-1970, since exports grew much faster than imports. Following the trend which started in 1968, the ratio of export receipts to import payments went up to 70 percent. This relative improvement in the trade balance was accompanied by a considerable rise in the surplus on invisibles Graph 8.2 IMPORT AND EXPORT GROWTH, 1961-1973 (Millions Dinars et current prices) 400 350- 300- 250- 200 -C'kN INf '1V 0 AC1961 1962 1962 1964 1965 1966 1967 1968 1969 1970 1971 1972 1973 World Bank-6448 which had appeared in 1970. Earnings from services and transfers, of which two-thirds came from tourism and emigrant workers' remittances, rose by 45 percent in 1971 and by 12 percent in 1972. 8.31 Receipts from tourism, becoming the largest source of foreign ex- change earnings, increased by 65 percent in 1971 and 28 percent in 1972 to D 71.5 million due to an increased number of tourists, longer stays, and in- creased expenditure per tourist. The rapid rise in workers remittances, which started in 1969, reflected an increase in the number of emigrants, higher wages in Europe, and the Government's encouragement of remittances by permitting Tunisians working abroad to open convertible dinar savings accounts in Tunisia. Receipts from workers' remittances grew by 50 percent in 1971 and 30 percent in 1972 to D 30 million, more than 9 percent of total foreign exchange earnings. 8.32 Payments on invisibles, including interest, continued to increase at a normal rate. Nevertheless, as a result of better debt management and the improvement in terms of borrowing during the preceding years, the rate of growth of interest payments fell. On the other hand, payments on invest- ment income have increased appreciably since 1969, reflecting some relaxation of Central Bank control, and profit remittances by foreign petroleum companies. 8.33 The large surplus on invisibles in 1971 and 1972 reduced the deficits on current account - D 21 million in 1971, D 20 million in 1972, compared with D 50 million in 1969-1970. This steady improvement, which started in 1968, is due to a combination of exceptionally favorable factors, such as big olive crops, and of the growth of some export sectors. However, as stated above, if olive oil exports in 1971 and 1972 were adjusted to a normal level, the balance of payments would still show a structural improvement. If olive oil export figures were reduced from D 24 million in 1971 and D 47 million in 1972 to D 15 million and D 20 million respectively, the ratio of current deficit to GDP would not be higher than 4 percent in 1971-1972 (instead of 2.2-2.4 percent). 8.34 Net capital inflow increased appreciably in 1971, but decreased in 1972 because of a peak in repaynment on private credits. There was an overall surplus of D 47 million in 1971 and D 38 million in 1972, including SDR alloca- tions of D 2.0 million and D 2.7 million respectively, reflected in a consider- able increase of Tunisia's foreign assets. The gross reserves of the Central Bank and commercial banks amounted to D 120 million (US$247 million), exceeding six months of commodity imports at the end of 1972, net reserves amounted to D 93 million (US$193 million). Over 1971-1972, net reserves increased by D 85 million. Of this increase, 42 percent could be attributed to the effect of exceptional weather on the olive crop. Even without this, Tunisia's balance of payments would still have improved significantly, reducing its dependence on external capital. Graph 8.3 DISTRIBUTION OF FOREIGN EXCHANGE EARNINGS (Percentages) 100 Other Other Other Inv,sible Invisible, n-isbles Other Othe Inois,bles 75 - Invisibles Remittances Remittances Remittances Rema,tances Tourism Tourism 62 S - Remittances Tourism C.s,. oul-.6 -uat ......... Tourism Tourism Torism . .m . Manufacture Manufacture . Other Inuisibles .- . . . *.- - - . ' Workers' remittances 50 _ Petroleum Mu r Tourism * r.1 ;|z ' g,z.- o.;1:,g, > - .- ,M~~'anufacture .Yv _ ;Mnaculprdc D'u.:is . S . * . Mr. . . . . . u . Petroleum - ~~~~~~~~~~~~~~~'. . * * * Malnufcrl ngproduc ts . . . . ... . r.:e i.. . . . . . . Agricultural products -- . .' . .; : . . . .. . . . . ..'- g ,d t . . . . . . . .n . . . . M . '. -. -. *- -. -- -- - ...~~~~~~~~~~~P"' .- -.uwa pr. ' 2E5 12 P 2E~~ ~ _ . - - - .;,..c .; 1961-62 1963-64 1966-67 1969-70 1971 -72 World Bank-80871R) B. External Relations and Structure of Trade 8.35 Since independence Tunisia's external trade has been dominated by changes in its relations with France. In addition, new markets have been opened following trade and payments agreements with a number of countries and with the EEC. A second major factor, which has influenced both the direction and the structure of trade, has been the steady extension of strict control of foreign exchange transactions. (i) The External Relations and Direction of Trade 8.36 Under the customs union with France in the years following indepen- dence, exports to France represented about 60 percent of total exports; and imports from France accounted I.or about 70 percent of total imports. In the latter part of 1959 the Tunisian Government terminated the Franco-Tunisian customs union and concluded a new financial and trade agreement with France, which became effective on September 14, 1959. This trade agreement, which was to be renewable each year, was not renewed in 1961 as a result of the Bizerte incident and the situatlion in Algeria. However, privileges accord- ed to Tunisian products in the French market have in fact continued, and ex- ports to France still accounted for about 55 percent of total in 1961-1962. In particular, wine, vegetables, citrus, fruits and cereals benefitted from quotas. On the other hand, imports from France fell to 55 percent of the total in 1961 and 52 percent in 1962. This tendency was, however, limited by the effects of past trading relations and the restrictive system, which continued to favor transactions with France in the framework of payment ar- rangements. 8.37 There was some hope of renewal of trade relations with France after Algeria's independence in 1962, the evacuation of Bizerte by French troops at at the end of 1963 and the signing of a new agreement between France and Tunisia. However, in response to the nationalization of all remaining French farmland, France terminated the financial and trade agreement in September 1964 and Tunisian products lost their preferential treatment. Exports to France, which had declined to 50 percent of the total in 1963, accounted only for 30 percent in 1965. At the same time, as a result of Tunisia's efforts to diversify its trade and its sources of supply, imports from France also fell to 40 percent of the total, but the trade balance with France re- mained largely negative. In May 1966, commercial relations were partly re- stored with the establishment of a new quota for wine and the granting of new tariff reductions for other Tunisian exports. The list included fish products, vegetables, citrus Eruits, olive oil, fruit and vegetable preserves, superphosphates and handicrafit products. The Tunisian quota for preferential imports of list products from France was relatively small, and quotas opened to other countries were not reduced. Until 1969 exports to France stabilized at 26-28 percent of the total, while imports from France fell again to about one third of the total. - 156 - Table 8.6: DIRECTION OF TRADE PERCENTAGE DISTRIBUTION 1961 1963 1965 1967 1969 1971 Ex. Imp. Ex. Imp. Ex. Imp. Ex. m Ex. Imp. Ex. Imp. France 55.0 53.7 49.8 48.2 30.9 39.2 27.8 31.8 26.0 33.1 18.7 36.1 Germany, Italy, Benelux 12.8 11.6 20.0 17.3 17.8 15.7 24.0 17.0 27.5 19.6 33.1 19.5 Total EEC 67.8 65.3 69.8 65.5 48.7 54.9 51.8 48.8 53.5 52.7 51.8 55.6 Other 18.6 28.0 17.4 26.5 30.0 32.6 24.7 36.2 22.0 34.4 24.4 36.1 countries with mul- tilateral trade of which: U.S.A. 0.6 14.9 0.8 11.1 1.6 16.2 2.8 25.4 0.9 20.2 1.3 14.6 Countries 9.3 5.2 7.5 7.0 15.1 9.5 16.5 13.2 14.5 11.0 12.2 7.9 with bi- lateral pay- ments agree- ments Algeria, 4.3 1.5 5.3 1.0 6.2 3.0 7.0 1.8 10.0 1.9 11.6 0.4 Morocco, Lybia Total 100 100 100 100 100 100 100 100 100 100 100 100 Source: National Statistical Office. 8.38 Quotas on the French market were terminated with the signature of the association agreement with EEC in 1969 and exports to France declined to less than 20 percent of the total in 1971. Similarly concessions granted by Tunisia to France on listed products were ended and 70 percent of the tariff preferences formerly accorded to France were extended to all EEC countries. Imports from the franc area have continued to benefit from favorable treatment within the general restrictive system; imports from France increased to 36 percent of the total in 1971, while total trade with France, which represented 66 percent of total Tunisian external trade in 1961, accounted for about 30 percent in 1971 and 1972. 8.39 Tunisia had already diversified its trade with EEC countries, other than France, particularly with Italy and Germany, even before the association agreement with the EEC was signed in March 1969. 1/ Trade with EEC countries, 1/ Tunisia had applied for an agreement with the EEC in October 1963. - 157 - excluding France, represented 21 percent of total Tunisian external trade in 1968 compared with 12 percent in 1961. The association agreement with EEC was limited to trade relations. The agreement was to last five years, and provision was made for negotiations to cover non-commercial aspects (capital and labor) by the end of the third year. These have not been con- cluded yet. The rationale of t:he 1969 agreement was to compensate Tunisia for the loss of French preferences to Tunisia on various products after mid- 1969 and to provide opportunities for developing and diversifying Tunisia's exports and varying their desti'nation. About 90 percent of Tunisia's indus- trial exports to the EEC enjoyed duty free entry into the Community, without quantitative restriction, and about half agricultural exports, mainly olive oil, citrus fruit and certain processed food, were granted tariff rebates provided their prices remained above agreed levels. Tunisia granted tariff reductions to EEC countries ranging from 20 to 30 percent of the minimum tariff on about half of its import trade and was to establish sub-quotas within existing quotas for imports from the EEC. For products not specified in the agreement, French preferences could remain in effect; ithe most impor- tant were wine, fish products, cork and cork products, and energy products regulated by the European Coal and Steel Community. 8.40 The general growth of Tunisia's exports in 1970-1971 was accompanied by a less rapid growth of exports to EEC - their share decreasing from 53.5 percent of the total in 1969 to) 51.8 percent in 1971. Thiis share ilas however increased in 1972 - 58.6 - due to the higlh increase in olive oil and petroleum exports, particularly to thze i']G. The sliare of total exports whicii went to France decreased from 26 percent in 1969 to 19 percenit in 1971 and 1972, in favor of exports to Italy aLnd 3ermany. The effects of the agreeraenLt with EEC on Tunisia's trade reriained linited as a result of thle introduction of EEC's generalized preferesce scheme in 1971 and the coinclusioin of Lrade agreemencs with other Mlediterranean countries, both eroding Tuniiisia's advantages. On the otlher hand, EEC exports to Tunisia increased from 53 percent of total Tunisian''s imports in 1969 to 56 percent in 1971 and 58 percent in 1972. 8.41 The loss of preferential treatment for agricultural products, par- ticularly citrus fruits and olive oil, on the French market has not been off- set by new markets in other EEC countries. Market conditions have been dif- ficult due to competition of products from other Mediterranean countries such as Spain and Israel. To benefit from the provisions covering industrial prod- ucts, which have been granted duty free entrance into the Community, Tunisia has still to increase its competitiveness. This may be achieved in the longer term if the new Tunisian policy to attract export-oriented industries succeeds. However, the creation of export-oriented industries will depend heavily on foreign capital and know-how provided by investors with established markets. 8.42 The revision of the agreement with the EEC was planned for 1974. In 1972 the European Committee developed a "Mediterranean policy" with the aim of combining negotiations with the three Maghreb countries, Algeria, Morocco and Tunisia, which were scheduled to take place after these with Spain and Israel. An executive committee (Maghreb-EEC) made proposals to the EEC'niiiiisterL, council after having its first round of talks with the Maghreb countries. C. ............*. ...* C., . . . . . . . . . . . . .. . . . . . . . . . . . . . . . . . . . .. . . . . . . . .. . . . . . . . . . . . . . . . . . . . . .. . . . . . . C . .... * . . . . . . ..4~ . . . . . . ... . . . . . . . . . . . . .. . . . . . . . . . . . . . .l I . . . . . . . . . .. . . . . . . .. .. . . . . . . . . . . .. . . .. . ... . . . . . . . . .. . . . . . .. . . . . . . . . . C)~~~~~~~~~~~~~C 0 ... . . ..J. . . . . . . . -' 0. . . . . . . . . . . . . . . . . . - 159 - These proposals included: (i) the creation of a free market zone for indus- trial products into the EEC, special provisions for petroleum and advantages for agricultural products from the Maghreb countries, provided that these countries will abolish, by stages, custom duties and quantitative limitations on their imports from EEC countries; (ii) economic cooperation, including pro- visions covering European private investments, sub-contracting and commercial agreements, technical cooperation and manpower training; and (iii) financial cooperation, including arrangement for direct investment, aid on favorable terms and lending on commercial terms. 8.43 The EEC ministers' council did not agree on all these proposals but it had defined the principles of negotiation with the Maghreb countries, Spain, and Israel: these included the creation of a free market zone for industrial prod- ucts from these countries, advantages more substantial than those already granted to some of them for a nuimber of agricultural products, excluding wine; agreements on social security for migrant workers; and the provision of finan- cial aid (through the FED and tlhe European Investment Bank); and the admission of Maghreb workers will have remained to be settled bilaterally. These proposals were constructive elements of a large scale agreement between the Maghreb coun- tries and the EEC but they fell short of the wishes of the Maghreb countries, particularly Tunisia and Algeria, in the fields of economic cooperation and workers migration, except for clauses granting migrant workers the same rights as local workers. 8.44 The negotiations took place in Septeber-October 1973 and Tunisia asked the EEC to revise its stand, especially with respect to the economic and financial cooperation and workers migration. As a result of the recent developments it is likely that negotiations will start again on a broader base including oil problems. 