Document of

The World Bank

FOR OFFICIAL USE ONLY

Report No.86052-TN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF EURO 181.3 MILLION

(US$250 MILLION EQUIVALENT)

TO THE REPUBLIC OF TUNISIA

FOR THE

SECOND GOVERNANCE, OPPORTUNITIES AND JOBS

DEVELOPMENT POLICY LOAN

April 1, 2014

Poverty Reduction and Economic Management Department

Maghreb Country Department

Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the

performance of their official duties. Its contents may not otherwise be disclosed without

World Bank authorization.

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TUNISIA - GOVERNMENT FISCAL YEAR

January 1 – December 31

CURRENCY EQUIVALENTS

(Exchange Rate Effective as of March 1, 2014)

US$ 1.00 TND 1.576

US$ 1.00 Euro 0.727

Euro 1.00 TND 2.167

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

AFD French Agency for Development

AfDB African Development Bank

ALMPs Active Labor Market Programs

AMC Asset Management Company

ANC Assemblée Nationale Constitutante / National Constituent Assembly

BCT Banque Central de Tunisie / Central Bank of Tunisia

BH Banque de l'Habitat / Housing Bank

BNA Banque Nationale Agricole / National Agricultural Bank

BOP Balance of Payments

CGF Contrôle General des Finances / General Directorate for Financial Control

CGSP Contrôle Général des Services Publics / Public Service General Comptroller

CNAM Caisse Nationale d’Assurance Maladie / National Medical Insurance Fund

COM Council of Ministers

COSEM Comité de Suivi et d’Enquête des Marchés / Public Procurement Monitoring Committee

CPR Congrès pour la République / Congress for the Republic Party

CPI Consumer Price Index

CSEE Commission de Suivi des Entreprises / Enterprise Monitoring Commission

CSOs Civil Society Organizations

DGRA Direction Générale des Réformes Administratives / General Directorate for Administrative

Reforms

DPL Development Policy Loan

DSA Debt Sustainability Analysis

DPR Development Policy Review

EIA Environmental Impact Assessment

EU European Union

FDI Foreign Direct Investment

FSAP Financial Sector Assessment Program

GDP Gross Domestic Product

GO DPL Governance and Opportunity Development Policy Loan

GOJ DPL Governance, Opportunities and Jobs Development Policy Loan

IBRD International Bank for Reconstruction and Development

ICT Information and Communications Technology

IDA International Development Association

IDF Institutional Development Fund

IFC International Finance Corporation

IFIs International Financial Institutions

ii

IFRS International Financial Reporting Standards

ILO International Labor Organization

IMF International Monetary Fund

INAS Instance Nationale d’Accréditation de la Santé / National Health Accreditation Office

INEAQA Instance Nationale pour l’Evaluation, l’Assurance Qualité et l’Accréditation / National Office for

Evaluation, Quality Assurance and Accreditation

INS Institute Nationale de la Statistique / National Statistics Office

INT Instance Nationale des Telecommunications / Telecoms Regulator Authority

ISIE Instance Supérieure Indépendante pour les Éléctions / Superior Independent Electoral

Commission

ISN Interim Strategy Note

ISPs Internet Service Providers

JBIC Japan Bank for International Cooperation

JICA Japanese International Cooperation Agency

LDP Letter of Development Policy

LFS Labor Force Survey

M&E Monitoring and Evaluation

MDGs Millennium Development Goals

MENA Middle East and North Africa

MHESR Ministry of Higher Education and Scientific Research

MIC Middle Income Country

MICS Multiple Indicators Cluster Survey

MOEF Ministry of Economy and Finance

MOH Ministry of Health

MSME Micro, Small and Medium Enterprises

MTEF Medium-Term Expenditure Framework

MTFF Medium-Term Fiscal Framework

MVNO Mobile Virtual Network Operator

NEF National Employment Fund

NGOs Non-Governmental Organization

NPLs Non-Performing Loans

OECD/DAC Organization for Economic Cooperation and Development/ Development Assistance Committee

PforR Program for Results

PAFN Programme d’Appui aux Familles Nécessiteuses / Support Program for Poor Families

PEFA Public Expenditure and Financial Accountability

PEPE Program for Schools with Education Priority

PER Public Expenditure Review

PFM Public Financial Management

PMR Product Market Regulation

PPP Public Private Partnership

PSD Private Sector Development

SBA Stand-By Agreement

SDR Special Drawing Rights

SME Small- and Medium-Scale Enterprise

SNCFT Société Nationale des Chemins de Fer Tunisiens / National Railway Corporation

SOE State Owned Enterprise

SOB State Owned Bank

STB Société Tunisienne de Banque / Tunisian Bank Corporation

STEG Société Tunisienne de l'Electricité et du Gaz / Tunisian Gas and Electricity Corporation

TA Technical Assistance

TND Tunisian Dinar

iii

UGTT Union Générale Tunisienne du Travail / Tunisia General Labour Union

UNDP United Nations Development Programme

UNICEF United Nations International Children's Fund

USAID United States Agency for International Development

UTICA Union Tunisienne de l'Industrie, du Commerce et de l'Artisanat / Tunisia Business Confederation

VAT Value-Added Tax

VNO Virtual Network Operator

VSL Variable Spread Loan

WBG World Bank Group

Vice President:

Country Director:

Acting Sector Director:

Sector Manager:

Task Team Leader:

Inger Andersen

Simon Gray

Bernard Funck

Bernard Funck

Jean-Luc Bernasconi

iv

REPUBLIC OF TUNISIA

SECOND GOVERNANCE, OPPORTUNITIES AND JOBS

DEVELOPMENT POLICY LOAN

TABLE OF CONTENTS

1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY

DEVELOPMENTS) .....................................................................................................2 2. MACROECONOMIC POLICY FRAMEWORK ........................................................8

2.1 Recent Economic Developments ...................................................... 8 2.2 Macroeconomic Outlook and Debt Sustainability .......................... 12 2.3 IMF Relations ................................................................................. 17

3. GOVERNMENT PROGRAM .................................................................................... 18 4. PROPOSED OPERATION ........................................................................................ 22

4.1 Link to Government Program and Operation Description .............. 22 4.2 Prior Actions, Results and Analytical Underpinnings .................... 24 4.3 Link to the Interim Strategy Note and Other Bank Operations ...... 42 4.4 Consultations and Collaboration with Development Partners ........ 43

5. OTHER DESIGN AND APPRAISAL ISSUES ......................................................... 44 5.1 Poverty and Social Impact .............................................................. 44 5.2 Environmental Aspects ................................................................... 45 5.3 PFM, Disbursement and Auditing Aspects ..................................... 46 5.4 Monitoring and Evaluation ............................................................. 48

6. SUMMARY OF RISKS ...............................................................................................49

ANNEXES

ANNEX 1: POLICY AND RESULTS MATRIX

ANNEX 2: LETTER OF DEVELOPMENT POLICY

ANNEX 3: FUND RELATIONS ANNEX

 

v

The Second Governance, Opportunities and Jobs DPL is jointly prepared by the World

Bank Group, the European Union and the African Development Bank. The World Bank

Group team consists of Jean-Luc Bernasconi (MNSED, Team Leader), Antonio Nucifora

(MNSED), Laurent Gonnet (MNSFP), Heba Elgazzar (MNSHD), Fabian Seiderer

(MNSPR), Diego Angel-Urdinola (MNSHD), Carlo Maria Rossotto (TWICT), Giuliana

Cane (CICIS), Georgiana Pop (CICIS), Martha Martinez Licetti (CICIS), Antonia

Preciosa Menezes (CICBR), Mohamed El Shiaty (CMEIC), Farid Tadros (CMEIC),

Amina Khaled El Zayat (CMEIC), Nina Arnold (MNSHD), Walid Dhouibi (MNAPR),

Salim Banouniche (MNAPC), Lamyae Hanafi (MNAFM), Laurence Folliot Lalliot

(MNAPR), Daniela Marotta (MNSED), Natsuko Obayashi (MNSED), Erik William

Churchill (MNAEX), Raymond Bourdeaux (MNSSD), Kamel Braham (MNSHD). Legal

counsel was provided by Jean-Charles de Daruvar (LEGAM), and disbursement guidance

was provided by Hassine Hedda (CTRFC). The operation benefited from comments from

peer reviewers Theodore Ahlers (Consultant) and Phil Keefer (DECMG), and inputs from

Shanta Devarajan (MNACE), Amine Mati (IMF) and Giorgia Albertin (IMF).

Outstanding administrative support was provided by Besma Saadi Refai (MNCTN),

Narjes Jerbi (MNCTN), Mohsen Sayari (MNCTN), Muna Abeid Salim (MNSPR),

Ludmila Melnikova and Faythe Calandra (MNSPR). The operation was prepared under

the overall guidance of Bernard Funck (Acting Sector Director, MNSPR), Eileen Murray

(Country Manager, Tunisia) and Simon Gray (Country Director, MNC01). Guidance was

further provided by Antoine Courcel-Labrousse (CMEMR) and Yolanda Tayler

(MNAPC). The team also benefits from interactions with colleagues from the African

Development Bank (Jacob Kolster, Philippe Trape, Mickaelle Chauvin, Justin Murara),

and the European Union (Regis Meritan, Francis Lemoine, Michaela Dodini) and is

thankful to many Government of Tunisia officials who contributed their time and

knowledge. Special thanks are due to Mr Hakim Ben Hammouda, Minister of Economy

and Finance, Mr. Nourredine Zekri, State Secretary for Development and International

Cooperation; Ms. Kalthoum Hamzaoui, Director General for Multilateral Cooperation at

the Ministry of Economy and Finance, as well as former Minister Mr. Lamine Doghri,

and former Secretary of State Mr. Nourredine Kaabi, and their collaborators for their

productive cooperation.

 

1

SUMMARY OF PROPOSED LOAN AND PROGRAM

REPUBLIC OF TUNISIA

SECOND GOVERNANCE, OPPORTUNITIES AND JOBS DPL

Borrower Republic of Tunisia

Implementing Agency Ministry of Economy and Finance

Financing Data

IBRD Loan. Amount: Euro 181.3 million (US$250 million equivalent).

Terms: Variable Spread Loan (VSL), repayment schedule linked to

commitment with a 29.5 year maturity and 6.5 years of grace period, with

tailored repayment of principal.

Operation Type

The proposed operation is the second in a programmatic series of three

single-tranche operations.

Pillars of the Operation

And Program

Development

Objectives

The objective of this DPL is to help Tunisia establish the policy

foundations for a more competitive business environment, a strengthened

financial sector, more inclusive and accountable social services, and more

transparent public governance. The policy pillars supported by this DPL

are: (i) promoting private investment and establishing a more competitive

environment; (ii) restructuring the financial sector; (iii) improving the

quality and accountability of social sector services; and (iv) increasing

transparency and accountability of public policies and finances. The DPL is

a core component of the World Bank's Interim Strategy to support the

Tunisian Government in its task to consolidate social and economic change

following the January 2011 revolution.

Results Indicators

First Policy Area:

- Increase in broadband capacity (Gbps): from 37.7 (baseline) to 220

(target).

- 50% reduction in the price of international telecommunications from

about 40 cents/min (baseline for incoming calls).

Second Policy Area:

- Implementation of restructuring strategies for the three state-owned

banks initiated under supervision of the Ministry of Finance (target)

Third Policy Area:

- Annual publication of performance indicators for all 24 governorates

in priority social sectors (target)

Fourth Policy Area:

- Reduction in contract award process average duration by at least 30

percent from 200 days (baseline) (target: 140 days)

Overall risk rating Substantial

Operation ID P132709

2

IBRD PROGRAM DOCUMENT FOR A

PROPOSED SECOND GOVERNANCE, OPPORTUNITIES AND JOBS

DEVELOPMENT POLICY LOAN

TO THE REPUBLIC OF TUNISIA

1. INTRODUCTION AND COUNTRY CONTEXT (INCLUDING POVERTY

DEVELOPMENTS)

1. This Program Document proposes a Second Governance, Opportunities and Jobs

Development Policy Loan (GOJ-2 DPL) for the Republic of Tunisia, in the amount of

US$250 million equivalent. The proposed DPL would be the second in a programmatic series

of three single-tranche multi-sector operations, to support the Tunisian Government in its efforts

to implement a program of social and economic reforms that will complete the transition process

leading to general elections at end 2014. The objective of this DPL is to help Tunisia establish

the policy foundations for a more competitive business environment, a strengthened financial

sector, more inclusive and accountable social services, and more transparent public governance.

