Growth of output (%) --------1980-90---------1990-97
Gross Domestic Product ----3.3------------------ 4.3
Agriculture------------------------ 2.8 ------------------1.0
Industry ---------------------------- 3.1------------------ 4.4
Manufacturing ------------------3.7------------------ 5.5
Services---------------------------- 3.5------------------ 5.2

Source: World Bank

Tunisia's strong performance in 1998 reflects the continued pursuit of a prudent macroeconomic policy, including, in particular, substantial fiscal consolidation. The budget deficit, excluding privatization receipts, was narrowed from 4.3 percent of GDP in 1997 to 3.2 percent in 1998 (below the target of 3.4 percent). Despite the effects of the dismantling of trade tariffs, fiscal revenue increased by 0.5 percent of GDP owing to the hike in the main VAT rate, the expansion of its base, and the introduction of 50 percent withholding at source for VAT due on sales to public administrations. Moreover, debt service declined by 0.4 percent of GDP and substantial privatization receipts (1.8 percent of GDP) made it unnecessary to tap international capital markets on unfavorable terms while limiting domestic financing of the fiscal deficit to 1.4 percent of GDP.

The monetary objectives set for 1998 were generally attained. The real effective exchange rate was kept unchanged, the inflation rate fell below target (3.1 percent instead of 3.7 percent), and the growth of M4 leveled off at 8.9 percent, slightly lower than the growth rate of nominal GDP. Moreover, M3 expanded moderately, offsetting the previous two years' sharp increases linked to the central bank's assumption of the arrears of the Cereal and Edible Oil Offices. The central bank intervention rate remained at its April 1997 level of 6.875 percent throughout 1998. In February 1999, following the observed drop in inflation, the president of the Republic announced a reduction of 100 basis points

After two difficult years, the Tunisian Stock Exchange regained strength in 1998 as reforms were put in place to increase efficiency and transparency; these include introduction of a CAC40-type market index, based on stock market capitalization weights (TUNINDEX), and real-time price quotations on Reuters. Trade volume increased 57 percent during the year, with foreign investors accounting for half of the total trade volume. Market capitalization was 11 percent of GDP at the end of 1998, 20 percent of which was held by foreign investors.

Structural reforms progressed on several fronts:

Banking sector: reform of the banking sector continued in the context of a structural adjustment program formulated with the World Bank, including the consolidation and restructuring of bad loans to public enterprises, the strengthening of the regulatory and prudential framework (adoption of a capital adequacy ratio of 8 percent applicable as of December 31, 1999 and reform of the banking law to establish universal banking), and merger of selected government-owned banks. The average capital-asset ratio rose from 6.3 percent in 1997 to 8.9 percent in 1998, with 2 banks instead of 3 not complying with the present minimum level of 5 percent.

Industrial restructuring: the program to restructure private industrial enterprises launched in 1996 to prepare them for the liberalization of markets and European competition was quite successful, particularly among small- and medium-sized enterprise (SMEs). At end-May 1999, 521 enterprises out of the targeted 4,000 had received investment assistance. The total amount of investment generated amounted to TD 1,196 million. Another 500 companies are likely to submit restructuring plans by year's end.

Privatization: following the sale of two large cement plants in 1998 for a total of TD 418 million, the volume of privatizations slowed markedly in 1999 because of delays in preparing the other cement plants for privatization.

Liberalization and demonopolization: government withdrawal from the productive sectors continued with the granting of the first concession for the private production of electricity and the opening of certain port activities to competition.

Generalized food subsidies (compensation): the authorities continued to raise the prices of subsidized products in line with the objective of keeping a lid on budgetary subsidies.

Social indicators remain outstanding at the regional level, and the authorities' attention to social problems merits special mention. However, the unemployment rate is still high (15-16 percent) and graduates are increasingly unable to find work. Although the problem mainly affects new arrivals on the labor market, job losses are beginning to emerge as a cause of unemployment. The authorities have adopted measures to overcome the skills and information shortage that drives a wedge between job supply and demand. The computerized system to match job seekers and job offers, which is made available to the public through intranet, is state-of-the-art and could serve as an example to other countries.

Table III:

Structure of Output (%)---------------------1980 ----------------------1997
Gross Domestic Product (US$ mn) ---8,742 --------------------18,937
Agriculture Value Added (%) ----------14 13
Industry Value Added (%) ----------------31 29
Manufacturing Value Added (%) -----12 19
Services Value Added ---------------------55 58

Source: World Bank

Short - term outlook
It is expected that the positive macroeconomic results achieved in 1998 will be reinforced in 1999 with growth rising to 6.5 percent. This does not necessarily reflect an improvement in trend growth, but is explained to some extent by exceptional factors such as the good crop year and the diversion of Mediterranean tourism to Tunisia due to the war in the Balkans and security concerns in Turkey. Still, domestic demand remains very dynamic. Gross fixed capital formation (GFCF) is expected to increase by 12 percent (in volume terms) in 1999, boosting the investment rate to 26.3 percent of GDP. By contrast, the volume of exports of goods and services is expected to grow by only 4.2 percent. The projection of an unchanged inflation rate (3 percent) rests on the assumption that the sectoral negotiations in progress will result in far more modest wage increases than in 1996.

The external current account deficit is projected to widen slightly to 3.7 percent of GDP in 1999, despite an upturn in the terms of trade. Structural and cyclical factors alike account for this development, including Tunisia's relative cyclical position, the high investment rate, and the trend deterioration in the energy balance. One encouraging note, however, is the prospect for a further rise in the rate of domestic saving in 1999.

The prudent stance of fiscal policy is reaffirmed by the 1999 objectives and the measures deployed to achieve them. The 1999 Budget Law targets a fiscal deficit (excluding privatization receipts) in line with the objectives of the IXth Plan, i.e., 3.5 percent of GDP. This target is expected to be met inasmuch as nonbudgeted expenditures (particularly the civil service wage increase) are being offset by new tax measures (notably the increase in fuel excise taxes in April 1999) and the substantial savings realized on food subsidies due to the drop in import prices.

The authorities' pursuit of a prudent monetary policy in 1999 will allow for the noninflationary financing of growth. The expansion of M3 is projected at 9.6 percent, in line with the nominal GDP growth rate. Given the planned increase in net foreign assets of TD 265 million and the absence of new net credit to the government, this should allow credit to the economy to grow at a rate of 9.3 percent.

Owing to the deterioration of the current account balance, it will not be possible to aim at a very ambitious reserve target. Reserves are projected to reach the equivalent of 2.7 months of imports at c.i.f. prices by end-1999. This objective will make recourse to the international financial markets necessary before year's end. The country's good economic fundamentals should enable the Tunisian government to obtain more favorable financing conditions than those available last year, in the lower range of the band of rates currently offered to emerging market economies.

Find out more about Tunisia by clicking HERE

Return to the Foreign Aid/Affairs/Defense budget by clicking HERE