8.45 Since 1959 the United States has become Tunisia's second most im- portant source of supply, including commodity aid. Imports from the United States accounted for 15 percent of total imports in 1971 and 12 percent in 1972, less than the 25 percent peak in 1967-1968. On the other hand, Tunisian exports to the United States have remained negligible. A number of bilateral trade and payments agreements htave been concluded with Eastern bloc and Asian countries: Yugoslavia, Bulgaria, Czechoslovakia, East Germany, Hungary, Poland, Rumania and the Soviet Union, and with United Arab Republic and China. Trade with India is, at least in part, conducted through a clearing account. Trade with these bilateral partners increased appreciably from 1961 to 1968, from 6.6 percent of total Tunisian external trade to 15 percent, but declined there- after to less than 10 percent in 1971. This was partly because Tunisia was not able to increase its imports from these countries at the same pace as its ex- ports to them and had to extencd sizeable credits to its bilateral partners. However, the agreements with Bulgaria, Poland and the Soviet Union remain especially active, exports consisting mainly of phosphates and olive oil and imports mostly of raw materials; and sugar. - 160 - 8.46 Tunisia also has concluded a number of trade agreements within the OECD area (Austria, Canada, Denmark, Greece, Norway, Portugal, Sweden, Switzerland and the United Kingdom), as well as agreements with Ethiopia, Iraq and Japan. IHowever, the quotas in these agreements have covered a relatively minor proportion of Tunisian trade with these countries. Trade has developed particularly with Canada, the United Kingdom, Austria and Spain. Trade with all the countries with multilateral trade, other than the United States and EEC countries, represented 22 percent of total Tunisian external trade in 1971 and 24 percent in 1972, compared with 15 percent in 1961. 8.47 Agreements have been reached with the other Maghreb countries on transport and cultural matters. A treaty on economic cooperation has been prepared, but has not yet taken effect. A trade protocol was signed with Algeria in 1969, providing for the abolition of customs duties on a number of industrial products and establishing quotas for others. Tunisia has sub- stantially developed its trade with Libya, and has concluded an agreement on economic and financial cooperation in 1973. Tunisian trade with the other Maghreb countries and Libya increased from 2.4 percent of total Tunisian external trade in 1961 to 5 percent in 1971. It consisted mainly of exports of olive oil, fruits and vegetables, livestock and construction materials, mostly to Libya and to a less extent to Algeria. Tunisia has also opened new markets in African countries, particularly for wine, but the trade is still small. (ii) The Structure of Trade 8.48 Within this framework of trade agreements, in order to protect domestic industry and foreign exchange reserves, the authorities exercised increasing direct control over foreign trade and payments throughout the 1960s. Quantitative restrictions were applied to imports, and within various quotas both import licences and foreign exchange payment authorizations were required. Imports of capital and intermediate goods have received priority, but have required separate approvals for the proposed outlays and for the pro- posed foreign source of finance. Import of consumption goods has been strictly limited, and for the most part imported directly by a single government agency, the Tunisian Office of Commerce. The main features of this complicated re- strictive system have been reviewed in Chapter 7. Further details follow. 8.49 All imports require licenses granted by the Trade Division of the Ministry of Economy, except those that may be affected under an import card or an import certificate (see below). All import applications must be submitted for the approval (avis technique) of the competent Ministry or government agency. The prior approval of the Ministry of Finance is required for all imports that are financed with supplier's credits. Thereafter, import licenses must be approved by the Central Bank, which authorizes the corresponding pay- ment. Imports of certain commodities (largely raw materials and certain equip- ment) under 230 tariff headings or their parts are liberalized and, in prin- ciple, licensed freely. Imports of some 100 commodities or groups of com- modities are severely restricted to protect domestic producers. A limited number of consumer goods are licensed under annual global quotas for all - 161 - countries. Imports of certain consumer goods from France are licensed under bilateral quotas; and special quotas are fixed annually for specified imports from EEC countries. Imports from countries with which Tunisia maintains bi- lateral payment agreements are licensed within bilaterally agreed quotas un- less the goods are among the few for which global quotas have been set. An overall foreign exclhange budget was introduced in 1968 to summarize enter- prise import requirements, but imports under some important foreign credits are programed separately and eKports and imports under bilateral payments agreements are on a counitry basis. 8.50 Import procedures have been somewhat simplifed since 1971. Indus- trial enterprises may obtain annual licenses covering their estimated import requirements. Certificates permitting imports without a license of specific commodities, mainly raw materials, semi-manufactures and spare parts, can also be obtained by industrialists and traders. Since 1971 these import facilities have been extended to a larger number of commodities and granted to a larger number of importers. There has also been some relaxation in controls on the import of consumer goods. Moreover a new custom tariff took effect in 1973. (See Chapter 7). Table 8.7: STRUCTURE OF IMPORTS (Annual Average) Percentage Distribution 1961-62 1963-64 1966-67 1969-70 1971-72 Investment Goods 19.5 25.5 23.8 23.0 29.5 Intermediate goods 30.7 37.0 42.3 41.3 36.3 Raw MIaterials and Semi-Finished Products 23.6 30.8 38.3 37.2 30.8 Energy Products 7.1 6.2 4.0 4.1 5.5 Agricultural and Foodstuffs 24.9 16.0 18.2 21.5 19.7 Cereals 13.6 3.8 9.5 11.2 5.8 Foodstuffs 11.3 12.2 8.7 10.3 13.9 Consumer Goods 24.9 21.5 15.8 14.2 14.5 TOTAL 100 100 100 100 100 Source: Ministry of Planning. 8.51 This restrictive system has enabled Tunisia to cbntrol the growth of imports, particularly of consumer goods, and to protect domestic industry. It has had also some impact on the terms of trade and the current value of imports. Licensing and the establishment of bilateral quotas have allowed Grapb 8.S STRUCTURE OF IMPORTS AND EXPORTS COMMODITY IMPORTS COMMOOITY E2XPURTS PERC6NTAGE DISTRIUrTION PERCENTAGE DISTR(6UTIOG6 j I 1 n a 196162 1963-64 196667 1969 -0 ,971 72 1961 62 1963-64 1966-67 969TL ,917 77 Z CONSUMER GOODS L PETROLEUM AGRICULTURA_ AN" FOODSTUFFS MANUFACTURED PRODUCTS I NTERMEDIATE GOODS 9 PROCESSED RAW MATERIALS INVESrMENT GOUDSD PROCESSED AGRICULTLRAL AND FCODSTUFFR MM PRIMARY MIN NO PRODUCTS PRIMARV AGRICULTLRE PRU vD J.T- - 163 - Tunisia to import products at a lower cost, particularly after 1965. From 1961 to 1970 the average growth of total imports at current prices was 6.6 percent per year, of which 3.7 percent in volume and 2.8 percent in price. In fact, the price index of imports grew by 6.3 percent from 1961 to 1965, and decreased thereafter. Imports of capital goods increased by 10 percent per year, imports of intermediate and energy products by 11 percent, imports of cereals and foodstuffs by 4 percent, and imports of consumption good were maintained at the same absolute level as in 1962. From 1970 to 1972 the meas- ures of relaxation led to an acceleration in growth of total imports, partic- ularly for capital goods, consumer goods and foodstuffs. As a result, there have been major changes in the structure of imports, reflecting the investment effort and industrial developments based on import substitution. The share of equipment in total imports increased from 19.5 percent in 1961-1962 to almost 30 percent in 1971-72, intermediate goods from 24 percent to 31 per- cent, while the share of foodstuffs and cereals decreased from 25 percent to 20 percent and consumer goods from 25 percent to less than 15 percent. 8.52 Tunisia did not have an active export policy during the 1960's due to the priority given to production for the local market as well as the need to expand revenue. Export licer,ces were required and foreign exchange receipts had to be declared and repatriated within specified periods of time. Most commodities had to be exported by public or semi-public enterprises and agen- cies. Special taxes introduced to prevent windfall profits from devaluation were maintained on exports of a number of products. On the other hand, rebates on turnover tax were accorded to some exports, for example food products. Direct Government subsidies to exporters were not accorded on a regular basis, but some public enterprises had different prices for the domestic and external markets. Lower interest rates applied to credit for export purposes. 8.53 The second Four-Year I'lan envisaged steps to encourage exports and, in 1970, in the framework of the new export oriented economic policy, the Gov- ernment abolished export licenses for most commodities and all export taxes, and granted exporters higher retention and freer use of foreign exchange earn- ings. In 1972 the Government set up legislation granting considerable advan- tages to export oriented enterprises in manufacturing, and established an export promotion center (see Chapter 7). - 164 - Table 8.8: STRUCTURE OF EXPORTS BY DEGREE OF MANUFACTURING (ANNUAL AVERAGE) Percentage Distribution 1961-62 1963-64 1966-67 1969-70 1971-72 Primary Agriculture Products 13.5 17.2 15.5 13.0 9.2 Processed Agricultural and Foodstuffs 52.0 47.6 32.8 28.8 44.5 (of which: Olive Oil) (23.8) (19.7) (15.6) (13.4) (34.2) Primary mining products 22.4 21.0 25.6 22.8 17.1 Processed Raw Materials 8.1 8.0 18.1 24.5 18.2 Manufactured Products 4.0 6.2 8.0 10.9 11.0 Sub-Total 100 100 100 100 100 90.4 100 76.2 100 75.6 Crude Oil - - 9.6 23.8 24.4 TOTAL 100 100 100 100 100 Source: Ministry of Planning. 8.54 Export performance from 1961-72 has been analyzed earlier. The rel- ativelv hifh qrnTTth , AR --rPt for total commodity exports from 1961 to 1970 was due, to a large extent, to the appearance of petroleum exports; excluding petroleum, the growth rate would have been little more than 5 percent per year. During the two years 1971-72 total exports increased by more than 60 percent mostly as a result of exceptional olive oil crops and increased petroleum production. Thus, the role of exports other than petroleum and olive oil in the growth of Tunisia's commodity exports has been modest. How- ever, the industrialization led to some diversification of the export structure. The share of agricultural products has shown a decreasing trend, even though it has depended on the fluctuations of olive oil and some other major products, as has the share of primary mining products. On the other hand, the share of industrial products has appreciably increased. Processed raw materials (super- phosphates, metal products and steel, phosphoric acid, refined oil products, cellulose and construction materials) represented 18 percent of total commo- dity exports - excluding crude oil - in 1971-1972, compared with 8 percent in 1961-1962. Manufactured products (mostly textiles and textile products) made up 11 percent of the total in 1971-1972, compared with only 4 percent in 1961-1962. C. Capital Flows and External Debt (i) Evolution, Structure and Use of External Capital 8.55 Tunisia has received large amounts of external capital since 1961. For the period 1961-1972 it amounted to D 821 million (in terms of actual disbursements) of which 64 percent was official capital (long term loans and grants), 24 percent was in the form of private medium term credits (suppliers' credits, financial and commercLal credits), and 12 percent represented for- eign direct investment. There have been significant changes in the struc- ture of external capital over t-hese twelve years. During the first four years, 70 percent came from governments, mostly in the form of grants and loans from the USA. During 19165-1968 the Government made more use of pri- vate credits, particularly medLum-term bank credits. The share of official capital fell to 57 percent of total capital inflow. Then, because of an at- tempt by the Government to lim:Lt recourse to private credits, which had seri- ously increased foreign debt service, the share of official capital rose again to 68 percent of total capital inflow. 8.56 During the whole periLod 1961-72 external capital financed 35 percent of total investment, while national saving provided the remaining 65 percent. Almost 25 percent of external capital was used to repay debt and about 6 percent was added to foreign exchange reserves. However, as a result of the structural changes in Tunisia's external position during this period, and of the increasing burden of debt repayment, there have been important changes in the use of ex- ternal capital. In 1962-1964, external capital inflow was not sufficient to offset the increasing current account deficit and foreign exchange reserves were extensively used. During the first Four-Year Plan period, 1965-1968, the stabilization program allowed Tunisia's balance of payments to improve steadily, and foreign exchange reserves wrere used to finance no more than 3 percent of gross capital inflow. On the other hand, an increasing share of external cap- ital was used for debt repayment, mostly of private medium-term credits, and little more than 75 percent of it was used for investment. Then, during the second Four-Year Plan, external. capital inflow exceeded foreign exchange needs. Only 41 percent of the inflow financed investment, while 32 percent was used for debt repayment, and 27 percent went to increase foreign exchange reserves. (ii) Official Capital 8.57 Tunisia has benefitted from a high level of external official aid since 1961. During the twelve years 1961-1972, it amounted to D 526 million (US$1,100 million) or about D 9 (US$19) per capita per annum. Thirty-four percent (34%) of the total was in the form of grants, mainly from the United States, France, Germany, Canada, Belgium, Sweden and the United Nations. For the whole period, technical assistance accounted for 48 percent of these grants; almost 30 percent consisted of foodstuffs, and the remainder was in assistance in kind, including equipment. - 166 - TABLE 8.9: BREAKDOWN OF GIt)SS CAPITAL INFIOW In Missions of DinArs 1961 1962-64 1965-68 1969-72 1961-72 Total Gross Capital Inflow 25.9 125.1 319.1 351.2 821.3 Official capital 19.4 86.6 181.8 238.0 525.8 Grants 17.2 32.6 47.4 81.3 178.5 Loans 2.2 5h.o 134.4 156.7 347.3 Private capital 6.5 38.5 137.3 113.2 295.5 Direct Investment 2.0 13.1 35.0 48.8 98.9 Suppliers' credits 1.7 22.8 49.5 58.5 132.5 Other credits / 2.8 3.6 52.8 5.9 64.1 Percentage Distribution 1961 1962-64 1965-68 1969-72 1961-72 Total Gross Capital Inflow 100.0 100.0 100.0 100.0 100.0 Official capital 74.9 69.2 57.0 67.8 6h.o Grants 66.4 26.1 14.9 23.2 21.7 Loans 8.5 43.1 42.1 44.6 42.3 Private capital 25.1 30.8 43.0 32.2 36.0 Direct Investment 7.7 10.5 11.0 13.9 12.1 Suppliers' credits 6.6 18.2 15.5 16.6 16.1 Other credits LI 10.8 2.1 16.5 1.7 7.8 1/ Including financial and commercial medium-term credits, and net short-term credits. Source: Ministry of Planning - 167 - TABLE 8.10: USE OF EXTEIRAL CAPITAL In Millions of Dinars 19 61 196-2-6 196-68 1969-72 1961-72 Total Gross Capital Inflow 25-9 125.1 319.1 351.2 821.3 Uses: Debt repayments 1.1 1i.5 75.2 113.5 204.3 On debt of public origin 0.4 L4.2 15.9 38.5 59.0 On debt of private origin 0.7 10.3 59.3 75.0 1l5*3 Investment Financing 32.7 143.6 253.4 Lo.7 SYo.L (= current account balance) Reserves V -7.9 -33.0 -9.5 97.0 46.6 Percentage Distribution 1961 1962-64 1965-66 1969-72 1961-72 Total Fross Capital Inflow 100.0 100.0 100.0 100.0 100.0 Uses: Debt repayments 4 .2 11.6 23.6 32.3 2L4.9 On debt of public origin 1.5 3.4 5.0 11.0 7.2 On debt of private origin 2.7 8.2 18 .6 21.3 17.7 Investoment Financing 126.3 114.8 79.4 40.1 69.4 (= current account balance) Reserves V -30.5 -26.4 -3.0 27.6 5.7 ;/ bExcluding SDR Source: Ministry of Planning - 168 - Table 8.11: TOTAL GRANTS IN 1961-1972 Million Of Dinars Percent Technical Assistance 85.5 48.0 Foodstuffs 52.6 29.6 Assistance in Kind 21.9 12.3 Equipment 18.0 10.1 TOTAL 178.0 100.0 Source: Ministry of Planning. The share of grant aid in official capital declined from 60 percent in 1961- 1962 to 27 percent in 1967-1968. There was a sharp increase in 1969-1970, associated with flood relief. In 1971-1972, with better harvests and an im- provement in the economic situation, the share of grant aid decreased again. 