The first operation in the series (GOJ-1 DPL) was approved by the World Bank Board of

Directors in November 2012.1 However, while the programmatic series was initially intended to

have only two operations of US$500 million each, it is hereby proposed to split the second

operation into two operations, increasing to three the total number of operations in the series. As

discussed below, this reflects the impact of the difficult political situation, which characterized

much of 2013 and led to a slower pace in the implementation of reforms, and efforts to chart a

reform path in 2014 that is coherent with the overall political timetable.

2. The resolution of the political crisis at end 2013, and the subsequent adoption of a

new Constitution and appointment of an independent, technocratic government that enjoys

broad support among political and civil society stakeholders, provide an important

opportunity to complete the transition while preparing the country for a new growth path.

The political stalemate of 2013 had limited the ambition of Government as to the depth and

scope of the economic reforms (see Box 1). As a result, the pace and quality of the reforms

program has been lower than initially anticipated. Further, 2013 was marked by repeated delays

in the process to prepare a new Constitution, culminating in a suspension of the National

Constituent Assembly (ANC, Assemblée Nationale Constituante) proceedings. Therefore, the

laws which underpinned some of the important reforms originally envisaged to be supported

under the program as presented in the GOJ-1 DPL Program Document could not be adopted. It is

only at end 2013 that the ANC fully resumed its work and was able to finalize the Constitution,

which was promulgated at the end of January 2014. Considering that the content of the proposed

program remains a priority, on which the new Government has been granted the mandate and has

committed to act, and in light of the urgent financing needs that have arisen, this Program

Document proposes to proceed with a GOJ-2 DPL, adjusting the loan amount to reflect the actual

progress in the implementation of the reform program as of early 2014. The program supported

by this smaller operation focuses on reforms that have been adopted within the authority of the

executive and did not require approval by the ANC. This will provide more time to the incoming

1 World Bank (2012). Program Document: Governance, Opportunity and Jobs DPL. October 2012. Report No. 71799-TN.

3

transition Government to finalize the ongoing preparation of the remaining reforms, which

would now be supported under a third DPL in the series (GOJ-3 DPL) envisaged later in 2014.

Box 1. Tunisia: Recent Political Developments

With the election in October 2011 of a Constituent Assembly, and the formation of a new Government, Tunisia

successfully completed the first phase of its political transition to a multi-party democracy, before becoming

entangled in a prolonged period of constitutional reform and, more recently, political turbulences. In January 2011,

the wave of protests that ended the 23-year rule of President Zine El Abidine Ben Ali, ushered in a new political and

economic era. The revolution was fueled by widespread anger and frustration over lack of social and political

inclusion, governance and corruption problems, mounting unemployment and the rising cost of living. On October

23, 2011, 90 percent of the 4.1 million registered voters participated in the elections of a Constituent Assembly.

The 2011 elections saw Ennahda, the once-banned Islamist Party, win most seats (89 seats, or 40 percent) in the

217-member ANC, making it the leading party. It formed a coalition government with two secular political parties,

the Congress for the Republic (CPR) with 9 percent of seats, and Ettakatol, the social democratic party, with 7

percent. Under the agreement brokered by the three parties, commonly referred to as the troika, a “mini-

constitution” was passed, which gave the ANC legislative powers, in addition to its role in drafting the Constitution,

and allowed the ANC to appoint a government and elect a president.

The period leading to the preparation of the Constitution was initially expected to last one year, but this proved too

short for the Assembly to write a constitutional text, while also performing a legislative role through the vote of the

budget and other laws. The finalization of the draft Constitution and subsequent actions (electoral law, electoral

commission creation) had been postponed several times, also because of initial difficulties in reaching a broad

consensus. Tunisia entered a prolonged period of political uncertainty after the two successive assassinations of

prominent opposition politicians in February and July 2013, respectively. These events gave way to a series of

isolated but violent attacks across the country, and unprecedented security operations against radical groups. On the

political front, following the second assassination, the opposition called for the resignation of the Government. As a

result of the crisis, the work of the ANC was suspended in August 2013.

Starting in October, shortly after the two-year anniversary of the first free elections, the governing coalition and the

opposition engaged in a National Dialogue, a process brokered by four key civil society organizations (the so-called

“Quartet” spearheaded by the confederation of trade unions, UGTT, and gathering the Employer’s Association, the

Bar Association and the Human Rights League). The Dialogue focused on the constitutional and electoral

timetables, as well as on the Quartet’s proposition to replace the coalition Government with a non-partisan,

technocratic Government to oversee the final year of the transition until new elections can be held. In December

2013, an agreement was reached on the new Head of Government and on the transition Government’s mandate. The

Constitution was promulgated on January 27, 2014. The new transition Government has been given latitude to

engage in policy making on much broader issues than caretaking during the democratic transition, including on

economic reform issues. The ANC also decided to increase the threshold for no-confidence voting, thereby

providing additional assurances for political stability during the remainder of the transition.

3. The World Bank Group (WBG) remains fully committed to supporting the

finalization of the transition process in Tunisia, as the new Government’s agenda focuses

on strengthening the conditions for the economic recovery, while restoring the security

situation. On the economic front, these objectives are coherent with the strategic orientations

taken by the predecessor Governments that held office since the revolution. The WBG Interim

Strategy Note for FY13-14 remains fully relevant, of which the programmatic multi-sector DPL

4

operations are a central component (see Section 4.3).2 This operation has been prepared by the

WBG team with strong participation by the International Finance Corporation (IFC). The

operation has also been prepared jointly with the European Union (EU) and in close

collaboration with the IMF and African Development Bank (AfDB).

4. While providing important financial support for the stabilization of the

macroeconomic situation, the DPL series aims at addressing some of the key structural

challenges hindering economic transformation, sustained growth and sustainable

employment generation. After recovering in 2012, growth had declined well below 3 percent in

2013, a pace largely insufficient to make a significant dent in unemployment. While the outlook

is cautiously optimistic, uncertainties remain significant. With a fiscal adjustment that can only

be gradual, external financing needs are expected to remain large in the next two years. On the

structural front, as laid out in the Bank’s forthcoming Development Policy Review, the priority is

to break with past policies that were based on cronyism and rent seeking and have limited the

dynamism of the private sector, narrowed the benefits to be gained by greater integration into the

global economy, and ultimately led to unequal development, with prosperity confiscated by few

while opportunities remained too limited for the majority.

5. The proposed operation is fully aligned with the World Bank Group Goals, the

MENA Regional Strategy and the FY 2013-14 Interim Strategy Note (ISN) for Tunisia. By

supporting reforms that aim at raising growth and lead to employment generation, while

strengthening accountability and efficiency in public service delivery, the DPL series contributes

to increasing prosperity and enhancing opportunities that can be seized by the less well-off to

increase their living standards. The reforms supported by the DPL will also contribute to the

MENA Regional Strategy objectives, notably improved governance, economic inclusion,

employment generation as well as accelerated growth and enhanced competiveness. Finally, the

series is fully aligned and with the WBG ISN’s three areas of engagement: (i) laying the

foundations for renewed sustainable growth and job creation; (ii) promoting social and economic

inclusion; and (iii) strengthening governance, voice, transparency and accountability. The DPL

series represents a key operational instrument to deliver the ISN.

6. The reforms supported by the proposed GOJ-2 DPL operation are also fully

consistent with the recommendations of the Bank’s Development Policy Review, aiming at

assisting Tunisia tackle the short-term challenges to consolidate the transition, while

paving the way to stronger and more inclusive growth, leading to job creation over the

medium-term. The reforms are instrumental to achieve the objectives that have motivated the

revolution: opening up the economy so that it can deploy more and better economic opportunities

for the Tunisian people, in particular the youth, while entrenching participation and voice as key

ingredients of policy making. Building upon achievements realized under the GOJ-1 DPL, the

reform program underpinning the proposed GOJ-2 DPL, focuses on four key policy areas: (i)

promoting private investment and establishing a more competitive environment; (ii) restructuring

the financial sector; (iii) improving the quality and accountability of social sector services; and

2 The ISN was discussed by the Board of Executive Directors on 3 July, 2012. IBRD (2012). Interim Strategy Note for the

Republic of Tunisia for the Period FY13-14. Report No. 67692 –TUN.

5

(iv) increasing transparency and accountability of public policies and finance. While some

important reforms in that direction have been taken on since the revolution, accelerating their

adoption and implementation will send a strong signal to private investors that the rules of the

game are really changing and that Tunisia is now more open than ever for business.

7. The most recent poverty estimates, based on revised poverty thresholds in line with

international standards, confirm that poverty nearly halved between 2000 and 2010, but

still place the poverty headcount at 15.5 percent on average at the end of the period

(extreme poverty is estimated just below 5 percent), with strong regional disparities.

Poverty rates surpass 30 percent in the most disadvantaged regions of Tunisia (notably the

predominantly rural Western part of the country), according to the quantitative assessment

undertaken by the National Statistical Institute with support by the Bank in 2012. Just as

importantly, the data suggests that the gains realized over the past decade remain fragile, as

many households remain slightly above the poverty threshold, making them vulnerable to

exogenous shocks such as the loss of employment or hikes in the prices of essential goods.3

8. More generally, Tunisia has performed very well on a range of social development

indicators, although regional disparities remain a source of concern. Growth and public

investments in human development have contributed to impressive indicators. At the national

level, substantial progress has been achieved since 1990 to reduce infant and maternal mortality

rates and child malnutrition, while the HIV/AIDS prevalence is low. MDGs in the education

sector have also been achieved. However, regional disparities remain: in rural areas for instance,

children are more than twice as likely to be stunted as in urban areas (10 percent versus 4

percent). It is also in these areas that maternal health is at the highest risk, as fewer women get

prenatal services and high-risk pregnancies are poorly treated, resulting in maternal mortality

rates that are three times higher (70 versus 20 deaths per 100,000 live births, respectively).

Access to basic social infrastructure is lagging as only 50-60 percent of the rural population has

access to safe drinking water and 40 percent to modern sanitation (compared to near universal

access in urban areas).4

9. High unemployment, a major cause of the 2011 revolution, remains an important

source of concern, as job creation is insufficient to allow the youth in particular, to reap the

benefits of expanding education. As amply evidenced in the Bank’s above mentioned

Development Policy Review, constraints on economic activity in the “onshore” domestic markets

have prevented greater endogenous investment in productive activities and stifled job creation,

therefore constraining Tunisia to take full advantage of its economic potential and of initial

successes in terms of diversification, integration and investment climate reforms. Pro-investment

incentives have been mainly geared at the “off-shore”, export economy, attracting some FDI but

mainly in low-value added manufacturing activities. As an example, in manufacturing (textile,

mechanical and other manufacturing), 93 percent of employees are low-skilled. Concurrently,

3 Institut National de la Statistique, Mesure de la pauvreté, des inégalités et de la polarization en Tunisie, 2000-2010, October

2012. 4 Governance and Opportunity DPL, Program Document, Report 61627-TN, World Bank, 2011; Ministry of Public

Health/UNICEF (2006), Multiple Indicator Cluster Survey (MICS3), Tunisia.; UNICEF (2009), State of the World’s Children

Report, UNICEF, New York.

