Tunisia: new IMF recommendations!

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Despite Tunisia’s efforts to respond to the recommendations of the International Monetary Fund (IMF) aimed mainly at getting the national economy back on track, much remains to be done and more needs to be done.

The slow economic transition has placed the country at great risk of economic recovery, as reflected in the latest IMF report.

The report, published on the Fund’s website, notes that the economy is not keeping pace with the democratic transition in this country, seen as the sole survivor of an agonizing Arab Spring.

The Fund recommends measures to improve budgetary outcomes, including tax administration development, voluntary reduction of the public service, comprehensive pension reform to limit transfers to social security at 0.5% of GDP in 2018, a strengthening of the performance of public enterprises and a reform of subsidies.

According to the IMF report, Tunisia’s political transition has advanced, but social discontent remains elevated and the economy remains fragile in a complex socio-political environment.

Structural deficiencies, an overvalued real exchange rate and weak confidence after the 2015 attacks continue to weigh on investment, the report notes, pointing out that exogenous shocks and policy slippages contributed to widen the current account deficit by more than 10 percent of GDP in the first quarter of 2017.

The authorities and IMF staff, therefore, agreed that Tunisia’s economic transition requires a shift from the public sector towards a competitive private sector as the main engine of growth and job creation.

Greater exchange rate flexibility and monetary policy tightening would improve the external current account deficit, mitigate inflationary pressures, and increase international reserve cover.

The IMF also advocates measures to strengthen the financial health of the social security funds and build better targeted social safety nets will help to maintain adequate social protection and accelerated progress with comprehensive structural reforms in order to support higher and more inclusive growth.

A stronger adjustment effort and more financing will be required, according to the IMF. Given lower growth and higher deficits, the adjustment effort through 2020 will have to be more ambitious to maintain macroeconomic stability.

Budget outturns through March signal that the targets remain realistic. Moreover, the authorities have identified contingency measures, including a 0.4 percent of GDP spending cut, in case larger-than-expected transfers to the pension funds are needed.

It is necessary to start sustainable deficit reduction in 2018, according to the IMF. “A strong package of measures would reduce the overall deficit to 5.4 percent of GDP from 5.9 percent in 2017, and the underlying structural deficit to 4.3 percent of GDP from 6.1 percent in 2017,” it said, calling for measures to improve fairness by widening the tax base, increasing VAT rates on services of liberal professions, and raising excises on goods and services prevalently consumed by higher-earning households.

The IMF Staff emphasized the need to target financial profits, rather than transactions, to avoid a negative impact from the financial activities taxes on financial development.

The IMF report said Tunisia’s democracy weathered many challenges, but economic transition is delayed.

Sustainable increases in employment and standards of living for Tunisia’s young population will only be possible by transforming the country’s economic model, which relies on unsustainable levels of public consumption—including for wages and subsidies—as well as on inefficient legal and regulatory frameworks that limit competition and discourage formal private sector activity.

“Monetary tightening is now necessary, even in the presence of weak growth, as structural deficiencies, exchange rate depreciation and higher administered prices and taxes increase inflation risks.”

To gradually achieve debt reduction and create more fiscal space for investment and social policies, it is important to hold the course on structural reforms in critical areas such as civil service, pensions, and public enterprises, the IMF recommends.

The success of the next phase of public bank restructuring will depend on more determined measures to help banks reduce their sizeable NPL portfolios.

Governance and business environment reforms will be crucial for private sector development and jobs growth.

Fiscal consolidation can proceed in a growth-friendly and socially-conscious way.

Staff supports the authorities’ policies for 2017-18 and beyond that are ambitious but also strike a reasonable balance between the feasible and the desirable in a difficult socio-political environment, the IMF pointed out.

The IMF also recommends other steps to reinforce revenue administration for more effective collection of sizeable tax and customs arrears (totaling 6 percent of GDP).

The IMF Staff also supports more exchange rate flexibility and a tightening of monetary policy and is for maintaining the exchange rate in line with evolving fundamentals is crucial to restore competitiveness and increase reserves.

Deep reform of the civil service will improve service quality and create fiscal space, the IMF stressed in its report.

It especially welcomes the authorities’ efforts to reduce the public wage bill, which is among the highest in the world. The reduction hinges on avoiding further new wage increases through 2020; and on successful voluntary departure programs for the public workforce in combination with strict and continued controls over future recruitments.

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