8.58 Official loans, which represented the largest part of foreign capital inflow, increased rapidly during the first half of the twelve year period, level- led more or less between 1966 and 1970, and increased appreciably in 1971-1972. Disbursements on official loans averaged D 18 million per annum in 1962-1964, D 34 million in 1958-1968 and D 39 million in 1969-1972. While Tunisia has been very successful in obtaining foreign aid commitments, it may have obtained much more than it was able to use efficiently. Shortfalls in disbursement were due to problems arising from tied procurement, to deficiencies in project preparation and to difficulties in using program loans, at least initially. Actual disbursements on official loans always fell below Plan objectives. During the second Four-Year Plan, however, the shortfall was reduced because of improved project preparation and the increased use of public savings to finance the local currency component of projects. - 169 - Table 8.12: OFFICIAL LOANS: DISBURSEMENTS BY COUNTRY ORIGIN (million of dinars) 1961-1972 1961-64 1965-68 1969-72 Value Percent Total disbursements 56.2 134.4 156.7 347.3 100.0 U.S.A. 33.1 71.9 56.1 161.1 46.4 France 6.0 6.1 21.7 33.8 9.7 Italy 4.2 15.0 13.0 32.2 9.3 Germany (Fed. Rep. of) 0.5 9.5 19.8 29.8 8.6 Kuwait /1 10.2 9.6 2.6 22.4 6.4 Sweden 0.4 1.5 2.2 4.1 1.2 Other European countries /2 - 2.5 9.2 11.7 3.4 Eastern European countries /3 0.8 7.2 0.1 8.1 2.3 IBRD/IDA 1.0 11.1 30.9 43.0 12.4 African Development Bank - - 1.1 1.1 0.3 /1 Including Bank of Kuwait, Kuwait Government and Kuwait Fund. /2 Netherlands, Spain, Denmark, Belgium. 7T USSR, Czechoslovakia, Democratic Republic of Germany, Hungary, Rumania, Yugoslavia. Source: Ministry of Planning. 8.59 During the twelve year period 1961-1972, official loans from bilateral sources accounted for 87.3 percent, the remainder (12.7 percent) coming from multilateral sources. The most important bilateral source was the United States, which provided more than 46 percent of total disbursements, mostly in the form of program loans and of PL 480 commodity aid. Other major lenders were France, for 9.7 percent of total disbursements, Italy, 9.3 percent, Federal Republic of Germany, 8.6 percent, Kuwait, 6.4 percent, and the World Bank Group, 12,4 per- cent. However, there were impostant changes in the sources of loans during the period. In 1961-1964 the USA and Kuwait supplied the bulk of official loans. During the first Four-Year Plan, a number of European countries began to lend to Tunisia, Italy providing the largest part, and there were also some loans from Eastern European countries. During the second Four-Year Plan there were important increases in loans from France, reflecting the improvement in polit- ical relations, and from the Federal Republic of Germany, which invested in a number of public enterprise projects, while the share of loans from the U.S.A. and Kuwait decreased considerably. Loans from the World Bank Group increased rapidly from 8 percent of the total in 1965-1968 to almost 20 percent in 1969- 1972. - 170 - Table 8.13: OFFICIAL LOANS: BREAKDOWN OF DISBURSEMENTS (Millions of Dinars) 1961- 1965- 1969- 1961- 1964 1968 1972 1972 Percent Total disbursements 56.2 134.4 156.7 347.3 100.0 Government Program Loans 28.4 43.5 35.5 107.4 30.9 Government Project Loans 6.4 29.4 31.7 67.5 19.4 Enterprise Project Loans 11.0 33.2 59.8 104.0 30.0 PL 480 10.4 28.3 29.7 68.4 19.7 Source: Ministry of Planning. 8.60 From 1961 to 1972, program loans and PL 480 food loans formed the largest part of official loans, and accounted for more than half of total disbursements. Project loans to enterprises accounted for 30 percent of disbursements, and project loans to Government for the remainder. However, the share of project loans, particularly to public enterprises, increased from 31 percent of total disbursements in 1961-1964 to 47 percent in 1965- 1968 and to 58 percent in 1969-1972. This was due to better project prep- aration and the improvement in the balance of payments after 1968, which reduced the need for program loans to finance current imports. Moreover, si:.ce 1971, the Government has given preference to project aid over tied program aid which does not help to liberalize trade. 8.61 On the basis of the commitments during 1967-1972, the sectors ben- efitting most from official project loans have been public infrastructure (including health and education), transport and communication, and energy and water supply. About 67 percent of program lending has been used to fi- nance current imports and 33 percent as budget assistance. Table 8.14: COMMITMENTS BY ECONOMIC SECTOR, 1967-1972 (Percent) Agriculture 10.5 Mining 0.9 Petroleum _ Manufacturing 4.7 Energy and Water 18.5 Transport and Communication 19.4 Tourism 5.6 Banking 8.2 Infrastructure and Community Services 32.2 TOTAL 100.0 Source: I.B.R.D. - 171 - (iii) Private Lending 8.62 Borrowing from private sources amounted to D 210 million, in ternms of gross disbursements, for the twelve year period, and represented 29 per- cent of total gross capital inflow and 36 percent of total loans. This bor- rowing was mostly in the form of medium-term credits and, in terms of net in- flow, represented only 10 percent of net external capital because of increasing debt repayments. Table 8.15: PRIVATE CREDITS: BREAKDOWN OF DISBURSEMENTS (Millions of Dinars) 1961- 1965- 1969- 1961- 1964 1968 1972 1972 Percent Suppliers Credits 24.5 49.5 58.3 132.3 62.8 Government - 2.5 6.7 9.2 4.4 Enterprises 24.5 47.0 51.6 123.1 58.4 Financial Credits - 38.6 4.6 43.2 20.5 Government - 18.2 1.1 19.3 9.2 Enterprises - 20.4 3.5 23.9 11.3 Commercial Credits 0.8 18.1 16.2 35.1 16.7 Government - 11.6 10.6 22.2 10.6 Enterprises 0.8 6.5 5.6 12.9 6.1 TOTAL DISBURSEMENTS 25.3 106.2 79.1 210.6 100.0 on Credits to Government - 32.3 18.9 50.7 24.1 on Credits to Enterprises 25.3 73.9 60.7 159.9 75.9 Source: Ministry of Planning. 8.63 Tunisia began to have recourse to private medium-term credits in 1963, in the form of suppliers credits to finance public enterprise invest- ment. The restriction of suppliers' credits under the 1964 stabilization plan led to the increased use of foreign medium-term credits which were used by enterprises, for investment and imports, and by the Government for budgetary purposes. The Government had to approve foreign medium-term credit (18 months to ten years) and various ceilings were fixed, but in 1968 repay- ments on private credits reached almost D20 million, and after 1968 aroused the Government's concern. The improved current balance allowed the author- ities to reduce the use of financial and commercial credits appreciably, and they endeavoured to keep authorizations for suppliers' credits in line with repayments. Nevertheless, suppliers' credits remain, to some extent, linked to official bilateral project loans, and do not lend themselves to much fur- ther curtailment. - 172 - 8.64 During 1961-1972, suppliers' credits represented 63 percent of gross disbursements on private credits, financial credits 29 percent, and commercial credits 17 percent. Out of the total of these credits, 76 percent were used by public enterprises and 24 percent by the Government. The bulk of financial and commercial credits was used in 1965-1968, when they reached 53 percent of total private credits, while suppliers' credits accounted only for 47 percent. W4ithin the category of suppliers' credits, the chief creditor has been France, followed by the USA, the Federal Republic of Germany, Italy, Spain and Sweden; these countries, with the exception of Spain, have also been the chief sources of bilateral project loans. Within the category of medium-term bank credits, the largest part was provided by Italian banks, and the remainder by French, Dutch, British and American banks. The main sectors benefitting from suppliers' credits have been transport and communication, infrastructure and energy. (iv) Direct Investment 8.65 Direct foreign investment has been rather limited during the twelve year period. It amounted to D 103 million, or 12.5 percent of total gross capital inflow. Over the period, however, it increased from D 2 million per annum in 1961 to an average of D 10 million in 1967-70 and D 20 million in 1972. Most direct investment went to the petroleum sector (76 percent of total) for exploration and equipment, and tourism (10 percent). Other sec- tors in which there was some foreign investment were transport, housing and manufacturing. (v) External Debt 8.66 Tunisia's foreign debt, including public debt and debt guaranteed by the Government 1/, almost quadrupled during the eight year period from the end of 1964 2/ to the end of 1972, from D 147 million (US$280 million) to about D 528 million (US$1,100 million). Disbursed debt rose over this period from D 98 million (US$186 million) to about D 336 million (US$700), increasing slightly less rapidly than total debt. As a proportion of GDP, total foreign debt rose from 32 percent in 1964 to about 52 percent in 1972, and disbursed debt increased from 21 percent of GDP to about 33 percent over the period, although the ratio fell during the years 1971-1972, because of the sharp increase in GDP and the slower growth of external debt. 1/ Siince most of external debts contracted by enterprises have been guar- anteed by the Government, these figures represent about 90 percent of the total foreign debt of Tunisia. 2/ External debt data before 1964 arc not available. Total external debt could be estimated at D 100 millfon at end-1961. - 173 - Table 8.16: EXTERNAL DEBT AS PERCENTAGE OF GDP 1964 1966 1968 1970 1972 Debt (including undisbursed) 31.7 39.6 53.4 58.1 52.2 Disbursed debt only 21.1 30.7 38.0 36.9 33.2 Source: I.B.R.D. 8.67 The share of debt of private origin was about 40 percent of dis- bursed debt in 1964-1967, and then decreased to 21 percent in 1972. More- over, there was a shift from suppliers' credits to other medium term credits. Suppliers' credits fell from 30 percent of total disbursed debt in 1964 to only 8 percent in 1972, while bank credits accounted for 12 percent in 1964 and 13 percent in 1972. At the same time, loans from public sources rose from 58 percent of disbursed debt in 1964 to 79 percent in 1972. There was also an important change in the structure of public origin debt as loans from multilateral sources, most:ly the World Bank Group, rose from 1 percent of total disbursed debt in 1964 to 12 percent in 1972. As a proportion of total debt, including undisbursed, debt of public origin rose from an aver- age of 69 percent in 1964-1967 to 82 percent in 1972. Loans from multi- lateral sources, with disbursements generally over a longer period, repre- sented 7 percent of total debt (including undisbursed) in 1964-67, and 18 percent in 1972. 8.68 During the eight years 1965-1972, total official loan commitments amounted to US$819 millions, averaging $102 millions per annum. The main lenders during this period were the U.S.A., which provided 22.3 percent of the total, France, 14.1 percent, the Federal Republic of Germany, 13.4 percent, Italy, 9.0 percent and Canada, 2.9 percent. Other countries of the Consultative Group for Tunisia 1/ accounted for 4.6 percent of the total. The People's Republic of China made its first loan to Tunisia in 1972, representing 18.3 percent of total commitments during that year. Kuwait (including Kuwait Fund and Bank of Kuwait) provided 3.0 percent of total commitments during 1965-1972, Eastern Bloc Countries 1.1 percent, and other countries, including Libya, Yugoslavia and Algeria, 0.8 percent. Loans from multilateral sources represented 24.9 percent of the total, and included 24.4 percent from the World Bank Group and 0.5 percent from the African De- velopment Bank. 1/ Austria, Belgium, Denmark, Netherlands, Sweden and United Kingdom. - 174 - Table 8.17: EXTERNAL DEBT OUTSTANDING BY ORIGIN, DISBURSED ONLY (Percent) 1964 1966 1968 1970 1971 1972 Loans from public source 58.3 61.8 64.8 70.5 72.8 78.8 Bilateral source 57.4 59.0 59.7 62.2 62.7 67.0 Multilateral source 0.9 2.8 5.1 8.3 10.1 11.8 Loans from private source 41.7 38.2 35.2 29.5 27.2 21.2 Suppliers' credits 30.0 20.4 15.7 11.5 9.7 7.8 Bank credits 11.7 17.8 19.5 18.0 17.5 13.4 TOTAL 100.0 100.0 100.0 100.0 100.0 100.0 Source: I.B.R.D. 8.69 While many countries have lent to Tunisia, at the end of 1972 al- most 90 percent of Tunisia's official debt, including undisbursed, was owed to only six creditors: the U.S.A. (24.5 percent), the World Bank (21.5 per- cent), France (16 percent), Germany (13.7 percent), Italy (6.8 percent) and Kuwait, including Kuwait Fund (4.8 percent.) Within the category of sup- pliers' and private bank credits, two major creditors were owed 84 percent of the total: France, 58 percent, and Italy (mostly bank credits) 26 per- cent. 8.70 Although Tunisia's total foreign debt continued to grow at a fairly rapid rate, its structure and terms have improved substantially since 1969 as a result of the efforts of the Government to limit borrowing from private sources and increase its concessionary nature. Of the outstanding debt, in- cluding undisbursed, at the end of 1972; 65 percent came from Governments (60 percent in 1968), 18 percent from multilateral sources (11 percent in 1968) and 17 percent from private sources (27 percent in 1968). These ef- forts were greatly facilitated by the high availability of official grants and loans, most loans being on concessionary terms. Furthermore, as the terms of borrowing from bilateral sources have appreciably improved since 1969, the grant element increased from 53 percent in 1969 to 73 percent in 1972. Although the terms of private bank and multilateral lending have hardened, the terms of total debt have significantly improved, so that the grant element of total for- eign debt rose from 37 percent in 1969 to 5r percent in 1972. - 175 - TABLE 8.18: AVERAGE T'ERMS OF FOREIGN LOANS AND CREDITS Average 1967 1969 1972 1967-1972 Interest Rate (percent) 3.9 4.8 2.9 3.8 Bilateral sources 2.8 3.3 1.4 2.2 Multilateral sources 5.0 5.5 5.9 5.4 Suppliers 5.7 6.1 5.9 6.0 Private Banks 4.9 5.6 - 5.6 Grace Period (years) 4.6 4.8 8.4 5.6 Bilateral sources 5.9 6.8 9.9 6.8 Multilateral sources 5.0 5.2 5.5 5.9 Suppliers 0.9 2.6 1.0 2.2 Private Banks 3.0 3.2 - 3.4 Maturity (years) 19.4 22.5 30.0 23.2 Bilateral sources 23.6 27.4 31.8 27.0 Multilateral sources 24.8 27.8 26.5 28.0 Suppliers 8.1 12.1 4.8 9.8 Private Banks 11.7 14.0 - 12.3 Grant Element of Loans V/(percent) 41 37 59 46 Bilateral Sources 54 53 73 61 Multilateral Sources 37 35 31 36 Suppliers 15 20 10 17 Private Banks 26 24 - 23 1I The grant element is the difference between the nominal value of the loan and the value of its service payments discounted at a rate of 10 percent . Source: IBRD - 176 - Table 8.19: DEBT SERVICE- INDICATORS (Percent) 1962 1964 1966 1968 1970 1971 1972 Debt service/debt outstanding /2 .. 