6

demographic trends and rising tertiary enrollment have resulted in a rapidly increasing number of

graduate youth entering the labor market, while growth has been insufficient to generate enough

jobs to absorb new entrants, with unemployment remaining above 13 percent since the early

2000s. In fact, demographic trends suggest that unless the pace of growth accelerates

substantially, unemployment will not improve over the medium term. With the economic

downturn of 2011, the unemployment rate increased from 13 percent in 2010 to 18.9 percent in

2011 (or approximately 740,000 people). Unemployment started to recede in 2012 (16.7 percent)

and in 2013 (15.3 percent at end December 2013), due to substantial hiring in the public sector

(including in SOEs), but is stabilizing at over 15 percent, i.e. well above the pre-revolution

level.5

10. Youth unemployment constitutes the major social challenge, with 72 percent of the

unemployed under the age of 30 in 2012. Unemployment rates are also much higher for

women (21.9 percent at end December 2013) and particularly for educated women (42 percent of

female graduates) and in remote regions, ranging between 24 and 30 percent in the Governorates

of the South West and South East. In absolute terms, the majority of the unemployed are low-

skilled workers. However, university graduates have the highest unemployment rate, which

reached 31.9 percent at end December 2013. Generally, the job market has not kept up with the

rate of new market entrants, falling short of 10 to 20 thousand jobs annually. For most university

degree holders, the public administration has been the main employer: more than 60 percent of

Tunisia’s highly educated workers are employed by the government.

11. Tunisia is one of the more advanced countries in the MENA region with respect to

gender equality and women’s rights in particular, and the role of women has been at the

center of the political debate, notably with the adoption of the new Constitution that

guarantees gender equality (see Box 2). Women have benefited from Tunisia’s high level of

public investment in education with associated outcomes such as attainment (e.g. 38 percent

university enrollment compared to 25 percent of men, in 2007), wage parity, and reduced fertility

rate (by nearly half). However, despite the fact that women have access to education and indeed

make up the majority of higher education graduates, they are less likely to be employed.

Women’s participation in the labor force is estimated at around 30 percent. As far as

participation in politics, only 58 of the current 217 member constituent assembly members are

women (i.e. 27 percent), and only few women had ministerial rank in the successive

governments (three women in the current government). On the other hand, women played an

important and vocal role to safeguard women’s rights in the Constitutional process. Civil society

groups successfully ensured that the 1956 Code of Personal Status (which outlawed polygamy,

called for mutual consent for marriages, and gave women constitutional equality, the right to

vote, to travel and work without permission from their husbands, to file for divorce, to sign

contracts and open bank accounts) is maintained and that the new Constitution guarantees

women’s rights.

5 A more extensive discussion of the employment issue, is provided in the Program Document of the 2012 Governance,

Opportunity and Jobs DPL: World Bank (2012). Program Document: Governance, Opportunity and Jobs DPL. October 2012.

Report No. 71799-TN.

7

12. Tunisia also made significant strides in improving governance since the revolution,

though the agenda remains incomplete. Global Integrity and Freedom House rankings used to

rate Tunisia as ‘very weak’ or ‘not free’ in most dimensions of governance.6 Since the

revolution, Tunisia’s Freedom House ranking improved to ‘partly free’ in 2012 and 2013, mainly

because of the marked improvement in political rights materialized by the free and fair elections

for the Transitional Constituent Assembly held in 2011, increased freedom of press and NGOs,

and reflecting the broad program of emblematic reforms to strengthen transparency and

participation initiated in 2011 by the Interim Government.7 Reporters sans frontières’ most

6 A detailed description of the governance rankings for Tunisia is provided in the Program Document of the 2011 Governance

and Opportunity DPL: World Bank (2011). Program Document: Governance and Opportunity DPL. June 2011. Report

N.61627-TN. 7 Notably the Government revised the law on Freedom of Association to remove all major legal obstacles and facilitate the

development of a strong and free civil society; revised the legal framework to allow public access to information and give the

public the right to access information held by public bodies (and among other things, remove constraints to public access to

economic and social statistics, including micro data); removed restrictions to access to the Internet and modified the Domain

Names Charter for the hosting of Internet websites; revised the legal framework for public procurement to improve the efficiency

and transparency of procurement procedures and to shorten the decision process without compromising quality; launched a

systemic, participatory, reform to simplify administrative procedures and red-tape and reduce discretion and arbitrariness in taxes

and customs procedures; established a new regulatory framework for the National Employment Fund, starting with moving its

management away from the Presidency to the Ministry of Employment; revised the regulatory framework on banks’ corporate

governance practices; and enabled the use of participatory monitoring and evaluation mechanisms that allow citizens to rate

performance of social programs and public services (e.g., community scorecards).

BOX 2. Tunisia’s new Constitution

The National Constituent Assembly (ANC) approved the new Tunisian Constitution in January 2014 and it

became effective in early February. The ANC was able to approve the Constitution as a whole by the

required two-thirds majority, thus not subjecting the text to a constitutional referendum by Tunisian voters.

The Constitution includes several significant advances in both the distribution of powers and the protection

of civil liberties and minority rights. Nevertheless, the Constitution is also very much a product of the

compromises between secular and Islamist sides within the Assembly, and in society at large. Civil society

and human rights groups in Tunisia have largely accepted the Constitution as a progress for women and

minorities. The constitutional chapters on decentralization mark an important step forward in local

governance. The Constitution provides a semi-presidential system, with most domestic policy-making

prerogatives resting in the prime ministry.

Provisions in the constitution on access to information, natural resource management, public financial

management, and decentralization are key areas of progress and will likely provide opportunities for WBG

support in Tunisia, though this will depend on subsequent legislation.

Chapter X of the Constitution concerns the transition process until a permanent parliament is seated

following elections. Under the transitional provisions, the ANC will continue to have legislative powers,

but its members may no longer introduce legislation, with the exception of the electoral law and the

approval of several new institutions included under the Constitution (such as the High Appeals Court,

Court of Accounts, and the Administrative Tribunal). The new government will continue to have the right

to introduce legislation for approval by the ANC and to promulgate decree legislation.

With the adoption of the Constitution, the National Dialogue process is nearing completion, having

previously facilitated the establishment of the electoral commission (ISIE, Instance Supérieure

Indépendante pour les Eléctions) and the appointment of a new government. The fourth and final milestone

will be the approval of a new electoral law, expected sometime in the first semester of 2014.

8

recent press freedom rankings (February 2014) place Tunisia 133rd

up from 164th

in 2010.8 Still,

some of the important pre-revolution shortcomings remain to be addressed, notably in relation to

the highly centralized decision-making process which undermines the system of checks and

balances, and more generally a legal and regulatory framework that has remained marred by

loopholes and discretionary regimes, especially in the economic area. Finally, Tunisia’s 2014

economic freedom score is 57.3, placing its economy 109th of 178 in the Heritage Foundation

ranking.9 Its score is 0.3 point higher this year, with improvements in trade freedom and labor

freedom, partly offset by declines in business freedom and monetary freedom.

2. MACROECONOMIC POLICY FRAMEWORK

2.1 RECENT ECONOMIC DEVELOPMENTS

13. The Tunisian economy has continued to recover from the 2011 recession, albeit at a

slower rate than initially expected. Following a 1.9 percent contraction in 2011, growth turned

positive in 2012 mainly due to the ‘base effect’ on the back of a strong rebound in tourism

related activities (accounting for more than 7 percent of GDP) and in the mining sector. Both

sectors were hit hard during the revolution. On the demand side, growth was fueled by

consumption resulting from a rise in government spending on wages and social programs. On a

yearly basis, GDP grew by 3.6 percent in 2012. Exports continued to suffer from the slow

Eurozone recovery, as the EU represents almost 70 percent of Tunisian exports.10

14. The recovery weakened in 2013, and GDP growth is estimated to have been lower

than in 2012. The recovery in FDI inflows and tourism receipts was halted again by uncertainty

following the acts of political violence and resulting tensions, coupled with weak economic

performance in the EU continues. At the end of 2013, tourism receipts were approximately 4.5

percent below their level in 2012 in real terms (and approximately 15 percent below their 2010

levels). GDP growth was only 2.6 percent for the year (compared with 4.0 percent initially

foreseen in the Government’s macroeconomic framework of May 2013). The combination of

political uncertainty and persistent social tensions that marked most of 2013, as well as the

persistent weak Eurozone performance and the impact of continued instability in Libya on trade,

investment and remittances, has impaired faster growth in 2013.

15. The Government has been pursuing an expansionary fiscal policy since the

revolution, but implementation ran into bottlenecks, especially with respect to capital

budget spending. As a result of steady increases in recurrent spending (mainly wages due to

recruitments and subsidies), the fiscal deficit rose from 0.6 percent of GDP before the revolution,

8 See 2014 World Press Freedom Index published at www.rsf.org.

9 See 2014 Index of Economic Freedom published at www.heritage.org/index 10 For instance, the export-oriented textile industry contracted in 2012 by an estimated 3.8 percent, and, overall, value added in

manufacturing grew only by 1.8% in real terms. Strikes and sit-ins continued to disrupt economic activity in 2012, albeit to a less

extent than during 2011, negatively affecting the performance of the export sectors, notably mining (phosphates), contributing to

the contraction of the non-manufacturing industries’ value-added by 2.2 percent. Weak performance in the industrial sector was

offset by a strong recovery in the service sector (private and public), which accounts for almost 60 percent of GDP, and which

grew by an estimated 5.5 percent, driven by tourism (+11.7 percent) and the ICT sector (+9.4 percent). As a result of the fiscal

stimulus, administration services also continued to grow (+6.3 percent). Favorable weather resulted also in growth in the

agricultural sector (+3.9 percent).

9

to an estimated 6.2 percent in 2013 (excluding grants). The fiscal deficit in 2012 was 5.7 percent

of GDP (excluding grants) instead of the budgeted 6.6 percent of GDP. Lower execution of

public investment projects, due to administrative bottlenecks and low execution capacity at the

local level, was in great part offset by increased expenditures on food and fuel subsidies (as a

result of increased international commodity prices). To limit the growing fiscal impact of rising

international oil prices in 2012 and early 2013, the government increased domestic energy prices

by 7 percent in early September 2012 and a further similar increase was carried out in early

March 2013. The civil service wage bill also increased significantly to reach 12.2 percent of

GDP in 2012, due to both additional hiring and salary increases. On the revenue side, an

improvement in indirect tax revenue collection helped maintain total domestic revenue collection

at around 23.9 percent of GDP in 2012.

16. The fiscal stimulus was extended for much of 2013, before measures were taken to

contain recurrent spending late in the year. As the deficit still widened, however, the

composition of expenditures deteriorated further. The 2013 budget initially envisaged a fiscal

deficit of 5.9 percent of GDP, and the Government adopted a supplementary budget placing the

deficit close to 6.8 percent of GDP. Measures were taken at the end of the year to limit the

growth in recurrent spending, notably by delaying recruitments, freezing payment commitments

earlier than in previous years, and cutting spending on other goods and services. As a result, the

fiscal deficit is estimated to have reached 6.2 percent (commitment basis, excluding grants).

Cash financing requirements were kept at bay (4.3 percent of GDP, including grants) thanks to

deferred financing related to transfers to public enterprises and slow execution of capital

spending projects.11

The execution of investment expenditures is estimated to have reached a

record low at 4.9 percent of GDP. Consequently, even if the Government’s deficit target has

been met, in terms of the structural balance (-4.6 percent of GDP vs. the -5.0 percent foreseen in

the program initially agreed to with the IMF), the composition of public expenditure has

remained skewed toward civil service wages and untargeted food and fuel subsidies (accounting

for a combined 68 percent of total expenditures).

17. After steadily increasing since 2012 to peak at 6.5 percent (year-on-year) in March

2013, inflation declined, finally averaging 6.1 percent for 2013. The flare in inflation had been

driven mainly by food prices (in particular, non-subsidized food prices had increased by nearly

10 percent year-on-year at end 2013). The impact of the increases in the international fuel and

food prices were further exacerbated by the depreciation of the Tunisian Dinar.12 Against a

background of rising public discontent with increasing cost of living, the Central Bank started

tightening the monetary stance in the second half of 2012. Specifically, the Central Bank

increased the main interest rate by 25 basis points in September 2012, and then again in March

(+25 basis points) and December 2013 (+50 basis points). As a result, the growth of M2

continued to slow down in 2012 to an estimated 7.6 percent, while growth of credit to the

economy decelerated to 6.8 percent (after 8.8 percent in 2012).

11 In the face of delayed or reduced external financial support, the bulk of the financing came from domestic sources, mainly a

drawdown of deposits held at the Central Bank (equivalent to about 3.7 percent of GDP). 12 Although the pass-through of international food and energy prices to domestic consumer prices is controlled as domestic prices

are administered, the rising fiscal cost of the subsidies forced the Government to raise fuel price in early September 2012. An

increase in subsidized food items is also expected.

10

18. Tunisia’s banking sector, already performing relatively poorly before the

revolution, was further hit by the economic situation. Following the revolution, banks were

initially hit by a liquidity squeeze which prompted the Central Bank to provide emergency

liquidity assistance to many financial institutions, while the economic slowdown translated into

lower credit quality. An example is provided by the tourism sector, which suffered a sharp drop

in revenues (by 33 percent in 2011), resulting in increased non-performing loans (NPLs), which

account for over 40 percent of the total NPLs in four major banks (the NPL ratio in this sector

progressed from 38 percent to 54 percent between December 2011 and December 2013). As part

of the economic stimulus measures, the Central Bank issued a Circular in April 2011

encouraging the banks to reschedule their loans and allowing them to maintain these restructured

loans in the category of sound credits, so as to limit the negative impact on provisioning

requirements and solvency ratios. This Instruction expired in early 2013 and the NPLs have

resumed growing (from 13 percent in December 2012 to 14.9 percent by mid-2013).

19. In order to tackle the banking sector’s structural weaknesses, the authorities have

engaged in a four-pronged stabilization and reform strategy. Firstly, recognizing that the

public banks are key to resolving the fragilities in the entire sector, they: (a) approved an initial

recapitalization of the Société Tunisienne de Banque (STB) bank in 2012 (of 0.4 percent of

GDP); (b) launched strategic and financial audits of the three public banks (which account for

about 36 percent of total banking system assets) to inform their future restructuring; and (c)

strengthened governance rules of the public banks (as part of this program, see below). Second,

the Central Bank has started to progressively address poor asset quality by reviewing loan

classification rules and strengthening collateral requirements, while adopting a stricter stance

related to regulatory norms.13 Third, the authorities have also launched a program to strengthen

supervision by adopting risk-based approaches, improving crisis preparedness and establishing a

deposit insurance scheme. Finally measures are being considered to remove barriers to lending to

SMEs (notably lifting the creditor interest rate ceiling).

20. After widening significantly in 2012, the current account deficit deteriorated slightly

again in 2013 to reach 8.4 percent of GDP. The trade balance deficit had widened from 10.4

percent of GDP in 2011 to 13.5 percent in 2012, as imports grew by 13.3 percent in nominal

terms in 2012 (or 8.5 percent in volume), against export growth of 5.8 percent (or 1.2 percent in

volume). This trend was halted in 2013 with positive, albeit subdued, growth in exports (+3.2

percent in real terms) and a deceleration of imports (+5.1 percent). As a result, the 2013 trade

deficit improved marginally to 12.6 percent of GDP. The slowdown in growth in imports was

driven mainly by mining (-8.3 percent in nominal terms) and mechanical equipment (+0.6

percent), whereas exports recovered very moderately in the off-shore segments, mainly textile

and clothing (+5.1 percent) and mechanical and electrical goods (+6.7 percent). The recovery in

mining exports, and especially in the phosphate industry (+27 percent in 2012, against -32

percent in 2011), decelerated sharply in 2013 (+3.9 percent), signaling the volatility of the sector

prone not only to demand changes but also to supply disruptions related to labor conflicts. The

13 For example, the Central Bank (Banque Centrale de Tunisie, BCT) requested banks to adopt best practices in terms of

corporate governance, to build collective provisions to improve their provisioning rate, to gradually raise the capital adequacy

ratios, and to limit large exposures.

11

tourism sector’s recovery was put on hold in light of the deteriorating security situation after the

sharp rebound of 2012 (+30 percent in nominal receipts). Remittances, however, are estimated to

have sustained the current account by more than US$2.2 billion. As a result, the current account

deficit is estimated to have deteriorated marginally in 2013, at 8.4 percent of GDP vs. 8.2 percent

in 2012.

21. Following a rebound in 2012, FDI declined in 2013, in the context of persistent

political uncertainty. FDI had risen by 85 percent in 2012 compared to 2011 and by 38 percent

compared to the pre-revolution level of 2010, although partly as a result of large energy projects

(46 percent of total FDI inflows in 2012) and receipts from privatization and acquisition

operations. Nevertheless, except for the services sector, FDI had increased in 2012 in all sectors

compared to 2011, raising hopes for a broad-based economic recovery. However, political

instability and the slowdown in reforms of 2013 appear to have deterred new investors, who have

adopted a wait-and-see attitude amidst the political stalemate. Net FDI flows are therefore

estimated to have declined to US$1.0 billion, compared to the US$1.7 billion reached in 2012.

22. While the level of foreign exchange reserves had increased in 2012, a persistently

high current account deficit and lower than expected FDI and official financing have led to

a gradual reduction during 2013. In 2012, shifting progressively from a tightly managed

exchange rate to a more flexible exchange rate helped to limit the Central Bank’s intervention in

the foreign exchange market and therefore to preserve foreign reserves. While the Central Bank

had used up significant reserves in 2011, with the latter dropping from about US$9.5 billion at

the end of 2010 (or 4.4 months of imports) to approximately US$7.5 billion by the end of 2011

(or 3.3 months of imports), to support the Tunisian Dinar and manage an orderly depreciation,

the reserves had recovered to about US$8.6 billion by the end of 2012 (or 3.9 months of

imports). This was also thanks to a multi-donor budget support package, which has provided

Tunisia approximately US$1.2 billion in 2012, including the Bank-financed GOJ-1 DPL

operation for an amount of US$500 million and a further US$500 million (equivalent) from the

AfDB and a grant of Euro 110 million from the EU. While some limited foreign exchange

interventions continued in 2013, as pressures on the currency mounted, a persistently wide

current account imbalance and lower than expected capital inflows have led to a reduction of

reserves to about US$7.7 billion by end 2013 (or just equivalent to 3.5 months of imports of

goods and services). Supported by only limited interventions of the BCT, the exchange rate has

depreciated by about 9.5 percent vis-à-vis the Euro and 5.4 percent vis-à-vis the US dollar in

2013.

23. In the face of increasing external financing needs, Tunisia signed a Stand-By

Agreement with the IMF in June 2013. The Government and the Central Bank of Tunisia

decided during the second half of 2012 to engage discussions with the IMF towards the design of

a Stand-By Agreement (SBA). The agreement was approved in June 2013, for a total amount of

12

US$1.7 billion over two years.14 A combined first and second review of the program was

successfully completed on January 29, 2014.

Table 1. Tunisia: Selected Macroeconomic Indicators, 2010-2016

2.2 MACROECONOMIC OUTLOOK AND DEBT SUSTAINABILITY

24. The economic outlook is only moderately positive, as policy levers are limited and

reforms gradually deploy effects, while significant downward risks remain. The framework

presented here is consistent with the approved 2014 budget law. It also reflects the program

presented by the authorities in the context of the successful first and second reviews (combined)

14 The SBA was prepared in close coordination with the World Bank. It concentrates on a mix of macroeconomic stabilization

measures and structural reforms, including banking sector restructuring, fiscal reform, targeted social transfers strategy, and

support to the tourism sector restructuring and the implementation of the new investment code (under preparation).

2010 2011 2012 2013 2014 2015 2016

(Est.) (Proj.) (Proj.) (Proj.)

Real Sector

Nominal GDP (TND million) 63,591 64,887 70,950 77,072 83,281 91,215 99,813

Nominal GDP (US$ billion) 44.4 46.1 45.2 47.0 48.2 50.2 52.2

Real GDP growth (% change) 2.8 -1.9 3.6 2.6 2.8 4.5 4.5

GDP per capita (current US$) 4,212 4,318 4,194 4,303 4,354 4,481 4,606

Gross Domestic Investment (% of GDP) 26.5 24.3 25.5 23.3 23.8 24.6 25.5

Gross National Savings (% of GDP) 21.7 16.9 17.4 15.1 17.2 19.1 20.5

Unemployment rate (% of active population) 13.0 18.3 17.6 16.7 16.0 15.0 14.6

Inflation (CPI, average) 4.4 3.5 5.6 6.1 5.5 4.8 4.6

Government finance (% of GDP)

Total Revenues including grants 23.4 24.6 23.9 23.5 22.9 23.5 23.7

Total expenditure and net lending 23.8 27.9 28.7 29.5 29.7 27.5 27.3

Overall balance (excluding grants) -0.6 -3.5 -5.7 -6.2 -7.1 -4.4 -3.8

Overall balance (including grants) -0.5 -3.2 -4.8 -6.0 -6.9 -4.0 -3.5

Public debt ratio (% of GDP) 40.3 44.4 44.3 45.0 51.7 53.2 53.5

Selected Monetary Accounts (Annual percentage change, unless otherwise indicated)

Money and quasi-money (M2) 11.9 9.3 8.2 6.9 9.6 10.8 13.1

Credit to the economy 19.6 13.4 8.8 6.8 8.6 7.3 9.3

Policy interest rate (%, eop) 4.50 3.50 3.75 4.50 .. .. ..

Balance of Payments (Percent of GDP, unless otherwise indicated)

Current account balance -4.7 -7.4 -8.2 -8.4 -6.7 -5.5 -5.0

Imports of goods 40.8 49.1 50.8 48.9 49.8 49.9 50.1

Exports of goods 32.5 38.7 37.4 36.3 37.5 38.2 39.1

Foreign Direct Investment 2.9 0.9 3.9 2.2 2.2 2.9 3.4

Gross reserves (US$ billion, eop) 9.5 7.5 8.6 7.7 .. .. ..

in months of next year's goods and non-factor services imports 1/ 4.4 3.4 3.9 3.7 .. .. ..

As % of short-term external debt 142.7 106.9 104.2 94.0 .. .. ..

External debt 48.1 47.8 53.8 51.9 56.9 58.6 59.9

Exchange rate, average (TND/US$) 1.43 1.41 1.57 1.64 .. .. ..

Source: Tunisian authorities and World Bank

1/ End-of-year reserves over next year imports

13

of the SBA. As mentioned above, GDP is estimated to have grown below target in 2013, i.e. by

an estimated 2.6 percent against 4.0 percent as initially foreseen in the Government’s program.

Although to a lower extent than in previous years, international fuel and food prices still weigh

on inflation, trade, and the fiscal balance. The Tunisian recovery is expected to resume

moderately from 2014 on, assuming a continuation of the political stabilization and an orderly

completion of the transition period leading to elections towards the end of 2014. Further, the

recovery in the EU, a relative stabilization of the situation in Libya, and moderate commodity

and energy prices would contribute to raise GDP growth towards 2.8 percent for the year, while

inflation would decelerate moderately to 5.5 percent. By adopting this relatively cautious target,

the authorities take into account remaining uncertainties related to these assumptions.

25. Unemployment is expected to remain high in the short-term, however. Given

demographic trends and the low historical employment-growth elasticity, Tunisia will need to

grow by at least 4.5 percent to reduce the stock of unemployed. The moderate growth over the

next few years is expected to keep unemployment around 15 percent in 2014-15. Beyond 2015,

assuming the adoption of the reforms package supported under this DPL series, and growth

closer to 4.5 percent, the level of unemployment could start decreasing. Although still uncertain,

a recovery in Libya could also absorb a significant number of unemployed.