10.7 12.1 15.0 13.3 12.7 14.2 Amortization/debt outstanding 7 .. 8.9 8.5 10.7 9.3 8.6 10.5 Debt service/Export of goods & NFS 2.3 12.4 17.9 26.7 22.1 17.7 17.7 of which: service on public origin debt 0.7 4.0 5.0 7.9 9.1 8.0 7.3 service on private origin debt 1.6 8.4 12.9 18.8 13.0 9.7 10.4 Debt service/Exports of goods & NFS and workers' remittances 2.2 12.0 17.2 25.3 20.2 16.0 15.9 Debt service/Gross National Savings 3.4 17.7 27.9 32.5 34.9 23.4 22.9 /1 Calculated on balance of payments data basis (Ministere du Plan). 72 Disbursed only. 8.71 Total service payments increased from D 1.2 million (US$2.9 million) in 1961 to D 48 million (US$100 million) in 1972, interest payments increased from D 0.1 million to D 13 million, and amortization payments from D 1.1 mil- lion to D 35 million. The rapid rise in debt service caused a large increase in all indicators up to 1968. Thereafter, they reflect improvement in the structure and terms of the foreign debt and Tunisia's economic growth. The ratio of debt service to total debt outstanding and disbursed rose to 15 per- cent in 1968 and decreased appreciably in 1969-71. A rise to 14 percent in 1972 was due to a peak in the amortization of private debt. The service on debt of private origin averaged 60 percent of the total during 1961-72. The most significant decreases after 1968 were in the ratio of debt service to ex- ports of goods and services, * including workers' remittances - which fell from almost 25 percent in 1968 to 16 percent in 1972 and in the ratio of debt serv- ice to national savings which fell from 35 percent in 1969 to 23 percent in 1972. Thlese latter ratios are expected to continue to decrease slowly in the coming years as a result of rising exports, the continued limitation of bor- rowing from private sources and continued official borrowing on favorable terms from bilateral sources. (vi) Aid Coordination 8.72 The principal donors of external assistance to Tunisia participate in the Consultative Group for Tunisia, which was organized by the World Bank in 1962 and has been one of the more active of the Bank's aid coordination groups. Annual meetings were held from 1967 through 1972. At the present - 177 - time, in addition to Tunisia and the Bank, the following countries and in- stitutions participate: Belgium, Canada, Denmark, Finland, France, Germany, Italy, Kuwait, Netherlands, Spain, Sweden, Switzerland, United Kingdom, United States, Japan, African Development Bank, European Investment Bank, Interna- tional Monetary Fund, and United Nations Development Programme. 8.73 The Consultative Group has contributed to the Government's internal organization and focus on development issues. At the meetings the Government has presented its development programs and needs to its principal sources of external assistance. The Group has also provided a common base of informa- tion and analysis to donor countries and institutions with the annual eco- nomic budget and special papers prepared by the Government and the annual economic reports prepared by the World Bank, and has provided a summary of the conclusions of the meetings. Of at least equal importance have been the preparatory work, the follow-up activities and the consultations with bilateral donors at a senior level facilitated by the meetings. 8.74 Disbursements on aid loans have been often postponed, as a result of delays in project preparation and execution. Moreover, coordination between projects and between and among donors, whether or not under joint financing arrangements, has been insufficient. Thus, external assistance may not always have responded to Tunisia's economic priorities. In the future, to increase the effectiveness of assistance made available and ensure that absorptive ca- pacity is sufficient, it would be important for the Government, in cooperation with donor agencies and institutions, to (i) improve the quality and expand the amount of project identification, preparation and evaluation; (ii) focus external aid, especially technical assistance, on areas of economic priority, including recurrent developmental activities such as extension services; (iii) ensure that greater efforts are made to develop the policy and institutional conditions for the successful execution of projects; (iv) establish an integrated program of pre-investment studies, external finance and complementary technical assistance; and (v) improve the supervision and execution of projects, partic- ularly in the field of technical assistance. - 178 - 9. THE FOURTH PLAN AND DEVELOPMENT PROSPECTS A. Introduction 9.1 The Fourth Plan was prepared within the framework of the Ten Year Perspectives, 1972-1981, in accordance with the Prime Minister's directive of June 21, 1971. 1/ This recognized that during the last decade there was a structural discrepancy between investments and returns because of the volume of funds that had been allocated to the social and infrastructure sectors in comparison with the directly productive sectors. Rigorous priorities for more directly productive investments and the initiation of measures for in- creasing the returns on existing investments were recommended. In the admi- nistrative field, two weaknesses in earlier planning were identified -- the concentration of planning and economic management in one ministry, and the absence of adequate machinery for project preparation. The Ministry of Plan was therefore instructed to prepare global forecasts, set up the general goals for the plan, and assume the role of co-ordinator and synthesizer. The tech- nical ministries were to be responsible for sectoral planning. 9.2 Sixteen sectoral commissions, with members drawn from both public and private sectors, were established. Each of these commissions was allowed to set up sub-committees, as many as 23 in the case of the two commissions dealing with the agricultural sector. Each sectoral commission was required to evaluate the results of the past decade, identify the main measures to be taken for the rehabilitation of the sector and to increase the returns to investment, and prepare plans for the next ten years on the basis of sound projects. The last phase of the technical preparation of the Plan was en- trusted to four co-ordinating commissions, for employment, finance, regional development and balanced growth respectively. There were, in addition, a number of technical consultative bodies together with a regional commission for each region. The Plan was issued as a law, but is indicative rather than compulsory. The annual economic budget is the chief tool for carrying out the medium-term plan. An analysis of the results of the decade 1962-1971, and a preliminary outline of the framework for the Fourth Plan, were presented to the Commission Nationale Superieure du Plan in September 1972. The re- port on the Fourth Plan, 1973-1976, was submitted to the Cabinet and approved at the end of June 1973. A definitive edition of the 1973-1976 Plan was pub- lished in November 1973. 9.3 In the light of the results of the past decade, the Government established as the principal objectives of the 1972-1981 decade: (a) accelerat- ing of growth; (b) promoting of new industrial activities to facilitate the creation of jobs to absorb additions to the labor force and reduce unemploy- ment and under-employment; (c) bringing the problem of employment under control by reducing population growth and improving education; and (d) maintaining internal and external financial stability. 1/ Circulaire Relative a l'Elaboration du Quatrieme Plan, June 1971. - 179 - B. The Underlying Strategy 9.4 The main elements of Tunisia's basic strategy are:' (a) moderate redistribution of the means of production among the public, semi-public and private sectors, and (b) an adequate redistribution of the economic return from production among the factors involved. The Plan projections reflect these principles in seeking to balance the roles of the public and private sectors, in seeking to find a middle road between systematic state interven- tion and leaving all activities in the hands of the private sector. The role of the state in terms of management is described as exclusive or predominant in the basic sectors of energy, transport, water, and mining. It is to be predominant, without being exclusive, in the industrial sector and may be found in a number of other sectors, on an experimental or partnership basis. The role of the state is also described as one of "orientation, advice and encouragement." This latter role is to be given ggreater importance. 9.5 The social problem is placed in the forefront of national aspira- tions. The Government commits itself to fight the social evils of unemploy- ment, poverty, ignorance and illness and allocate the maximum of its resources to bridging the gap which separattes the different social classes. Growth is seen as, above all, a means to the promotion of man and human dignity and must be reconciled with social progress. The Plan states that social pro- gress can be achieved only by elimination of underemployment and unemployment, and an equitable redistribution of income at the level of the individual and of the region. Employment Ls thus the major Tunisian objective in the coming years and is to be achieved by: (a) accelerating economic growth; (b) reducing population growth i:o bring it into line with (a); and (c) adapt- ing the education system to serve this policy of eliminating underemployment and unemployment. 9.6 The education system has expanded enormously during the 1960s. Twenty percent of the populationa is now at school. In the Government's view, for education to contribute to a resolution of the employment problem, it must respond to "economic" demand and moreover supply for the future generations capable of integrating into the modern world and of acting as a motor for development. The education system needs to be reorganized and re-equipped to respond. A major obstacle to progress is recognized in the excessive economic cost arising from dropouts and misfits littering the path to employment and from the encyclopaedic nature of training, the length of st'udies and the rigid stratification of the system. Research and study are being undertaken to find solutions. 9.7 Progress will be made to establish the technical institutions and mechanisms to achieve a greater diffusion of development across the country and to provide a more elaborate basis for a policy of redis'tribution of income. In the light of available information a three-fold effort would be made during the Fourth Plan: (a) to establish some balance between the interior of the country and the coastal regions; (b) to direct development in such a way as to generate increased activity in the rural areas where employment and income is more precarious; (c) by means of other measures - 180 - such as salary changes and movements in the price of staple commodities, to bring about some movement in incomes of the less-favored social categories. 9.8 The main objectives of the Government's social program are there- fore to promote professional training and employment, improve living condi- tions in the rural regions and raise the level of income of the rural popula- tion. Other measures are to contribute to the same objectives, notably a poli cy of industrial decentralization to be financed by a special fund for this purpose, as well as the fiscal reforms under consideration designed to in- crease taxation of those who have better benefited until now from development, with a view to benefiting the population which has not yet had sufficient advantages. C. Economic and Social Policy 9.9 The Fourth Plan contains many proposals in the area of economic and social policy. The general objectives are maximum mobilization of the coun- try's human, physical and financial resources, and improvement of the produc- tivity and competitivity of the various economic sectors. The Plan's propo- sals are reviewed in detail in the pertinent sectoral chapters of the report; only the broad lines are indicated here. 9.10 In agriculture, four areas are singled out for action: land reform, extension services, the development of credit, and water resources utiliza- tion and soil conservation. Under the heading of water resources, the plan assigns priority to completion of the studies for the two dams at Sidi Salem on the Medjerda and at Sidi Saad on the Zeroud in the south, and to the first stages of their construction. Emphasis is also laid on flood control, refo- restation, and control of desert encroachment. The water resources develop- ment program will have only a long-term impact, but quicker results are ex- pected in the Plan from the measures in the fields of land reform, extension services and agricultural credit policy. In land reform, the Plan provides essentially for the transfer to private ownership of a million hectares of collective lands suitable for cereals and tree crops, continued implementa- tion of the 1970 law concerning the 800,000 hectares of "terres dominiales", and accelerate application of the law on agrarian reform in the public irri- gated perimeters. 