Fiscal Policy, Monetary Policy and Inflation

26. In light of the economic slowdown and low execution rates in the investment budget

that have marked 2013, the authorities have prepared a 2014 budget, which posts a higher

deficit than in 2013 (6.9 percent of GDP vs. 6.0), but remains sustainable overall, while

breaking with recent trends in expenditure composition. The adjustment on the expenditure

side can only be progressive and will not translate into reduced financing gaps before 2015. The

shift in the composition of expenditures, however, is being initiated with the 2014 budget,

including restraints on current spending, notably the civil service wage bill and subsidies. While

progressively reducing spending on the wage bill and subsidies, the authorities will face new

pressure points arising from the restructuring of the banking sector and associated

recapitalization needs (starting in 2014), as well as from increasing financing needs from social

security funds. Further, it appears that the SOEs are starting to accumulate losses, as a result of

the weaker economic environment and burdened by the significant increase in personnel over the

past two years, adding to fiscal challenges on the medium-term.

27. The fiscal framework for 2014 includes only very moderate increases in the wage

bill, which should stabilize at 12.4 percent of GDP, while the share of subsidies and

transfers would decline to 7.0 percent of GDP (after having peaked at 7.6 percent of GDP in

2013). Initial measures to contain the wage bill in 2014 include measures to control salaries and

a slowdown in new net recruitments, limiting them to key priority sectors (education, health and

internal security). Additional measures to contain the wage bill will be explored in the context of

the preparation of a supplementary budget towards the middle of the year. On the subsidies front,

changes in electricity and gas tariffs will yield savings amounting to 0.7 percent of GDP (lifeline

tariffs remaining protected). Fuel price increases are also foreseen for the latter half of the year,

estimated to result in additional 0.1 percent of GDP. Measures have also been taken on the

revenue side (totaling 0.3 percent of GDP), including streamlining exemptions and widening the

tax base. In order to avoid crowding out financing for the private sector, the authorities will rely

14

on external financing to bridge the budget borrowing requirement in 2014 (the equivalent of

US$4 billion), mainly from the IFIs, including US$1.3 billion from the IMF in the form of

budget support, World Bank program lending, as well as EU grant and macro-financial

assistance. An additional US$1.1 billion is expected to be raised on international capital markets

with the benefit of guarantees from bilateral partners.

28. The authorities could further tighten the monetary policy stance in 2014, if

inflationary pressures were to re-emerge. The recent increase in the policy rate was an

important step to signal the authorities’ stance to curb inflation, even if the policy was not

complemented yet with other measures that would have allowed real money market rates to

become positive. As mentioned above, CPI inflation has stabilized and even declined since mid-

2013, and it is expected to remain below 6 percent by year-end. Nevertheless, despite lower

forecasted international commodity prices, international food and oil prices may continue to

weigh on inflationary pressures, due partly to the increase in domestic fuel prices, as well as a

possible further depreciation of Tunisian Dinar. Hence, monetary restraint will need to continue

to help maintain inflation in check in 2014.

Table 2. Tunisia: Key Fiscal indicators 2010-2015 (in percent of GDP)

2010 2011 2012 2013 2014 2015

(Est.) (Proj.) (Proj.)

Overall balance (including grants) -0.5 -3.2 -4.8 -6.0 -6.9 -4.0

Overall balance (excluding grants) -0.6 -3.5 -5.7 -6.2 -7.1 -4.4

Primary balance 1.2 -1.7 -3.9 -4.3 -5.4 -2.9

Total revenue (including grants) 23.4 24.6 23.9 23.5 22.9 23.5

Tax Revenues 20.0 20.9 21.0 21.1 21.3 21.6

Non-tax revenues 3.3 3.3 2.0 2.1 1.3 1.6

Grants 0.1 0.3 0.9 0.1 0.3 0.3

Capital income 0.0 0.0 0.1 0.0 0.0 0.0

Total expenditures and net lending 23.9 27.7 28.7 29.5 29.7 27.5

Current expenditures 17.8 21.1 22.6 24.6 23.2 20.9

Wages and salaries 10.7 11.7 12.2 12.4 12.4 12.2

Goods and services 1.7 1.6 1.6 1.6 1.8 1.4

Interest payments 1.8 1.8 1.8 1.9 1.8 1.4

Transfers and subsidies 3.6 5.9 7.0 7.6 7.0 5.7

Other expenditures 1.1 0.2 0.2

Capital expenditures and Net lending 6.0 6.7 6.1 4.9 6.5 6.6

of which: public banks' recapitalization 0.0 0.0 0.1 0.0 1.2 0.0

Overall balance (including grants, cash basis) 1.7 -2.5 -4.1 -4.3 -8.7 -4.0

General Government Financing -1.7 2.5 4.1 4.3 8.7 4.0

Privatization 1/ 0.0 0.6 0.6 0.7 0.5 0.4

External (net) -0.4 0.6 3.6 -0.8 7.2 2.1

Domestic (net) -1.3 1.3 0.5 4.4 1.0 1.5

Sources: Tunisian Authorities and World Bank staff estimates

1/ includes sale of confiscated assets.

15

29. In 2014, taking into account a recovery in both domestic and external demand, the

authorities expect the current account to improve, but the deficit will remain large (6.7

percent of GDP). Exports and tourism would be supported by the European recovery, assuming

that political stability is preserved throughout the year. The current account deficit would be

absorbed by a gradual recovery of FDI (including receipts from the privatization and/or selling of

confiscated assets), as well as increased external financing.

30. With continued political stability, the overall external financing situation is expected

to remain manageable, thanks partly to the support by the international community and the

IMF’s balance-of-payments support. External financing requirements are expected to decrease

gradually, starting in 2015 (Table 3), due to a lower current account deficit and lower

amortizations. Requirements will still remain large at about 9 percent of GDP. The

Government’s framework foresees an increase in international reserves to approximately US$9.0

billion by end-2014 (or approximately 4 months of imports), as a result of the Bank support

under this proposed DPL and the subsequent GOJ-3 DPL, the IMF support under the SBA, and

the EU macro-financial assistance (for an estimated Euro 200 million in 2014). A Sukuk bond

issue (US$500 million), guaranteed by the Islamic Development Bank, and further bond issues

supported by guarantees from partner governments (US$600 million), as well as assistance from

Turkey (US$200 million, already disbursed) would further contribute to close the gap.

Table 3: External Financing Needs 2012-2016 (in US$ million)

31. For 2014, the authorities are focusing on mobilizing official budget support. In 2013,

Tunisia received a bond guarantee by the Japan Bank for International Cooperation (JBIC) which

allowed it to raise approximately US$228 million in July 2013. For 2014, a multi-donor financial

package of approximately US$ 1.2 billion would include the proposed GOJ-2 and GOJ-3 DPLs

for an amount of US$750 million, as well as further budget support from the EU in the form of

various grants (Euro 135 million) and macro-financial assistance (Euro 200 million). The AfDB

has not yet confirmed the possibility to provide budget support, on account of its exposure limits.

Finally, the authorities have been granted the request to use the proceeds from the SBA for

budget financing purposes, and an amount equivalent to US$507 million has already been made

available upon satisfactory completion of the first and second reviews of the program at end-

January.

2012 2013 2014 2015 2016

(Est.) (Proj.) (Proj.) (Proj.)

Current account deficit 3,687 3,963 3,212 2,759 2,614

External medium and long term debt amortization 1,897 1,773 1,447 1,585 1,572

Total requirements 5,584 5,736 4,659 4,344 4,186

Capital grants and privatization receipts 708 320 231 220 157

FDI and portfolio investments 1,748 1,080 1,163 1,496 1,845

Long term disbursements 3,664 2,118 3,248 2,292 1,966

IMF credits 0 150 1,381 220 0

Other capital flows n.i.e. (includes short term lending) 585 344 2,389 1,807 1,169

Total resources 6,704 3,862 7,032 5,815 5,137

Change in forex reserves 1,120 -1,874 2,373 1,471 952

Total financing 5,584 5,736 4,659 4,344 4,185

Sources: World Bank staff estimates

16

32. Beyond 2015, the authorities expect that a return to capital markets will be possible,

to cover for an increasing share of their financing needs, while official external financing

will continue to be sought in the interim. Until the global financial crisis Tunisia was

borrowing significantly from international capital markets for its financing needs, and the IFIs

were only providing a small level of support (as is usually the case in middle income countries).

Since the cost to access capital markets for Tunisia remains high (due to the risks associated with

the transition period),15 the authorities will need to continue to rely mainly on external official

financing in 2014 and 2015, and will return to capital markets only with the benefit of

guarantees, as already happened in 2012 and 2013.16

Debt Sustainability

33. After a decade of reduction, external debt has increased in the aftermath of the

revolution, reflecting the impact of expansionary fiscal policy and widening current

account deficits. It remains, however, sustainable in the medium term, assuming the fiscal

consolidation effort is sustained. Prudent debt management and sustained growth reduced

public debt from 52 percent of GDP in 2004 to 40 percent in 2010, before rising again to 44.3

percent by end 2012 (28 percent being foreign currency-denominated). Total external debt has

decreased in parallel from above 60 percent of GDP in 2004 to 48 percent of GDP in 2010 (of

which medium and long term debt was 37 percent of GDP in 2010). While external debt remains

fairly high, its composition suggests limited risks for debt sustainability. In fact 38 percent of

Tunisia’s external debt is owed to multilateral donors and 20 percent of the debt is

‘concessional’.17 The maturity structure is also favorable, with 44 percent between 10 and 15

years and 18 percent between 15 and 20 years. Public debt and external debt levels are estimated

to have increased by approximately 6 percent of GDP over 2011-2013, as a result of the

financing needs associated with the fiscal response to the crisis and a widening of the current

account. The results of a Fiscal and Debt Sustainability Analysis (DSA) carried out by the Bank

in 2012 (in collaboration with the authorities, and in consultation with the IMF) highlights that

under a prudent growth scenario the public debt ratio is projected to plateau at approximately 55

percent of GDP by 2017.18 This higher level of public debt remains tolerable in comparison to

the standard debt sustainability thresholds. The increase in public debt has also been reflected in

an increase in external debt from approximately 48 percent of GDP in 2011 to 52 percent of

GDP at end 2013. The DSA stresses the need to adopt less expansionary fiscal stance and

implement prudent borrowing strategies.

34. While the economy has been growing again since 2012, downward risks over the

short to medium term remain significant. The most significant risk to the projection relates to

renewed political and security instability, which could jeopardize the reform program and

15 Since the revolution, all major rating agencies have repeatedly downgraded Tunisia's sovereign rating, such that Tunisia’s

sovereign bonds are now rated well below investment grade. 16 The Government returned to capital markets in 2012 as the US Government provided a guarantee which allowed the Tunisian

Government to raise US$485 million from the international capital markets in July 2012. The Government also raised US$303

million (equivalent in the Samurai market) in December 2012, backed by a guarantee provided by JBIC. A further JBIC

guarantee allowed the Government to raise US$228 million in July 2013. 17 This refers to historical commitments. 18 These projections assume that the increasingly loss-making pensions system will be reformed in 2014. Further there are risks

related to contingent liabilities in State Owned Enterprises, which could raise public debt by approximately 10 percent of GDP.

17

unfavorably affect trade and investment. Continued delays in the recovery of the Eurozone,

combined with persistent stability concerns in Libya, would further deteriorate the outlook for

Tunisian exports and the economy at large. Even with the stabilization of the political situation,

social tensions could remain due to the persisting high rate of unemployment. In addition,

difficulties in the banking sector could endanger the economic recovery. Banks’ solvency and

liquidity is likely to be further challenged in the coming months as a result of the slow pace of

the recovery.

35. With previous policy buffers all exhausted by now, the Government of Tunisia is

taking action to mitigate these risks. In the framework of the IMF-supported program, the

authorities are committed to restrain the growth of public wages and curb subsidies. Similarly, in

order to mitigate risks in the financial sector, the authorities have adopted measures to strengthen

the stability of the banking sector, including implementing the audits of the three main state-

owned banks and strengthening prudential measures (supported by the GOJ-1 DPL).

Overall Assessment of Macroeconomic Policy Stance

36. The new Government identified the support to economic recovery as one of its two

main objectives for the remainder of the transition period, next to the preservation of the

security situation. Stabilizing the macroeconomic situation and in particular consolidating

public finances is seen as an immediate priority. Combined with the gradual tightening of the

monetary policy stance, the resulting macroeconomic policy framework underpinning the

proposed operation is deemed as satisfactory even if tainted by substantial risks. While the

effects of past policy stimuli have not been as strong as hoped for, the room for accommodating

macro policies has now significantly diminished. The authorities have realized that tighter

monetary policy is needed to contain inflation and strengthen the exchange rate. Similarly, the

authorities’ Medium Term Fiscal Framework (MTFF) includes a gradual reduction in subsidies

and transfers and stricter control over the wage bill. Implementing such expenditure controls

against the backdrop of continuing social pressures and in the run up to elections by end-2014

will require significant discipline by the authorities, a commitment the incoming transition

Government has clearly taken in front of the National Assembly and the broader public,

receiving political backing.

2.3 IMF RELATIONS

37. Finally, as mentioned above, Tunisia signed a stand-by agreement with the IMF in

June 2013, for a total amount of US$1.7 billion over a 24-month period. A first disbursement of

around US$150 million occurred upon approval. Tunisia accessed an additional US$507 million

in January 2014, upon completion of the combined first and second reviews of the program.

While performance under the program has been mixed, the Fund and the authorities have agreed

on a policy stance for 2014 that would maintain macroeconomic and financial stability without

jeopardizing prospects for accelerating growth and protecting priority social spending programs.

18

3. GOVERNMENT PROGRAM

38. The incoming technocratic Government has committed to act on two fronts: restore

and maintain security, while establishing the conditions for a stronger economic recovery. The Government sees these twin objectives as key to successfully complete the democratic

transition, with general elections planned at end 2014. The Government will also strictly adhere

to the principles of the multi-stakeholder “roadmap” approved in the fall 2013 by political parties

and major civil society organizations, with a view to ensure the neutrality of the administration in

the run up to elections.

39. While a detailed program is being prepared, the Government has committed to

accelerate and deepen the structural reforms initiated since the revolution, aimed at paving

the way for stronger growth and job creation (see Letter of Development Policy, Annex 2).

The Government intends to take actions to boost the recovery of sectors experiencing difficulties

(mining, tourism) and contain cost of living increases. The economic program laid out in the

attached Letter of Development Policy, focusses on restoring macroeconomic stability,

promoting regional development, and accelerating reforms for growth and competitiveness. With

respect to the latter objective, the Government will build on reforms and achievements realized

since the revolution, notably those supported by the predecessor GOJ-1 DPL. This reform

package is based on four economic action lines where results are sought in the short run: (i)

consolidating public finances and rebalancing the composition of expenditures; (ii) improving

the business environment and strengthening the financial sector; (iii) supporting the social

dialogue and social peace to launch meaningful reforms in the social and human development

areas; and (iv) consolidating recent achievements in terms of greater transparency and

accountability. These orientations are fully consistent with the preliminary achievements of the

previous program devised after the revolution and described in the Program Document of the

GOJ-1 DPL.19

Public finances

40. In addition to the macroeconomic stabilization measures mentioned above, the

Government has decided to improve the execution of public investment projects. To this

end, the Government intends to deepen a series of measures previously adopted to accelerate the

implementation of the investment budget. In 2012 and 2013, Tunisia has shown limited capacity

in execution of public investments. In order to improve the execution of past fiscal stimuli, the

Government carried out an extensive analysis of the problems facing public investment projects.

As a result of this exercise, the Government approved measures to initiate a simplification of

tendering processes and devolve more responsibility to line agencies. The effectiveness of the

public procurement system is further enhanced with the adoption of a new public procurement

decree. Concurrently, the work on the new Organic Budget Law will be finalized, allowing for

better budget planning, streamlining of redundant controls and strengthening of accountability.

19 World Bank (2012). Program Document: Governance, Opportunity and Jobs DPL. October 2012. Report No. 71799-TN.

19

Investment climate and financial sector stability

41. In parallel, the Government intends to complete reforms to improve the business

environment and attract investment. As evidenced in the Bank’s forthcoming Development

Policy Review (DPR), the economic environment under ex-President Ben Ali was characterized

by lack of transparency, cronyism, rent-seeking and related anti-competitive practices, which

discouraged entrepreneurship and private sector investment, preventing higher growth and

employment. In order to address these problems the post-revolutionary governments initiated

reforms with a view to change the orientation of industrial policy, cut red tape, reduce discretion

and increase transparency in the regulatory and legal framework for investments, and to

eliminate privileges and to allow greater market contestability and competition. These reforms

include:

The decision to revise the Competition Law (Indicative Trigger for the GOJ-3 DPL) and

its institutional framework aiming at increasing market access, improving transparency,

improving law enforcement, and reducing discretionary decision-making application of

the decisions.

The gradual liberalization of the telecommunications sector, as an emblematic sector,

notably because of its backbone function for the whole economy. Liberalization started

rapidly with the domestic mobile market, followed by more incremental steps to increase

competition in international telecommunications (Prior Actions for the GOJ-1 and GOJ-

2 DPLs) and to open up access to alternative providers of fiber optic backbone

infrastructure for telecommunications (Prior action for the GOJ-2 DPL).

The institutionalization of systematic and participatory reform process of simplification

of the regulatory environment for investment (Prior Action for the GOJ-1 DPL), based on

streamlining of procedures, transparency, and reduction of arbitrary and discretionary

behavior. In this context, the incoming Government has committed to accelerate on-the-

ground reforms in the areas related to tax administration, customs administration and

other key areas for private investment throughout 2014.

The revision of the Investment Incentives Code (Indicative Trigger for the GOJ-3 DPL)

with a view to simplify it, improve its transparency, and streamline the process for the

provision of investment incentives, rationalize the use of tax incentives and limit tax

expenditure, to reduce the dichotomy between the onshore and offshore sectors of the

economy and to open up to investment certain sectors that were previously restricted.20

In parallel, the Law on Public-Private Partnerships (PPP) has been revised and

submitted to the National Assembly.21

As part of the efforts to improve the investment climate, the Government is also

finalizing a revision of the Bankruptcy Law (Indicative Trigger for the GOJ-3 DPL) to

modernize and simplify the process of restructuring firms and liquidating insolvent firms,

with a view to ease the exit of poorly performing firms and in parallel decrease the

number of NPLs. This will help improve financial stability and facilitate access of new

firms to bank lending.

20 A cooperation agreement was signed in August 2012 between the Government and IFC to provide technical assistance to

reform the investment framework with an emphasis on the review of the law and the simplification of procedures for investment. 21 The policy dialogue on PPPs and Concessions was led by the EU with involvement of the Bank.

20

42. The problems of Tunisia’s banking sector relate heavily, but not exclusively, to its

exposure to tourism. The sector has for a long time been afflicted by political interference,

weak governance, and loose regulation, resulting in weak intermediation capacity and

performance, as well as a deterioration of loan portfolios. Reforming the tourism sector debt

is particularly critical, as debt in this sector accounts for the largest percentage of NPLs on the

balance sheet of the banking sector, with a significant acceleration of the volume of NPLs in

2012 and 2013. The Government is preparing to address the problem of debt in the tourism

sector through the creation of a dedicated Asset Management Company, which will be tasked

with facilitating the recovery of debts and restructuring unviable units (Indicative Trigger for the

GOJ-3 DPL). Beyond the tourism debt issue, the Government will pursue the reform of state-

owned banks, starting with the finalization of the strategic and financial audits of three public

banks (a call for Expression of Interest to commission the audits of STB, BH, and BNA was a

Prior Action for the GOJ-1 DPL). The selection process was finalized in July 2013 and two of

the three audits have completed their preliminary phase, while the undertaking of the last audit

will last until summer 2014. As a first step to strengthen the public banking system the

Government has adopted a Decree to improve the governance of three public banks through the

reinforcement of an increased independence of the boards (Prior Action for the GOJ-2 DPL).

Based on the findings of the audits, the Government intends to take a decision on how to

restructure the three State-owned banks (Indicative Trigger for the GOJ-3 DPL) and to launch a

deep restructuring process of the relevant public banks in parallel with their recapitalization,

which could amount to 1.2 percent of GDP in 2014.

Social dialogue and social sector reforms

43. While Tunisia’s unemployment problem can only be solved over the medium term,

the important labor market reforms to address it will be launched this year. To build a

broad based consensus around the launch of structural reforms of the labor market, and in the

social sectors more generally, the Government and social partners had launched in 2012, a social

dialogue process, including the main trade union (Union Générale Tunisienne du Travail,

UGTT) and the main business confederation (Union Tunisienne de l'Industrie, du Commerce et

de l'Artisanat, UTICA), with the support of the International Labor Organization (ILO). A ‘new

Social Contract’ was signed in January 2013, a form of consensual action plan which will pave

the way for a reform of the Labor Code. With UTICA and UGTT being among the civil society

organizations playing a major role in the resolution of the political crisis, and laying the

foundation for a constructive social dialogue, the Contract represents an important opportunity to

build consensus around key labor market and social reforms. As a an example, the Ministry of

Social Affairs has been discussing with the Bank the undertaking of a comprehensive study to

review the financial and fiscal sustainability of the social security system, including the pension

system, the health insurance and a possible employment loss insurance scheme to be introduced.

This analytical work and the resulting policy options will be examined in the framework of the

Social Contract. In addition, the Government will pursue the pilot implementation of new Active

Labor Market Programs (ALMPs) and continue a database consolidation process to establish a

unified social protection information and verification system in order improve the targeting of

transfers to poor beneficiaries.

21

44. There is a consensus that strengthening social accountability and quality of public

services is important to reduce social disparities, particularly in underserved regions. In

2011, the Interim Government established a participatory process for systematically monitoring

the performance of public services by civil society, citizens and service providers (Prior Action

for the 2011 GO DPL). This system is now being implemented by the Public Administration

Reform Directorate, within the Prime Minister’s office, which has published the results of

feedback from citizens nationwide on 19 public services, and is being reinforced by the

institutionalization of the participatory evaluation as one of the tasks of the Internal Audit

Department for Public Services (Prior Action for the GOJ-2 DPL). In the same vein, the

accreditation agencies for higher education and health services, established by decree in 2012

(Prior Action for the GOJ-1 DPL), are either fully operational (health) or in the final process of

being so (higher education) and will carry out their first work program of assessments in 2014.

Transparency and accountability

45. Building on immediate, post-revolution reforms to enhance transparency and

accountability of public policies and services, the Government will finalize a new organic

law on Access to Information (Indicative Trigger for the GOJ-3 DPL), broadening the scope of

the existing 2011 decree-law to strengthen information access rights, while clarifying the

institutional responsibilities for the monitoring and enforcement of these rights, through the

operations of an independent Information Authority. The Authority will monitor the

implementation of the right to access to information (ATI), provide opinions/advice and handle

citizens’ complaints. The organic law will also allow resolving legal uncertainty related to

conflicting regulation, by elevating the ATI rights. Similarly, in spite of initiatives taken

following the revolution, much remains to be done to turn the process of preparing the annual

state budget into a more open and informed debate about priorities and budgetary

decisions. Hence, the Minister of Finance has issued a Decision instructing the relevant

Departments to publish key information on public finances (Prior Action for the GOJ-1 DPL),

including a citizen’s budget and an online open budget platform enabling citizen’s direct access

to detailed and timely public expenditure data. The first citizen’s budget has been published for

the 2014 Budget.