9.11 The Plan underlines the need for a greater technical assistance effort by, for example, increasing the capacity of the public services in- volved and improving the institutional infrastructure. Particular emphasis is placed on the training of new, and the retraining of existing, extension workers, and on efforts to adapt the system of supervisory and.professional staffing to the needs of the sector and to motivate the young,for agricultu- ral work. While no major changes are expected in agricultural prices, it is proposed to improve the administrative procedure for determining those prices that are still regulated, in order to steer production in the desired direc- tions. Finally, efforts will be made to accelerate the industrialization of agriculture, particularly by crop management directed toward exports, and to introduce incentives to export-oriented agro-industrial enterprises, parti- cularly in fruits and vegetables. As regards agricultural credit, in addi- tion to expansion of the local mutual credit funds (caisses locales de credit - 181 - mutuel), the main proposal concerns the creation of a new central agricultu- ral credit institution. Its purposes would be: (a) to define the investment programs eligible for credit; (b) to supervise the activities of the regional credit commissions, and (c) to examine credit applications over a certain amount. The purpose of these proposals seems to be more to achieve greater control of available funds than to spread credit more equitably among the regions and give small farmers a better access to credit. It is also proposed to create a guarantee fund to cover a proportion, still to be determined, of losses arising from irrecoverable credits to small and medium farmers, as well as a stabilization fund to consolidate certain credits to carry farmers over periods of poor harvests. These proposals are reviewed in detail in the chapters on Agriculture (Arnex I). 9.12 In industry and services, the Plan proposes to pursue the dual aim of stimulating investment and improving the productivity and competitivity of enterprises. The identification, preparation, execution and management of projects are seen to be the most urgent needs in the industrial sector. The public authorities are to concentrate on the preparation of large-scale public sector projects, while responsibility for evaluation of private-sector projects will be entrusted as far as possible to private promoters and banks. So far as public enterprises are concerned, it is proposed to create or reinforce planning sections in the ministries and public enterprises and to give in- creased support to the National Center for Industrial Studies. 9.13 The Plan further provides for the start of operations of the three real estate agencies recently c:reated for industry, tourism and housing, and revision of the Investment Code. These proposals were put into effect in 1974. Another new development is the creation of a fund for the promotion and decentralization of industry (FOPRODI). The purpose of FOPRODI will be to attract new promoters/entrepreneurs to the industrial sector and to alle- viate the effects of the lack of an active capital market, due in part to the predominance of family businesses. For this purpose the fund will give its support to executives capable of identifying, realizing and managing indus- trial ventures by providing the necessary capital. It will also have a role to play in the decentralizatiorn of industry by arranging for the allocation of premiums and by offering long-term credits, interest subsidies, and all other forms of incentives to new entrepreneurs who locate their projects in the priority regions. Finally, it will give particular support to small- and medium-scale enterprises. 9.14 For improving the competitivity and productivity of enterprises, the Plan contains a number of proposals which reflect the new economic orien- tation defined in 1970.. It prcvides for strengthening of the system of in- centives established, in particular, by the Investment Code and the Law of April 1972, with the object of steering industry toward exports. The Plan also proposed to extend the liberalization of imports to further products, gradually to eliminate quantitative restrictions and quotas, replacing them by a system of Customs duties, and to introduce flexibility into the system of price setting. It provided also for continuance of the action to bring - 182 - order into the finances of the public enterprises. These proposals were am- plified and defined in greater detail in the 1974 Economic Budget, and a number of measures implementing them have been taken since the Plan was pub- lished. The policies concerning industry and services are reviewed in detail in Chapter 7 and in the chapters on Industry (Annex II) and the chapters on Transportation and Tourism (Annex III). 9.15 As regards financial policy, the Plan contains very constructive proposals for general improvement of the mobilization and allpcation of re- sources. In fiscal policy, the main proposals are the introduction and gra- dual application of a tax on value added, strengthening of administrative structures to improve the effective yield of direct taxation and development of the powers of the local authorities in the fiscal area in order to increase their role in the financing of regional development. To mobilize the neces- sary savings for financing of the Plan, substantial efforts are proposed to develop the financial market by facilitating the issue of bonds by financial institutions and to encourage liquid savings with the banks. In the monetary field, the Plan introduced a number of instruments concerned with the calcula- tion of the compulsory reserves of the banks and the establishment of a port- folio of public securities to be subscribed by the banks. A number of mea- sures were proposed to develop medium-term credit and to give greater initiative to the banking system in the financing of investments. The measures proposed, and those put into effect since the Plan was published, are reviewed in Chapters 5 and 6, on mobilization of resources and financial policy. 9.16 In the social field, the Plan puts the emphasis on overcoming the employment problem and correcting the social imbalances, from both the re- gional and the income standpoints. The measures proposed for employment are geared to three main lines of attack: the promotion of employment creation, control of population growth, and adaptation of the education system. Among remedial measures for income, the Plan provides for action concerning low wage levels, particularly in agriculture, revision of social security policy in favor of the lowest wage groups, and the steering of social investments toward the least privileged regions. The Plan assigns high priority to regional development; general action in pursuit of this objective includes the incentives created or proposed for the regionalization of investment, the measures proposed for development of assistance to small- and medium-scale enterprises and for strengthening of the extension services in agriculture, the orientation of public investment, both in infrastructure and in produc- tion, toward the interior of the country, and the strengthening of the re- gional administrative structures. In addition, a rural development fund, with a budget of D 40 million for the Plan period, has been set up to imple- ment this policy and will be concerned particularly with vocational training and job creation in agriculture and handicrafts. The Plan's proposals in the social area are reviewed in Chapter 3 (Population and Employment), Chap- ter 4 (Income, and Income Distribution) and Chapter 20 (Education). 9.17 Taken together, the objectives of the Plan in the economic and social areas are well adapted to the country's present needs. The extent to which they will be attained will depend on the putting into effect of - 183 - precise action programs in the various fields and the strengthening of the institutional structures. In the field of regional development, it would be essential also to establish regional planning structures whose work would be integrated into overall planning. D. The Conceptual Framework 9.18 There has been a considerable effort to shape Tunisia's latest Plan with the aid of quantitative models. Three different models have been employed during different stages of the work, in an attempt to provide both an overall frame for sector projections, and as a consistency check on the sectoral projections themselves. The three models can be summarized as follows: (a) The "global prospects" model which was a simulation model de- signed to show some of the basic alternatives available and to provide some macro-economic aggregates to serve as guide- lines for planning. (b) The table of inter-industrial flows, which consisted basically of an extremely detailed 136-sector current flow matrix. By using the final demancl aggregates of the global model, this exercise was basically a consistency check on the projections of the sectoral sub-committees. (c) The "sectoral prospect:s" model, which became available largely after the Plan was completed and is designed to furnish updated projections of macro-economic aggregates and sectoral value added on a more condensed 14-sector basis. The sectoral model will replace the global model and will be used during the Plan period to gauge the effects of changes in investment plans anid growth targets, both for the economy as a whole and on a sectoral basis. (i) The "Global Prospects" Model 9.19 The global model was a simple simulation model designed to give some feel for the basic macro-economic magnitudes and constraints on growth through 1981. It adopted three constraints as binding during the period: (1) the debt service ratio shou:Ld not go above 20 percent, (2) the ratio of gross national saving to investment should not go below 80 percent, (3) private consumption per capita should grow at 6 percent. Furthermore, it aimed at the maximum increase in employment within these three constraints. Using this model, the conclusion was reached that a 6.2 percent overall growth rate would allow a 5.9 percent growth rate of private consumption per capita, and also satisfy the other constraints of the model. Consequent- ly, most of the consistency work done later in the Plan was done against the background of a 6 percent target growth rate. - 184 - 9.20 One other major conclusion emerged during this stage of prepara- tion. The objective of creating the 500,000 new jobs required to meet the increase in the labor force between 1972 and 1981 was found to be prohibi- tive for the Tunisian economy, since it was to require an annual rate of growth of 10 percent a year and an annual rate of investment of D 428 million, compared with an average of D 125 million in the previous decade. It was also to have involved investment at the rate of some D 260 million a year in the non-agricultural productive sector. In order to restrict dependence on exter- nal finance to 20 percent of investment, domestic savings would have had to in- crease at the rate of 13 percent a year and exports at the rate of 12 percent a year. External finance would have had to average D 86 million a year. In- debtedness would have risen to 65 percent of GDP and the debt service ratio to 19 percent by 1981. The Government concluded that it was impossible to accept a target of 500,000 new jobs during the decade, and that further sub- stantial emigration, averaging some 15,000 persons a year, would be indispen- sable. (ii) The Table of Inter-Industrial Flows 9.21 The second major piece of quantitative work involved the construc- tion of a 136-sector input-output matrix. This table for current flows was based on 1968 data updated to 1972. In addition, provision was made for the introduction through 1976 of new industries for which there are no present estimates of input-output coefficients. This model used the aggregate final demand estimates from the global model to produce consistent estimates of sector outputs. These estimates were then used as a check against the proj- ections made by Sectoral Sub-Committees and by the individual industries themselves. (iii) The "Sectoral Prospects" Model 9.22 The purpose of the sectoral model is to provide a better long-term view of the economy than the global model, while incorporating some sec- toral information from the input-output model. Its chief object is to analyze the effects of different investment mixes on production, imports and growth. Basically, the model starts with a 14-sector version of the current flow matrix to determine sector demands. Outputs for agriculture, government services and housing are exogenous, as are exports by sector. The outputs of other sectors are based on a distributed lag incremental capital-output function related to the investment of the previous three year period. Total investment is controlled by the capacity of the con- struction industry, and this capacity is then allocated among sectors using fixed coefficients which in fact represent policy tools. The gap between sector outputs and sector demands is met by imports. 9.23 Unlike the global model, the sectoral model makes no attempt to project employment, capital requirements and the resulting debt seryice. Government revenues are related to production and income and so, combined with exogenous government resources and consumption, produce an estimate of Government saving. The model does not include monetary or price factors, and is completely in real terms. For private consumption, it appears that a - 185 - fixed marginal coefficient of 0.95 has been used. However, this model is particularly useful for analyzing the implications of sectoral investment possibilities. Its development, unfortunately, came somewhat late for it to have much impact on the Plan. It is intended that the sectoral model will be an ongoing exercise during the Plan period and beyond. On this basis the model offers advantages, in that it can help in the planning process as new alternatives and possibilities emerge during the decade. E. Fourth Plan Objectives 1/ 9.24 The "Ten-Year Perspectives" is drawn up with 1971 as the base year and covers the period 1972-1981; the Fourth Plan uses 1972 as the base year and covers the period 1973-1976. The Fifth Plan will cover 1977-1981. The development strategy is directed towards attaining a rate of growth of GDP of 6.6 percent in order to provide a 6 percent growth in private consumption, while satisfying constraints imposed by the balance of payments and limitations on the external financing of investment. According to the projections, more than D 3 billion will be investedi in the period 1972-1981, including D 1.2 billion in 1973-1976. (i) Growth 9.25 The rate of investment would yield a growth rate of 7.5 percent per year at constant prices for the period 1972-1981, with a rate of 6.6 percent 2/ in the Fourth Plan period and 8.5 percent for the period 1977- 1981. In framing its strategy, the Government has placed overriding empha- sis on the non-agricultural, procluctive sector as the primary source of growth and the principal instrument for employment creation. Growth in the non-agricultural productive sectcor is primarily a function of investment, with a projected average capital-output ratio of 3.5. This is appreciably lower than the ratio of 5.7 experienced during the last decade, on the grounds that much of the earlier investment should now begin to yield results, and a greater part of current and future investment is directed towards di- rectly and more rapidly productive projects. 