46. Finally, with a view to improve the transparency and efficiency of public investment

programs, the Government intends to improve the public procurement system. Following

the 2012 self-evaluation of the procurement system using the OECD/DAC methodology, the

Government has published in March 2014 a decree reforming the procurement systems to

implement the key recommendations from the OECD/DAC study (Prior Action for the GOJ-2

DPL). Further, the Government intends to launch a process of reform of all State controls

systems by establishing a High Level Committee to guide and supervise the reform progress. As

a first step in this process, the Government has introduced a streamlining of a priori

administrative controls and moving instead towards granting the administration more autonomy

and carrying out controls a posteriori, in line with the principles set forth in the new

Constitution.

22

4. PROPOSED OPERATION

4.1 LINK TO GOVERNMENT PROGRAM AND OPERATION DESCRIPTION

47. The proposed Governance, Opportunities and Jobs (GOJ-2) DPL is the second in a

programmatic series of three operations which supports the transition period in Tunisia

since 2012. This programmatic DPL series supports a multi-sector program of reforms and

builds on the pioneer 2011 GO DPL approved in June 2011 to support the Tunisian Interim

Government immediately following the January 2011 revolution.

48. The delays experienced in the transition period due to political instability and

growing security threats that culminated in the political paralysis of 2013, have slowed the

preparation and implementation of the economic reforms. In addition, the difficult political

climate limited the ambition of the previous governments as to the depth and scope of the

reforms, as the search for political consensus became ever more important. As a result, the pace

and, to some extent, the quality of the reforms program has been lower than initially anticipated.

Achievements of results in terms of better transparency and accountability have only just started

to materialize, while the impact in terms of improvements in the business environment and

strength of the financial sector (which would bring increased investment and creation of good

quality jobs) is lagging, mainly because of implementation delays.

49. The Constituent Assembly has focused until recently predominantly on the

Constitution and legislation related to the preparation of general elections and transitional

justice. It has therefore not discussed the laws which underpin the reforms originally envisaged

under the reform program, such as the new Investment Code, the Bankruptcy Law, the Law for

the establishment of the Asset Management Company (AMC) for the tourism debt, the revised

Competition Law and the Law on Public-Private Partnerships. However, the Government was

able to approve executive measures associated with some of the key reforms supported by the

DPL series in 2013 or early 2014, on its own authority.

50. In response to the political developments, the Bank is hereby proposing to adapt the

design of the DPL programmatic series to the evolving country situation. The Bank remains

fully committed to supporting the transition process in Tunisia. While the series was originally

intended to have only two operations of US$500 million each, it is hereby proposed to split the

second operation into two operations, thus increasing to three the total number of operations in

the series. The program supported by this second of three operations focuses on reforms that are

within the authority of the executive and do not require approval by the Constituent Assembly.

This will allow more time for the incoming technocratic Government to finalize the ongoing

preparation of the reform program which would be supported under a third and final DPL in the

series.

51. The development objective of this programmatic DPL series remains fully relevant

in the current context that is to help Tunisia complete its transition, while supporting the

establishment of policy foundations for a more competitive business environment, a

strengthened financial sector, more inclusive and accountable social services, and more

transparent public governance. In this context the programmatic DPL series continues to

support a program of measures that consolidate governance reforms introduced with the 2011

23

GO DPL, and expand the economic reforms supported with the GOJ-1 DPL. A core theme

across all reforms is to improve transparency and accountability and foster a level playing field

for economic activity. The reforms are expected to result in greater domestic investment and FDI

inflows, greater competitiveness and increased opportunities for private firms, improved

performance of the banking sector, more efficient public procurement processes and greater

transparency in the use of public funds.

52. As mentioned above, the GOJ-2 DPL operation has been prepared jointly with the

European Union (EU) and in close collaboration with the IMF and African Development Bank

(AfDB). Preparatory missions have been jointly conducted, even if some flexibility was needed

to respond to the difficult political environment of 2013. The Bank endeavors to continue to

play the leading role to help coordinate the work with budget support partners, to communicate

with the Government, evaluate the macroeconomic framework for this program and share

knowledge and best practices emerging from international experience.

53. Previous DPLs in Tunisia highlighted the substantial benefits of engaging other

development partners in the preparation of a joint budget support program, thereby

strengthening policy dialogue and fostering commitment by the Government to the

program. However, the challenges in the implementation of the reforms in 2013 have

complicated the coordination among partners. Yet a coordinated policy dialogue has been

undertaken during preparation of the GOJ-2 DPL, which has helped to maintain the

Government’s focus on the implementation of reforms in a politically fluid situation, while

allowing for flexibility in the response of the individual partners. In addition, the multi-sector

nature of DPLs has been effective to consolidate policy dialogue in the transition context,

provided the program remains highly focused and is accompanied by a strong analytical and

outreach effort to build support for the reforms. The experience of the 2011 GO DPL and 2012

GOJ-1 DPL reflects to a large extent the fact that these operations continuously facilitated a

process to consolidate and prioritize the policy dialogue, which brought together the various

ministries into a single dialogue with the main development partners. This feature will be

pursued in 2014 as partners have committed to support the completion of the transition around a

commonly agreed and realistic agenda that minimizes transaction costs for the Government.

54. The transition period provides a unique window of opportunity to introduce

reforms, which improve governance, transparency and accountability. However, such

context can also be volatile and brings about challenges as to the continuity and

implementation of reforms. Both the 2011 GO DPL and the 2012 GOJ-1 DPL showed that

there are significant reforms that can be introduced early on during the transition phase, if they

directly tackle some of the injustices and bottlenecks which have been a source of frustration for

the population. Notably reforms related to greater transparency, creating a level playing field,

facilitating job creation, and facilitating development in lagging regions are at the top of the

agenda. But the transition period also implies potential political instability and social tensions

which in turn tend to lower the willingness or capacity of the government and the administration

to design and implement difficult reforms. Donors have strived to provide the necessary

technical assistance to support the preparation of high quality reform proposals. Experience since

2011 has demonstrated the need to be selective on the reforms that can meaningfully and

realistically be implemented in such a period.

24

55. In a transition context such as the one prevailing in Tunisia, the slow

implementation of reforms constitutes a high risk to the success of the program. A related

lesson has also been that the policy dialogue needs to be sustained over various stages of the

reform, and beyond, into implementation. This finding holds true for the reforms supported by

the GOJ-1 DPL, where the implementation requires intensive monitoring and dialogue, before

even results can be seen on the ground. Consequently, the preparation of the GOJ-2 DPL has laid

a heavy emphasis on (i) discussing upfront implementation challenges and measures to address

them for the proposed prior actions, and (ii) reviewing the performance of GOJ-1 DPL-supported

reforms and agreeing on corrective actions required to improve or accelerate implementation as

needed. This has also inter alia led to the proposed split of the initially envisaged second and

last DPL operation into two operations.

4.2 PRIOR ACTIONS, RESULTS AND ANALYTICAL UNDERPINNINGS

56. The GOJ DPLs policy matrix and results framework presents the specific areas

supported by the programmatic series. The Policy Matrix of reforms supported by this DPL

series of three operations is presented in Annex 1. The proposed reforms supported by the DPL

series, and this GOJ-2 DPL operation in particular, are prominent among a larger program of

economic and democratic reforms supported by the EU in particular.

57. Implementation of the reform program supported in 2012 as part of the GOJ-1 DPL

has encountered delays, which the incoming Government has committed to correct. The

delays had arisen from the difficult socio-political context and also from weaknesses in the

coordination and prioritization of the economic governance reforms by the government. While

the overall commitment to reform has been repeatedly reaffirmed at the highest level of

Government, the electoral agenda will understandably remain a central priority. A brief update

of the progress in the implementation of the reforms supported by the GOJ-1 DPL is also

provided below.

58. The prior actions supported by the GOJ-2 DPL were selected based on (i) their

critical importance for achieving the objectives set forth by the Government; and (ii) the

capacity of the Government to move on them, based on its executive authority, while the

legislative branch had been focusing on reforms pertaining to the democratic transition

and the Constitutional process. As summarized in Box 3, the proposed GOJ-2 DPL supports

five prior actions that have been fulfilled by the Government prior to presentation to the Board.

The detailed prior actions supported by this operation and the expected results are discussed

below. Furthermore, the reform program supported by the GOJ-2 DPL is fully coherent with the

list of indicative triggers presented in the Program Document for the GOJ-1 DPL. All the

reforms are the subject of intensive policy dialogue with the authorities, and have benefitted

from continuous WBG technical support to ensure that they adhere to quality standards that will

allow them to produce the expected development outcomes in terms of economic and social

opportunities. The following sections also provide a detailed description of implementation

progress for GOJ-1 DPL prior actions, of the rationale and status of proposed GOJ-2 DPL prior

actions, as well as a summary of indicative triggers for the subsequent GOJ-3 DPL operation. As

was the case with the proposed operation, judgment will need to be exercised during the

preparation of the GOJ-3 DPL, if it emerges that, under the constraints of the political transition,

25

some of the results being sought would be best pursued by administrative rather than legislative

action.

Box 3. Summary of Prior Actions for the GOJ-1 DPL, Prior Actions for the GOJ-2 DPL and proposed Indicative

Triggers for the GOJ-3 DPL

Prior Actions for GOJ-1 DPL

(completed in 2012)

Indicative triggers as

presented in GOJ-1 DPL

Program Document

Proposed prior actions for

GOJ-2 DPL (completed in

2013-2014)

Indicative Triggers for

GOJ-3 DPL

Promoting private investment and establishing a more competitive environment

• The Government has launched

a systematic and participatory

regulatory review process of

business formalities to

streamline procedures, increase

transparency, and reduce the

room for arbitrary and

discretionary behavior by

public officials; and committing

to deliver concrete reforms

within 9 months, in the areas

related to private investment.

• The President of the National

Telecommunication Council

has issued a decision to open up

access to the landing stations of

international

telecommunications cables to

more operators (in addition to

Tunisie Telecom).

• The new Bankruptcy Law

has been published in the

National Gazette.

• The new Investment

Incentives Code has been

published in the National

Gazette.

• The revised Competition

Law has been published in

the National Gazette.

• The President of the INT

has approved a technical

and price offer by the main

holders of alternative fiber

optic backbone

infrastructure (SNCFT and

STEG) to lease capacity to

licensed operators on a

non-discriminatory and

cost-oriented basis.

• Prior action #1: The

President of INT has issued

and published on the INT

website, Decision No.

165/2013 dated November

15, 2013, to reduce the

access tariffs to the

submarine cables landing

stations by at least sixty (60)

percent with respect to the

offer approved by INT in

October 2012.

Status: Prior action met.

• Prior action #2: The

President of INT has issued

and published on the INT

website, Decisions No. 149

and 150, both dated June 13,

2013, approving technical

and price offers by the main

holders of alternative fiber

optic backbone infrastructure

(Société Nationale de

Chemins de Fer Tunisiens

(SNCFT), and Société

Tunisienne d’Eléctricité et de

Gaz (STEG)) to lease

capacity to licensed operators

on a non-discriminatory and

cost-oriented basis and to

provide connectivity across

borders.

Status: Prior action met.

• The Government has revised

the decree specifying the

schedule of obligations

(cahiers des charges) for

Mobile Virtual Network

Operators (MVNOs) and

granted licenses to [x]

MVNOs with international

gateway access

• The new Bankruptcy Law

(which merges the Chapter

IV of the Commerce Law

and the Law No. 95-34) has

been published in the

National Gazette.

• The new Investment Code

(which consists of a

complete revision of the Law

No. 93-120 and its

subsequent revisions) has

been published in the

National Gazette.

• The new Competition Law

(which revises Law No. 91-

64) has been published in the

National Gazette.

Restructuring the financial sector

• The Minister of Finance has

issued the call for Expression of

Interest to commission strategic

and financial audits of the three

public banks, namely the

Société Tunisienne de Banque

(STB), the Banque de l'Habitat

• The Law establishing an

Asset Management

Company to deal with the

debts in the tourism sector

has been published in the

National Gazette.