9.26 The sector growth rates assumed are shown in Table 9.1. The Four- Year Plan started off with a high base year (1972), a less favorable view of 1973, and an average rate of growth which appears to understate the economy's growth potential in the years of the Fourth Plan. The growth rate for agri- culture seems to be on the high side; while it implies a fall in production from 1972's exceptionally high level, it also implies an annual growth of 10 percent by reference to the normal production anticipated for 1973. It is, incidentally, very difficult to make forecasts for agriculture because of its great dependence on the weather. On the other hand, the assumptions for industry, transport and services appear to be conservative. Initiatives 1/ The Fourth'Plan was prepared before the recent rises occurred in the world prices of raw materials. The resulting increase in Tunisian financial resources could lead to important changes in the goals of the Plan. This aspect is examined in Part F. 2/ The rate of 6.6 percent is that given by the method of calculation used in the Tunisian Plan. rhe compound annual rates method gives 7.1 percent. - 186 - already taken mean that expansion can be more accurately forecast in some sectors (petroleum, phosphates, fertilizers, textiles and export industries generally). Construction must at least reflect part of the expansion in in- vestment; likewise, transport and services could well increase their growth rates. A more detailed analysis of the Fourth Plan's sectoral growth projec- tions is made in the sector chapters of the report (Annexes I, II and III). Table 9.1: STRUCTURE AND RATE OF GROWTH OF GDP 1969-1976,- BY SECTOR AT CONSTANT PRICES (1966) 1969-1972 1973-1976 1962-1971 Rate Rate Rate of Struc- of Struc- of Growth ture Growth ture Growth Agriculture 1.5 17.8 5.8 16.1 -2.1 Industry 8.1 25.6 8.5 28.2 10.2 of which Manufacturing 7.9 9.9 11.2 11.4 9.6 Services 4.0 41.5 7.9 41.1 6.8 of which Transport and Telecommunications 7.2 8.5 7.0 8.0 6.2 Tourism 28,3 3.6 19.0 5.0 14.9 Housing 1.6 7.7 1.9 6.0 2.3 Government Services 5.8 15.1 6.2 14.6 7.5 4.7 100.0 7.8 100.0 6.6 (ii) Consumption 9.27 The pattern of output, growth, investment and foreign trade implied in the Four Year Plan are projected to give a real growth in total consump- tion at 1966 constant prices of 7.5 percent annually. Public-sector consump- tion and private consumption would grow at the same rate and this would mean a growth of per capita private consumption at 5.4 percent annually. This contrasts with per capita private consumption growth rates of about 1.7 per- cent between 1962 and 1971, and 6.7 percent for the period 1968-1972. This goal is to be achieved by reducing the marginal rate of national savings from 29 percent in 1969-1972 to 20 percent in 1973-1976 and inflating the volume of total resources by a large increase in imports (13.5 percent a year at constant prices). If savings have been projected too low and imports too high, then the resource gap and external capital flow projections are also too high. 9.28 A growth rate for public consumption of 7.5 percent a year at con- stant prices, while higher than the rate of 5.4 percent for the years 1969- 1972, seems realistic in the light of needs. In the last decade, the rapid growth of investment and expenditure on education was achieved only at the - 187 - Table 9.2: USES AND RESOURCES 1971-1976 AT 1966 CONSTANT PRICES Average Rate of Grawtk 1973 1969 1971 19?72 1973 1974 1975 1976 1976 1972 Million Dinars Percentage GDP at market prices 729.0 857.4 882.1 973.2 1047.1 1127.7 6.6 7.8 Imports of goods and services 234.4 286.14 335.2 381.0 417.0 453.9 13.5 16.0 Total Resources 963.4 1143.8 1217.3 1354.2 1464.1 1581.6 8.4 9.6 Private consumption 483.9 561.9 601.2 645.3 700.8 756.3 7.5 9.0 Public consumption 120.5 129.7 141.2 150.1 161.0 172.5 7.5 5.4 Gross fixed capital formation 172.1 204.9 253.0 295.8 300.7 323.2 14.9 11.5 Change in stocks 7.4 24.7 -5.0 9.2 15.5 18.0 - - Exports of goods and services 179.5 222.6 226.9 253.8 286.1 311.6 7.8 12.6 CNP at market prices 717.1 847.0 869.6 960.7 1036.3 1117.3 6.6 8.6 National Income 588.3 701.6 708.5 779.8 835.4 895.8 5.6 8.2 Income per head (in dinars) 112.4 131.4 130.0 140.3 147.5 154.9 3.5 6.o Consumption per head (in dinars) 93.1 105.2 110.3 116.1 123.7 130.8 5.4 6.7 Source: Fourth Plan, 1973-1976, Slatistical Annexes; Series Statistiques Retrospectives, 1961-1971; Ministry of Pln. - 188 - expense of strict control of wages and regular cuts in expenditure on goods and services. The growth rate of public consumption in the next decade must take account of the need to re-establish wage and salary levels that will direct manpower toward activities in which they are most required, in- cluding some areas of administration. At the same time, there should be a substantial increase in government expenditure on extension services and assistance to the private sector in agriculture and industry. In addition, although expenditure on formal education ought perhaps to be restricted, sub- stantial additional outlays on vocational training will be required to com- plement the formal education system at all levels. 9.29 With regard to the narrow difference between the consumption growth rate at constant prices (7.5 percent) and the rate at current prices (7.7 percent) for the period 1973-1976, the Fourth Plan underestimates the effect of price changes on expenditure, having regard to the inflation of world prices and the wage adjustments that would be needed to improve incentives and reduce income disparities. The probability of a substantial rise in the general level of prices over the next two or three years is now greater, as a result of the rise in the world prices of raw materials and of inflation in the industrialized countries. (iii) Investment 9.30 The investment program is a challenging one. The figure of D 1.2 billion for the Fourth Plan represents almost a doubling of the total invest- ment in the Third Plan period and is very close to the investment total for the whole of the decade 1962-1971. The annual average (D 300 million) is to be attained by an increase in the annual rate from D 207 million in 1972 to D 330 million in 1976; this implies a rate of increase of about 15 percent a year, compared with 10.7 percent for the Third Plan. Total investment will represent 24.5 percent of GDP, compared with 22.4 percent for the last decade and 20 percent for the Third Plan. - 189 - Table 9.3: INVESTMENT, BY SECTOR, 1969-1976 1969-1972 Plan 1973-1976 Plan Execution Projections Million Million Dinars Percent Dinars Percent Agriculture 109.6 16.4 177.7 14.9 Industry 205.7 30.9 382.7 31.9 Mining 18.8 2.8 34.0 2.8 Petroleum 54.3 8.2 110.3 9.2 Energy 56.9 8.5 78.2 6.5 Manufacturing 75.7 11.4 160.2 13.4 Services 267.4 40.1 472.1 39.6 Transportation and Telecommunications 87.1 13.1 195.7 16.5 Tourism 74.2 11.1 113.6 9.5 Housing 92.9 13.9 144.5 12.1 Trade and other services 13.2 2.0 18.3 1.5 Economic and social infrastructure 83.9 12.6 161.7 13.6 Total 666.6 100.0 1,194.2 100.0 Source: Ministere du Plan (S1:atistical Annex, tables 10.5 and 10.7). 9.31 The country's financial resources justify this investment goal, particularly considering the :increase in resources deriving from the improve- ment in terms of trade in 1974; the problem will be mainly one of absorptive capacity at the institutional and technical levels. The execution of this investment program will call cor strengthening of the agencies and institu- tions responsible for project preparation and execution, development of the capacity of certain key sectors such as construction, and also substantial efforts of training of the necessary technicians and skilled manpower, parti- cularly in industry. The share of the public sector in total investment will remain high (59 percent, compared with 68 percent during the decade 1962- 1971) but that of the private sector will increase substantially (41 percent, against 32 percent). The public enterprises will be responsible for 60 per- cent of public-sector investment and 35 percent of total investment, i.e. the same proportion as for the decade 1962-1971 (34 percent). - 190 - 9.32 A greater proportion of investment will he concentrated on those sectors and projects that can make a direct contribution to production. Thus, 60 percent of investment will be made in the directly productive sectors (agricultural production, industry, tourism, transportation and trade), 14 percent in agricultural infrastructure, transportation and services, and 20 percent in housing and economic and social infrastructure (Table 9.4). In agri-ulture, 57 percent of investment will go into directly productive proj- ects, compared with 25 percent in the decade 1962-1971. The sectoral distri- bution of investments is indicated In Table 9.3 and detailed in Tables 10.5 and 10.7 of the Statistical Annex. The sectors that will receive an increased share of total investment during the Fourth Plan, by comparison with the TMird Plan, 1969-1972, are petroleum (9.2 percent, against 8.2 percent), manu- facturing (13.4 percent, against 11.4 percent), transportation (16.5 percent, against 13.1 percent) and economic and social infrastructure (13.6 percent, against 12.6 percent). The share of agriculture will fall from 16.4 percent during the Third Plan to 14.9 percent, that of energy from 8.5 percent to 6.4 percent, and that of services (including tourism) from 27 percent to 23 percent. An analysis by sector of the investment programs is made in the sectoral chapters of the report (Annexes I, II and ITT). Table 9.4: NATURE OF INVESTMENT, 1973-76 Million Dinars Percent Directly productive 716.2 60.0 Agriculture sector (101.4) 8.5 Non-agricultural productive sector (614.8) 51.5 Infrastru(turv 478.0 40.0 Agriculture sector (76.3) 6.4 Non-agricultural infrastructure (95.5) 8 n Social infrastructure (306.2) 25.6 Total 1,194.2 1 nn . e q*33 Of the projects in the investment program, 32 percent (Category A) are already in progress. A further 36 percent (Category B) represent firnm commitments. Category C, accounting for 32 percent of the total, comprises new projects which are likely to be undertaken under the Fourth Plan but are subject to further examination before they can he included in one of the annual economic budgets. Many of these Categorv C projects are at present only identified within the framework of a sector program, and the greater part of them relate to the productive sector. - 191 - Table 9.5: INVESTMENT BY STAGE OF PREPARATION, 1973-1976 (In Million Dinars) Category 1973 1974 1975 1976 Total Amount % 1973-1976 A. In progress 149.5 98.0 71.7 60.4 379.6 32 B. Committed 97.6 117.0 111.8 103.7 430.2 36 C. Under preparation 10.1 86.2 213.0 165.2 384.5 32 Total 257.2 301.2 306.5 329.3 1,194.2 100 (iv) The Financing of Investment 9.34 The sharp increase in investment planned for the Plan Period will require a great effort to mobilize financial resources. Total gross capital f-rnliation is projected to increase from D 716 million during the Third Plan to D 1,235 million, during the Fourth Plan, an increase of D 517 million. Of this, national savings growth is to account for D 368 million, and in- creased net external capital flows for the balance of D 149 million (Table 9.6). Thlis represents an increase in national savings of almost 65 percent and an increase in net external capital flows of almost 55 percent (taking into ac- counit a projected increase of D 90 million in net reserves). Whilst the rate of national savings will increase from 17.7 percent (Third Plan) to 19.6 per- cent (Fourth Plan), the real marginal savings rate will decline (see paragraph 9.27). The rate of external financing of investment will rise from 20 per- cent during the Third Plan to 23.5 percent during the Fourth Plan. 9.35 Government savings are substantially those of the Central Government, with a smaller contribution from local government and social security resources. Government revenues are expected to increase by 9.2 percent a year; over 80 percent of the total increase will be accounted for by increases in the yield of direct and indirect taxes (SLatistical Annex, Table 10.6). The fis- cal burden is expected to remain more or less unchanged at about 21 percent of GDP. Current central government expenditure is projected to grow at 7.6 percent a year, reflecting an increase of 10.5 percent on health and 8.5 per- cent on education, which together account for almost 45 percent of current expenditure. The effect of these factors will be for Covernment savings to increase, doublinig the Third Plan level, at a rate of 19 percent per year. The estimate of savings of enterprises is based on the assumption that self- financing will be equivalent to roughly 54 percent of gross fixed investment. The savings of households, which would rise by 7.5 percent a year, are ex- pected to provide for the fixed capital formation of households, primarily in the form of housing, and also to make a major contribution to the finance of other sectors. This is largely a residual item resulting from the sepa- rate calculations for the savings of administration and enterprises. - 192 - Table 9.6: PLANNED AND ACTUAL INVESTMENT AND ITS FINAIICING 1969-1976 1969-1972 Plan 1973-1976 Plan Execution Projections Million Mi]li on Dinars Percent Dinars Percent Gross Investment 718.0 100.0 1.235.2 100.0 Gross fixed investment 666.6 92.8 1.194.2 96.7 Govemnment 18h.0 25.6 285.3 23.1 Ehterprises 391.2 5h.5 766.4 62.0 Public 209.6 29.2 421.4 34.1 Private 181.6 25.3 3h5-0 27.9 Households 91.4 12.7 1h2.5 11.6 Changes in stocks 51.4 7.2 1.0 3.3 Financing 718.0 100.0 1.235.2 100.0 Foreign Capital (net) 245.1 34.1 379.5 30.7 Public 242.1 33.7 365.1 29.6 Private 122.4 17.0 150.4 12.1 Repayments 119.L 16.6 136.0 11.0 National Savings 577.7 80.5 945.2 76.5 Administration 123.8 17.2 2h2.L 19.6 Ehterprises 437.8 35-. Households 265.0 21.5 Foreign Assets (Increase=-)-10h.8 -14.6 -89.5 -7.2 Rate of Extemnal Financing (%) 20.0 - 23.5 Source: Ministry of Plarning (Statistical Annex, Table 10.6) - 193 - 9.36 The savings of the financial institutions themselves represent only a small percentage of the total but the Plan assigns an important role to them in the mobilization of finanicial resources. Thus, while the money sup- ply is expected to grow by 12 percent a year, rising from 27.4 percent of GDP in 1972 to 32.2 percent in 1976, the Plan estimates that quasi-money (term deposits and savings accounts in banks and with the Savings Funds, bonds, and other quasi-monetary items) will increase from D 90 million in 1972 to D 210 million in 1976, i.e. by an annual 23.5 percent (Statistical Annex, Table 10.14). The total long and medium term resources of the banking system (own funds, special funds of the State, and quasi-money) would increase from D 169 million in 1972 to D 322 million in 1976. This growth of resources would be reflected in a considerable rise in long and medium term utilizations of the banking system, which would reach a slightly higher level than long and medium term resources in 1976 (D 344 million). The banking system is expected to increase the volume of government equipment bonds it takes up from D 32 mil- lion in 1972 to D 111 million in 1976 and its medium and long term credit to enterprises from D 123 million to D 233 million over the same period (Statis- tical Annex, Table 10.15). This projected contribution by the banking system to both public and private investment will call for the development of effi- cient instruments for the mobilization of savings and also for the strength- ening of bank structures for the promotion and evaluation of projects. These aspects are reviewed in Chapter 6. (iv) The Balance of Payments - 9.37 Following the exceptional export performance in 1971 and 1972, the Plan projected a rise in the trade deficit from D 58 million in 1972 to D 143 million in 1976. (Statistical Annex, Table 10.8). This deficit would repre- sent 10.5 percent of GDP in 1976, a ratio comparable to those for the period 1961-1967. Exports were expected to grow by 7.5 percent a year (1972 basis). Excluding olive oil exports, which were expected to fall from the exceptional- ly high level of D 47 million in 1972 to D 17.5 million in 1974, and then rise again to D 28 million in 1976, other exports were projected to grow at 13.6 percent per year to realize this target. Since the volume of petroleum exports was expected to increase by only' 5.7 percent, and phosphate product exports (including the newly important phosphoric acid) by 8.8 percent, this implied that all other exports had to mc're than double in four years, with a rapid growth of manufactured exports, particularly textiles, metal and mechanical products, wood and paper. 9.38 As a result of the liberalization measures and the rapidly increas- ing demand, particularly for equipment, intermediate goods and foodstuffs, total imports were projected to grow by 13 percent a year. Because of the high volume of planned investmenit, equipment imports were expected to in- crease at a rate of 18 percent per year and, in line with the development of export-oriented industries, :Lmports of raw materials and. semi-finished 1/ The Plan projections that could be affected by the 1974 changes in terms of trade include, in particular, those for savings and for balance of payments (See Part F). - 194 - Table 9.7: BALANCE OF PAYMENTS, 1969-1976 (Annual averages, in millions of dinars) 1969-1972 1973-1976 Imports of goods and services 223.4 391.4 Exports of goods I/ and services / 199.9 327.5 Balance of goods and services -23.5 -63.9 Net factor income and net transfer j-11.7 -8.6 Current account deficit -35.2 -72-5 Public capital, net 49.9 74.7 Private capital, net 11.5 20.2 Changes in reserves (increase -) -26.2 -22.h ]/ Of which: Olive oil 22.8 21.4 Petroleum 30.4 52.4 Phosphate products and phosphoric acid 20.7 25.9 j Of which: Tourism receipts 47.7 97.3 j Of which: Worker's remittances 19.7 32.0 Source: Ministry of Planning (Statistical Annex, Table 10.8) - 195 - products were expected to grow by almost 17 percent a year. While these rates could be justified if there were a widening of the range of liberalized goods, they appeared less plausible after the rapid growth during 1970-1972, which may be explained in part by replenishment of stocks. Similarly the projected imports of foodstuffs appeared to be over-estimated in relation to the high growth rate assumed for agriculture. 9.39 It was expected that, continuing the trend of the preceding years, a surplus on invisibles would offset an increasing part of the trade deficit; the current deficit would rise from D 23 million in 1972 to D 77 million in 1974 and to level off thereafter. It would represent 6.3 percent of GDP in 1973-1974 and 5.6 percent in 1975-1976, ratios comparable with the 1969-1970 level. Tourism receipts were expected to grow at the present rate of 14 per- cent, and workers' remittances at 9.4 percent a year. Total receipts from services were likely to grow at 11 percent, but payments for services at only 8 percent. The net surplus on transfers was expected to remain stable. 9.40 The current account deficit was to be financed by grants and loans totalling D 429 million gross, and direct investment amounting to D 87 million which, with debt amortization of D 136 million, would leave a net contribution to total investment of D 379 million. Approximately D 90 million of this was expected to accumulate in foreign exchange reserves (Table 9.7 and Statisti- cal Annex, Table 10.9). Of the gross inflows, grants would fall slightly, largely as a result of the reduction of food and commodity aid from the United States. This would be more than offset by an expected increase in direct investment. Private borrowing is projected to fall; it mainly takes the form of suppliers' credits and financial credits with rates of interest up to 7 percent and with a repayment period of about 10 years. A large in- crease - 75 percent over the 1969-72 total - is projected in official borrow- ing. The average terms assumed are 3.7 percent interest with a repayment period of 30 years and a grace period of 7 years. At the time when the Plan was drawn up, commitments for a substantial part of the total (D 123 million) had already been received, leaving a balance of D 164 million to be obtained over the course of the four years of the Plan period. The Government consid- ered this sum consistent with indications given by the principal members of the consultative group for Tunisia (Statistical Annex, Table 10.12). Of gross external aid, 50 percent is desl:ined for enterprises, 42 percent for adminis- trations, and 8 percent for financial institutions (Statistical Annex, Table 10.13). 9.41 According to the Fourt:h Plan, this borrowing would raise total ex- ternal debt from D 386 million Ln 1972 to D 600 million by 1976, giving a rate of indebtedness at the end of the Fourth Plan of 42 percent, compared with 41.5 percent for the Third Plan. Debt service charges were expected to fall from 17.3 percent for the Third Plan to 13.2 percent of current export earnings for the Fourth Plan. The increase of D 90 million originally proj- ected in external reserves by the end of the Fourth Plan would bring net ex- ternal reserves to a total of D 181 million at the end of 1976; this would have represented the equivalent of four months imports of goods and services. - 196 - (vi) Employment 9.42 The labor force is projected to increase over the period 1973-1976 by 198,000 (163,000 men and 35,000 women). This projection takes account of an increase of 46,000 in working-age school enrollment and assumes that only 20 percent of working-age women will enter the labor market. The investment program under the Plan is expected to create 119,000 new jobs (89,500 for men and 29,500 for women); emigration is projected at about 60,000 male workers over the four-year period. The sectoral distribution of new jobs would be: industry 33 percent, construction and public works 16 percent, and services 51 percent. In agriculture, the Plan expects that the job supply will be reflected less in an increase in the labor force than in an improve- ment in labor utilization. In sum, the Plan does not expect that a balance can be achieved during the period between job supply and incremental labor supply. The employment projections of the Fourth Plan are reviewed in greater detail in Chapter 3. F. The New Prospects Ci) Introduction 9.43 Under the conditions prevailing at the time when the Fourth Plan was prepared, the mission's analysis showed that the goals adopted, particularly for growth and national savings, were more conservative than Tunisia's resources and potential seemed to warrant. Normally, for a developing country the two major constraints on economic growth are savings and foreign exchange holdings. But Tunisia is in the unusual position that neither of these factors appears to present a major obstacle to its growth. The problem is apparently rather one of increasing the average productivity of new productive investments and of using existing productive capacity to the full. 9.44 To test these hypotheses, the Bank constructed a long-term develop- ment model, the technical features of which are described in Annex IV. This is a consistency model which requires as inputs (i) a series of projected levels of output for certain key sectors, predetermined on the basis of the sectoral analysis of this report; (ii) a series of sector incremental capital- output ratios, estimated from the data for the preceding period; (iii) a series of investment assumptions for certain sectors where investment and output can- not be tied directly or where output is functionally linked to investment, and (iv) assumptions concerning the prices of the country's main exports and also import prices. The model then determines the output levels for the re- maining sectors, total GDP, total fixed investment, sector exports (other than those predetermined), imports by end-use, consumption, savings, resource gap, and changes in stocks. The model also projects employment by sector, using fixed incremental labor-output ratios. It further incorporates detailed bal- ance of payments projections. With the introduction of assumptions concerning factor payments, transfers and other balance of payments flows, as well as the terms and amounts of foreign aid, the model projects debt-service payments and calculates the level of exchange reserves necessary to ensure equilibrium be- tween the balance of payments and national accounts projections. A number of different combinations of assumptions are examined in this way, relating mainly to agricultural production, major exports (olive oil, petroleum, phosphates), and manufacturing investment and growth. - 197 - 9.45 Prior to the recent changes in world prices of raw materials, a num- ber of variants, or "cases", involving different combinations of assumptions, had been analyzed. One of these variants combined all the low assumptions, and another all the high assumptions. It was found that the rate of growth of the economy used in the Fourth Plan (7.1 percent a year, calculated by the compound rates method) came very close to the Case 1 ("low assumptions") com- bined growth rate of 6.9 percent, which suggested that the growth rate adopted in the Plan were quite feasible. The results obtained with this same variant further showed that import needs could have been less than projected in the Plan and that, consequently, the national savings effort could hive been more intensive. The most optimistic variant (Case 2), a combination of the high assumptions together with, in particular, a more rapid exports growth, yielded an annual growth rate of 8.9 percent for the period 1973-1976, with a slightly higher volume of investment and a sectoral distribution of investment more favorable to industry, particularly energy and manufacturing, than in the Plan. The higher growth rate could be achieved without excessive strain on the balance of payments and with the same volume of external aid but with a higher incremental savings rate. (ii) The revised projectiors 9.46 Since the initial projections, the world economy has undergone a period of rapid change. The rapidly rising world prices generally, and of petroleum and other commodities in particular, and the adverse effect of these price changes on the outlook for growth in Europe, was not anticipated. Con- sequently, the projection model has been updated to reflect latest available estimates (November 1974) of the major exogenous factors with particular respect to production volumes and prices. The most important changes reflect higher prices for petroleum, phosphates and olive oil. At the same time, the earnings estimates from tourism and workers remittances have been modified downward to reflect the deterioration in the prospects of European growth. The import price indices have also been revised upwards to take into account the high increases experienced in 1973 and 1974 and to allow for the anticipat- ed higher level of world inflation. The model also assumes a little less in- vestment in real terms and less capital inflows than projected in the Fourth Plan for the period 1973-1976, taking into account the levels actually exper- ienced in 1973-1974, and the latest forecasts. The net effect, however, is a temporary improvement in Tunisia's balance of payments. Some key assumptions affected by the new situation and underlying the projections are detailed in Tables 9.8, 9.9 and 9.10 below. Table 9.8 shows main assumptions comnmon to both cases. Table 9.9 gives the more conservative set of assumptions - the "low growth case". Table 9.10 shows the assumptions for the high growth case. 9.47 It should be noted that this projection model aims, in the light of past experience and present knowledge, to give a picture of possible macro- economic developments under certain assumptions; thus its results have an in- dicative value only, showing what can be reasonably expected if the assumptions hold true. Any major change in external factors, such as world commodity prices or economic situation in developed countries, which may occur in this period of rapid evolution of the world economy, would of course affect the results presented below. - 198 - Table 9.8: MAIN ASSUMPTIONS, BOTH CASES ! 1973 1974 1975 1976 1978 1980 1985 Export Prices Olive Oil (dinar per ton) 506 730 650 600 660 730 930 Petroleum (dinar per ton) 14.2 37.5 33.5 35.0 39.3 44.2 62.0 Phosphate (dinar per ton) 4.7 17.7 19.0 17.3 13.0 14.9 19.0 Annual Growth rate (%) Tourism (at 1966 constant prices) -11.O -6.o lo.o lo.o lo. lo. 8.0 Worker Remittances (at current prices) 39.0 6.8 6.8 6.14 10.2 10.2 9.2 Import Price Index Goods (1972=100) 117.5 152.8 165.0 176.5 195.6 215.5 262.2 Services (1972=100) o1.0 116.0 122.9 130.3 144.3 159.2 193.6 Goods and Services (1972=100) 113.6 144.3 155.1 165.5 183.2 202.2 246.5 Table 9.9: MAIN ASSUMPTIONS, LOW GROWTH CASE 1/ Volumes 1973 1974 1975 1976 1978 1980 1985 Phosphate production (Th. tons) 3,476 3,800 4,ooo 4,500 5,200 5,900 6,500 Petroleum exports (Th. tons) 3,750 3,300 3,700 3,700 4,200 4,200 4,200 Olive Oil exports (Th. tons) 51.8 78.0 68.0 78.0 85.2 93.0 115.9 Annual Growth rate (in volume) % Agriculture (excluding olive oil) 1.0 4.0 4.0 4.0 3.5 3.5 3.0 Agricultural exports (excluding olive oil) 46.0 -36.0 5.7 16.1 2.5 2.5 2.0 Manufacturing fixed investments (mil. Constant 1966 Dinar) 35.8 41.5 36.8 41.8 55.5 67.0 89.0 Table 9.10: MAIN ASSUMPTIDNS, HIGH GRDWTH CASE V Volumes 1973 1974 1975 1976 1978 1980 1985 Phosphate production (Th. tons) 3,476 4,100 4,500 5,100 5,800 6,500 7,200 Petroleum exports (Th. tons) 3,750 3,500 4,100 5,200 6,ooo 6,ooo 6,ooo Olive Oil exports (Th. tons) 51.8 83.0 75.0 85.0 95.5 107.0 144.0 Annual Growth rate (in volume) % Agriculture (excluding olive oil) 1.0 4.0 5.0 5.0 5.0 5.0 5.0 Agricultural exports (excluding olive oil) +46.o -36.0 5.7 16.1 4.0 4.0 4.0 Manufacturing fixed investments (mil. Constant 1966 Dinar) 35.8 41.5 40.0 48.5 67.5 83.5 117.0 &/ Detailed assumptions are shown in the Annex volume which describes the model. - 199 - 9.48 The impact of recent changes as outlined above can most easily be summarized by examining the effect on the terms of trade projections. Before the changes, as shown in Table 9.11, a slight increase in the terms of trade index was projected for Tunisia, as a result mainly of improvement foreseen in the prices of petroleum and olive oil. The index (base 100 in 1972) was projected to rise to 105 by 1974 and then slightly decrease. Under the new assumptions, the higher prices oil exports cause the index to rise to 120 in 1974, despite an estimated 27 percent increase in import prices over 1973. From 1975 and in the following years, there is likely to be a reversal in the terms of trade, resulting from the expected levelling off of prices for Tunisia's main commodity exports and further increases in import prices. Tunisia's terms of trade advantage is thus assumed to disappear by 1978, but the net effect is still a better terms of trade picture up to 1977 than as- sumed previously. Table 9.11: TERMS OF TRADE (1972=100) (Low Growth Case) 1973 1974 1975 1976 1978 1980 1985 Old assumptions Export Price Index (goods and services) 118.6 124.2 126.3 128.6 135.7 145.2 173.9 Import Price Index (goods and services) 113.6 118.2 121.7 125.6 134.5 144.2 171.2 Terms of Trade 104.4 105.0 103.8 102.4 100.9 100.7 101.6 Revised assumptions Export Price Index (goods and services) 118.6 173.4 170.6 172.0 182.7 195.0 231.5 Import Price Index (goods and services) 113.6 144.4 155.2 165.6 183.3 202.2 246.5 Terms of Trade 104.4 120.1 109.9 103.9 99.7 96.4 93.9 9.49 The present improvement in the terms of trade has one major effect on the economy. The increased export earnings means a higher gross national income (GNP adjusted for the terms of trade gains), and thus higher levels of consumption and imports. The higher consumption expenditures in turn generate higher levels of output in those areas of the economy which are assumed to be demand driven; i.e. services and food industries. The rate of GDP growth, as a consequence, will be higher than previously projected. In addition, the influx of larger foreign exchange resources would allow that a somewhat more rapid investment program could be undertaken after 1975 than previously antici- pated, and thus would also raises the overall growth rate in subsequent years; however, this projected increase in investment is likely to be limited due to the delays already experienced in the investment program in 1973-1974, and the likely reappearance of balance of payments constraints in the long term. - 200 - 9.50 Looking at the sector value added growth rates (constant prices), Tunisia can be expected to have a real growth rate of about 7.5 percent during 1972-1980 even under the "low growth" assumptions. With the high growth as- sumptions, a rate of about 9 percent would be possible (see Table 9.12). These growth rates imply a growth of about 2 to 3 percent per annum for agriculture and about 11 to 12.5 percent per annun for manufacturing (the agricultural growth rate is somewhat understated because of the exceptionally high level of 1972; from 1973 to 1980 the rate would be between 4 to 5.5 percent per annum). By way of comparison, the 1965-72 period had an overall growth rate close to 7 percent, with about 6 percent for agriculture and 11.5 percent for manufacturing. The projected growth rate for the mining sector (7.2-8.5 per- cent) is somewhat higher than that in the past, which actually showed a nega- tive growth rate, this is due to the increased outputs resulting from the CAFSA investments. Growth of tourism is projected at about 5 percent per year compared with 27 percent per annum in recent years, due to the actual decline in tourism in 1973-74 and to the lower growth of the OECD area. Table 9.12: SECTOR GROWTH RATES, 1972-1980, 1980-1985 (Value added at 1966 constant prices) Actual Projected 1972-1980 Projected 1980-1985 1965-1972 Low Growth High Growth Low Growth High Growth Agriculture 5.7 1.9 3.2 3.2 5.1 Mining -1.3 7.2 8.5 1.9 2.0 Energy 11.9 14.3 15.7 11.0 12.8 Petroleum 39.6 4.1 8.1 - - Manufacturing 11.4 11.1 12.4 10.5 12.2 Construction 2.3 7.9 9.9 5.3 6.3 Tourism 27.3 5.0 5.0 8.0 8.0 Transport and Communications 7.4 8.1 9.6 7.1 8.3 Other Services and Government 5.4 7.3 8.6 6.8 8.0 Total GDP (Factor Cost) 6.8 6.9 8.3 6.7 8.0 Total GDP (Market Prices) 6.8 7.5 9.0 7.1 8.4 9.51 Table 9.13 gives the projected expenditures on domestic product for the two variants, with growth rates for the Plan period (1973-76) and beyond. Both growth variants show slightly slower Rrowth rates during the 1977/80 period, than the 1973-76 period. This is largely due to the stimulus of im- proved terms of trade during the first period. Export growth in constant prices (i.e. volume) is relatively low during the first period, about 5.0 to 6.5 percent per annum due to the exceptional level of the base year 1972, but the export earnings are high due to the price increases. After 1976 export volume shows a more rapid growth due to both a resumption of tourism growth - 201 - and greater exports of manufactured goods, resulting from the increased in- vestments in industry. Imports tend to keep pace with exports and growth, al- though there is some lag so that the resource gap remains limited until the end of the 1970's. After 1980, there would be again some acceleration of import, particularly of intermediary goods imports to sustain growth in manu- facturing. Table 9.13: PROJECTED NATIONAL ACCOUNTS (millions of dinars at 1966 constant prices) Growth Rates 1972- 1976- 1980- 1972 1976 1980 1985 1976 1980 1985 Low Growth Case Gross Domestic Product 848.8 1151 1517 2141 7.9 7.2 7.1 Gross National Savings/a 202.4 264 370 530 6.8 8.8 7.5 Consumption 693.4 959 1229 1720 8.4 6.4 7.0 Investment 220.6 297 394 564 7.7 7.3 7.4 Imports 291.6 380 511 755 6.8 7.7 8.1 Exports 226.4 275 405 612 5.0 10.2 8.6 Exports, adjusted/a 282.8 356 492 723 5.9 8.4 8.0 Fixed Investments 1973-1976 1977-1980 1981-1985 - Total 1043 1201 1933 - Annual average 261 300 387 High Growth Case 1972- 1976- 1980- 1972 1976 1980 1985 1976 1980 1985 Gross Domestic Product 848.8 1221 1687 2520 9.5 8.4 8.3 Gross National Savings/a 202.4 304 431 648 10.7 9.1 8.5 Consumption 693.4 1011 1363 2008 9.9 7.8 8.1 Investment 220.6 328 461 723 10.4 8.9 9.4 Imports 291.6 409 578 904 8.8 9.0 9.4 Exports 226.4 291 441 693 6.5 11.0 9.5 Exports, adjusted/a 282.8 398 558 842 8.9 8.8 8.6 Fixed Investments 1973-1976 1977-1980 1981-1985 - Total 1113 1407 2364 - Annual average 278 352 473 /a Includes terms of trade ad'justment. - 202 - 9.52 A fairly high savings effort would be required particularly after 1976. As shown in Table 9.14 growth under the low assumptions could be easily achieved with a relatively moderate marginal savings rate of about 20 percent during the plan period, allowing for rapid increase in consumption; thereafter the marginal savings rate would have to rise to 28 percent during the 1977-1980 period and 25 percent during the 1980-85 period in order to sustain the 7 percent growth of GDP. This compares with an actual savings rate of 29 per- cent during the 1968-72 period. While the latter period is probably not re- presentative due to exceptional performances in 1972, marginal savings rates of the order of 25 or 28 percent do not seem out of the feasible range in the coming years. In the high growth case, the marginal savings rate would have to be higher during the plan period, remaining at about 25 percent during the following period. As a result of the higher growth of output (which is asso- ciated with relatively more rapid growth in agriculture, petroleum and phos- phate) the incremental capital-output (ICOR) would be lower (2.8 in 1973-1976, 3.1 in 1977-1980) than in the low growth case (3.4 and 3.5). Table 9.14: MACRO-ECONOMIC INDICATORS 1968-1972 1972-1976 1976-1980 1980-1985 Low Growth Case Marginal Savings Rate 0.29 0.19 0.28 0.25 ICOR 2.3 3.4 3.5 3.7 Import Elasticity 1.88 0.86 1.07 1.14 High Growth Case Marginal Savings Rate 0.29 0.25 0.26 0.25 ICOR 2.3 2.8 3.1 3.4 Import Elasticity 1.88 0.93 1.07 1.13 9.53 'The balance of payments aspects of these projections are shown in Tables 9.15 and 9.16. Under the low growth variant, relatively moderate re- source gap and current account deficit are maintained during the whole period. After 1974 reserves could rise slowly, but their share of imports would decline until they reach 3 months imports by 1980. External public borrowing would remain limited until 1980, but would have to increase thereafter to sustain growth, and the volume of borrowing on hard terms would probably have to in- crease, though in manageable proportions. The debt service ratio, which would decline from a level of 17.7 percent in 1972 to 7.2 in 1980, would rise to 8.4 only in 1985. - 203 - Table 9.15: BALANCE OF PAYMENTS, LOW GROWTH CASE (millions $ current prices) /a 1972 1973 1974 1975 1976 1978 1980 1985 Exports 563 675 1049 1134 1293 1682 2162 3870 Imports 588 743 1066 1237 1388 1748 2283 4115 Resource Balance -25 -68 -17 -103 -95 -66 -121 -245 Net Factor Payments -23 -31 -48 -48 -49 -44 -33 -19 Net Transfers 6 3 9 4 2 2 2 2 Current Account Balance -42 -96 -56 -147 -142 -108 -152 -262 Medium & Long Term Loans 139 145 155 162 183 159 182 497 Amortization -74 -78 -78 -76 -75 -87 -98 -202 Other Capital /b 55 102 98 97 88 78 81 76 Reserve Change (- = increase) -78 -73 -119 -36 -54 -42 -13 -109 Net Reserves 193 284 403 439 493 560 599 1038 Reserves/Imports of Goods -.43 0.38 0.38 0.36 0.36 0.32 0.26 0.25 Debt Service Ratio Xc 17.7 15.2 10.3 9.6 8.7 7.9 7.2 8.4 /a 1972 converted at 2.08 dinars, all other years at $2.27. lb Grants, direct investment and short term capital. Tc Amortization plus interest as percentage of exports of goods and non- factor services. 9.54 The high growth case (Table 9.16) puts slightly more strain on the balance of payments after 1980. Under this scenario, increases in foreign borrowing would be necessary due to a falling reserve level. The culminative effect of substantial borrowing on hard terms (7 years maturity, 1 year grace, 9 percent interest) would lead to an escalating level of loan repayments by 1985 and an escalating debt service ratio. Nevertheless, the numbers project- ed are not out of range; the debt service ratio would rise to 10 percent by 1985 or less than its 1972 level. The level of gross disbursements would reach $847 million in current prices. In 1972 terms, however, this is a gross flow of about $340 million, or a net flow of about $226 million, which is consistent with the present levels of capital inflows. - 204 - Table 9.16: BALANCE OF PAYMENTS, HIGH GROWTH CASE (millions $ current prices) /a 1972 1973 1974 1975 1976 1978 1980 1985 Exports 563 675 1086 1196 1448 1900 2456 4522 Imports 588 743 1082 1293 1499 1933 2587 4928 Resource Balance -25 -68 4 -97 -51 -33 -131 -406 Net Factor Payments -23 -31 -49 -51 -60 -58 -50 -82 Net Transfers 6 3 9 4 2 2 2 2 Current Account Balance -42 -96 -36 -144 -109 -89 -179 -486 Medium Long Term Loans 139 145 155 162 183 159 182 847 Amortization -74 -78 -78 -76 -75 -87 -98 -290 Other Capital /b 55 102 98 97 88 98 81 74 Reserve Change (- = increase) -78 -73 -139 -39 -87 -61 -14 -145 Net Reserves 193 284 423 462 549 658 668 1242 Reserves/Imports of Goods 0.43 0.38 0.39 0.36 0.37 0.34 0.26 0.25 Debt Service Ratio /c 17.7 15.2 9.9 9.1 7.8 7.0 6.3 10.0 /a 1972 converted at 2.08/dinar; all other years at $2.27. /b Largely direct investment, grants and short term capital. /c Amortization plus interest as percentage of exports of goods and non- factor services. 9.55 The balance of payments projections illustrate that high growth can be attained without strain on the balance of payments through 1980. After 1980, there would be a need for increased capital from external sources on terms somewhat softer than used by the model. Such projections are, of course, somewhat uncertain, particularly after 1980. The model assumes, for instance, workers' remittances of $168 million in 1980 and $260 in 1985. This is based on an assumption of zero net worker migration from Tunisia in 1975 and 1976. This assumption could very well be wrong in either direction and could there- fore modify slightly our conclusions. Similarly, major unforeseen changes in commodity prices, tourism receipts or the cost of imports could upset these calculations. Nevertheless, these projections are considered to be reason- able on the basis of present knowledge. 9.56 Employment projections presented by the model indicate that unem- ployed and underemployed labor will continue to be a major problem in Tunisia through the 1970s. More substantial reductions in unemployment can occur under the higher growth assumption. As shown in Table 9.17, the rate of un- employment and underemployment under the low growth assumption is 22 percent in 1980 and 14 percent in 1985. While this is lower than the 28 percent esti- mated for 1972 (this figure results from a theoretical calculation), it by no -205- means offers an expeditious solution to the problem. Under the higher growth case the projected unemployment rate is only 16 percent in 1980, or about half the level of 1972. A continuation of these projections to 1985 indicates very small unemployment, which could allow some net returns of Tunisians working in Europe and other foreign countries. Table 9.17: EMPLOYMENT PROJECTIONS (in thousand) Growth Rate 1972- 1976- 1972 1976 1980 1985 1976 1985 Low Growth Case Employment 1115 1269 1486 1841 3.3 3.3 - agricultural sector 530 539 599 675 0.4 2.5 - non-agricultural sector 585 730 887 1166 5.7 5.4 Labor force 1541 1727 1895 2136 2.9 2.4 Unemployment and underemployment /1 426 458 409 295 - - Unemployment and underemployment rate 0.28 0.27 0.22 0.14 - - High Growth Case Employment 1115 1301 1585 2086 3.9 5.4 - agricultural sector 530 550 639 778 0.9 3.9 - non-agricultural sector 585 751 946 1308 6.5 6.4 Labor force 1541 1727 1895 2136 2.9 2.4 Unemployment and undermployment /1 426 426 310 50 - Unemployment and underemployment rate 0.28 0.25 0.16 0.02 - /1 That figure results from a theoretical calculation. (iii) Conclusions 9.57 Having overcome the chronic balance of payments deficits of the past, and with an adequate savings level, the Tunisian economy has the financial re- sources that should enable it to attain growth rates ranging from 8 to 9.5 per- cent per annum until 1977 and thereafter from 7 to 8.5. However, aiming at the higher rates of growth would require, after 1980, substantially higher external aid than in the past, which could probably have to be obtained at harder terms. Tunisia should therefore continue to seek part of its external needs on concessionary terms to prevent the debt service ratio from rising rapidly in the long term. The level of future growth would also depend to an important extent on the ability of Tunisia to stimulate private invest- ment, and to plan and implement public investments at the necessary levels and in the appropriate sectors. There is no constraint due to the size of the labor force. The upper range of the growth alternatives could bring - 206- with it employment opportunities sufficient to solve one of Tunisia's most important problems. The high growth alternative would be expected, however, to strain the adminiistrative and technical capacity of the country and would therefore require tlat the necessary supporting policies be pursued and that institutional development and adequate training programs be accelerated.