• The Minister of Finance

• Prior action #3: Decree No.

2013-4953 dated December

5, 2013, on the modalities of

management and governance

of the three publicly owned

banks (Société Tunisienne de

Banque, STB; Banque

• Based on the diagnosis provided

by the public banks full audit, the Government has issued an

Inter-ministerial Committee

decision on the restructuring of the three main public banks

(search for some strategic partners, merger, liquidation,

26

(BH), and the Banque

Nationale Agricole (BNA).

• The Governor of the Central

Bank has issued a Circular

outlining stricter prudential

regulation for the banking

sector, gradually moving

towards international best

practice.

has strengthened the

governance of public

banks by increasing the

independence of their

Boards and management

teams.

Nationale Agricole, BNA;

and Banque de l’Habitat,

BH), has been published in

the Official Gazette No.98,

dated December 10, 2013.

Status: Prior action met.

privatization, recapitalization…).

• The Law establishing an

Asset Management Company

to deal with the debts in the

tourism sector has been

published in the National

Gazette.

Improving the quality and accountability of social sector services

• The Government has

consolidated and streamlined

job insertion programs financed

by the National Employment

Fund and established a

monitoring and evaluation

framework to assess the impact

of employment programs on

beneficiaries’ labor market

outcomes.

• The Government has instituted

in the health sector an

autonomous auditing,

evaluation and accreditation

system of the quality of health

services using standards

harmonized with international

accreditation bodies.

• The Government has

established the National

Authority for the Evaluation,

Quality Assurance and

Accreditation of higher

education.

• Prior action #4: Decree No.

2013-3232 dated August 12,

2013, institutionalizing

participatory, independent

evaluation of service delivery

performance improvement

under the national

controller’s body, has been

published in the Official

Gazette No.67, dated August

20, 2013.

Status: Prior action met.

Increasing transparency and accountability in public policies and finance

• The Government has specified

the procedures for the

implementation of the 2011

Decree-Law on the right by the

public to gain access to

documents held by public

agencies.

• The Minister of Finance has

issued a Decision on the

publication of key information

on public finances, including a

Citizen’s budget and an online

open budget platform giving

citizen’s direct access to

detailed and timely public

expenditure data.

• The Government has

revised the Decree

defining the national

public procurement system

(implementing the key

recommendations of the

OECD/DAC review),

which has been published

in the National Gazette.

• Prior action #5: Decree No.

2014-1039 dated March 13,

2014, on the national public

procurement system, has

been published in the

Official Gazette No. 22,

dated March 18, 2014.

Status: Prior action met.

The Organic Law on Access

to Information has been

published in the National

Gazette.

27

FIRST POLICY AREA: Promoting private investment and establishing a more

competitive environment

Progress on GOJ-1 DPL prior actions:

59. The regulatory simplification process initiated in 2012 has picked up after

significant delays. The Government launched in August 2012 a systematic and participatory

regulatory review process of business formalities to streamline procedures, increase

transparency, and reduce the room for arbitrary and discretionary behavior by public officials, in

the areas related to private investment (Prior Action for the 2012 GOJ-1 DPL). The review was

intended to be carried out over a period of nine months, but progress has been initially slow,

before picking up towards the end of 2013. Eight of the nine ministries have completed the

inventory and self-assessment of 1,597 procedures (of which 801 have been recommended for

simplification and 98 for elimination). The Ministry of Finance (responsible for close to a third

of the procedures) has been identified as a pilot ministry for the implementation of the

simplification, and has submitted a detailed report on streamlining recommendations to the

COM. Out of the 446 procedures which have been inventoried, 346 procedures were

recommended for simplification, and another 30 for elimination, mainly in the customs and tax

administration. So far nine ministerial circulars and internal notes have been issued to simplify

27 procedures, covering such areas as cargo transport, customs, exports and VAT amongst

others. As part of the approved 2014 Budget Law, further four procedures related to the VAT

administration will be eliminated. A ministerial decree has also been issued, which stipulates that

the complete inventory of formalities would be posted online, including all the documents,

procedures and time limit required to obtain the concerned authorizations or clearances.22

The

decree also spells out appeal possibilities for citizens, an important step to ensure more

transparency in the administrative process thereby reducing discretionary practices. While these

reforms are promising, the number of reforms adopted remains significantly lower than expected.

The Government has committed to accelerate the pace of passing some of the remaining

recommendations in the short-term. Consultations with the private sector related to the 2012

decree on the simplification measures have started in early 2014, following the resolution of the

political stalemate. Overall, the Government and the Bank have agreed to focus the first wave of

regulatory reforms on the procedures with the biggest potential impact based on a set of criteria

related to frequency, burden and complexity, economic impact and strategic direction of the

country.

60. The increase in competition in the international telecommunications market has so

far only partially resulted in a reduction of prices. In order to strengthen competition in

international communications, in September 2012 the National Telecommunication Authority

(Instance Nationale des Télécommunications, INT) has issued a first Decision to open up access

to the landing stations of international telecommunications cables (controlled by Tunisie

Telecom) to other operators (Prior Action for the GOJ-1 DPL). By allowing more licensed

operators open access provisions on the landing a station, including co-location, this Decision

was meant to introduce competition in the international telecommunications market. The opening

of the landing stations represented an important decision in the overall telecommunications

22

See the following websites: www.finances.gov.tn, www.douane.gov.tn, www.impots.finances.gov.tn

28

regulatory framework, as it creates the conditions for an increased competition and reduction in

the price of international communications. Nevertheless, the reduction in the price of

telecommunications was initially only partial for outgoing calls, due to the high prices charged

by the national carrier to provide direct access to the submarine cables for international

telecommunications.

61. In order for consumers to reap the benefits of lower international

telecommunications prices, the Telecom Regulator intervened, imposing a reduction in

access rental prices to landing stations to align them to actual costs. Additionally, the

Government has approved a schedule of operations for Mobile Virtual Network Operators

("MVNO") with Voice over IP capability, and is considering the possibility of granting them

international gateway licenses to further increase competition in the international

telecommunications market.

Proposed GOJ-2 DPL prior actions and GOJ-3 DPL indicative triggers:

Prior action #1 for GOJ2-DPL on increasing competition in the market for international

communications: The President of INT has issued and published on the INT website,

Decision No. 165/2013 dated November 15, 2013, to reduce the access tariffs to the

submarine cables landing stations by at least sixty (60) percent with respect to the offer

approved by INT in October 2012.

62. Rationale: The international telecommunications and backbone markets had remained

characterized by uncompetitive pricing. Notably, the state controlled operator Tunisie Telecom

enjoyed until recently a de facto monopoly on international connectivity thanks to its exclusive

control over access to all international cables landing stations. As part of the reforms program,

the INT has decided to open up access to the landing stations to all three licensed operators

(Prior Action for the GOJ-1 DPL). This measure had only limited effects on the price of

international communications because of the high access charges, as discussed above.

63. Policy reform: In order to allow de facto direct access to the submarine cables for

international telecommunications, the National Telecommunication Authority (INT) has issued a

decision to reduce the tariffs charged by Tunisie Telecom to provide access to the submarine

cables landing stations by 60 percent with respect to the offer approved by INT in October 2012,

in line with actual costs, following the completion of a benchmarking and costing study. The

INT has committed to consider further reductions in the first semester of 2014, depending on the

market response.

Prior Action #2 for GOJ-2 DPL on increasing competition in the telecommunications sector

and improving access to the internet: The President of INT has issued and published on the

INT website Decisions No. 149 and 150, both dated June 13, 2013, approving technical

and price offers by the main holders of alternative fiber optic backbone infrastructure

(Société Nationale de Chemins de Fer Tunisiens, SNCFT, and Société Tunisienne

d’Eléctricité et de Gaz, STEG) to lease capacity to licensed operators on a non-

discriminatory and cost-oriented basis and to provide connectivity across borders.

29

64. In parallel to opening up the landing stations of submarine cables to improve competition

in the international telecommunications segment (Prior Action for the GOJ-1 DPL), the

Government has also been working to increase competition in the market for backbone

connectivity. The main bottleneck is that Tunisie Telecom has a dominant operator position in

domestic backbone connectivity. Substantial additional fiber optic infrastructure has been put in

place by various State Owned Enterprises (notably by STEG, SNCFT, and to a lesser extent also

Tunisie Autoroutes) but it is only used for their own corporate needs. Enabling these companies

to rent out access to their alternative backbone infrastructure is expected to introduce stronger

competition in the market, impacting the prices of domestic and international connectivity. It

would also increase significantly and cost-effectively the backbone network, in particular in

inland regions.

65. Policy Reform: To enable the use of alternative backbone infrastructure the INT has

approved technical and price offers by the two main holders of alternative fiber optic backbone

infrastructure (STEG and SNCFT) to lease capacity to licensed operators, to the Internet Service

Providers (ISPs) and to "private" networks (e.g. networks of schools, networks of private banks

etc.), on a non-discriminatory and cost-oriented basis.

66. The offers are technically good, and up to international standards. The wholesale access

price of STEG for access to their optical ground cables is much lower than the current prices of

Tunisie Telecom, which can stimulate the development of infrastructure in rural areas and

contribute to the growth recovery in lagging regions. The offer of SNCFT is also complete and

well developed, and commercial agreements between SNCFT and some operators are already

operational. STEG has yet to develop its commercial capacity to reach out to potential

customers. Tunisie Autoroute has not yet presented an offer, for technical reasons, but could do

so in the coming months. In the meantime, the vast majority of the fiber optic capacity held by

non-telecom operators in Tunisia will already be subject to market discipline and governed by a

transparent regulatory framework.

Indicative trigger #1 for GOJ-3 DPL on liberalizing the telecommunications sector: The

Government has revised the decree specifying the schedule of obligations (cahiers des charges)

for Mobile Virtual Network Operators (MVNOs) and granted licenses to [x] MVNOs with

international gateway access.

67. Rationale: This measure is expected to substantially increase competition in the

international market segment, and encourage substantial entry, similarly to the experiences in the

EU and Turkey.

68. Expected results: The price of international telecommunications is expected to drop by 50

percent over the next two years from close to 40 cents/minute in 2013 to 20 cents/minute by

2016. As a result, the volume of calls per capita should quadruple. The broadband capacity will

increase from 37.7 Gbps in 2011 to 220 Gbps at completion of the DPL series. These results will

increase the competitiveness of Tunisian companies benefiting SMEs and large companies alike,

and also increase the attractiveness of Tunisia as an offshoring destination. In addition, it is

expected that investment in backbone and international infrastructure will be stimulated. Finally,

network redundancy and network security will increase, reducing the possibility that physical

damage to a landing station will harm Tunisia’s access to the Internet.

30

Indicative Trigger #2 for GOJ-3 DPL on reforming Tunisia’s bankruptcy regime: The new

Bankruptcy Law (which merges the Chapter IV of the Commerce Law and the Law N° 95-34)

has been published in the National Gazette.

69. Rationale: High levels of NPLs compounded with political uncertainty and high bank

exposure implies that Tunisian businesses are generally experiencing financial distress and an

overall de-leveraging, and are unable to access additional credit to finance operations. Tunisia’s

bankruptcy framework is thus of critical importance in improving stakeholder recovery, reducing

creditor risk and facilitating asset disposal. As mentioned earlier, estimates suggest that Tunisian

NPLs accounted for close to 16 percent of total loans in 2013, with a particularly acute situation

in the tourism sector, where the NPL ratio is now exceeding 52 percent.

70. Tunisia currently has two laws dealing with restructuring and bankruptcy.23

Although

these laws provide a framework for dealing with distressed enterprises, they have resulted in a

fragmented and outdated bankruptcy regime, with duplicate and overly cumbersome processes

for both business rescue and business exit, leaving a marginal role for creditors. Some of the

primary problems in the current insolvency regime include: forcing all businesses to go through

judicial settlement (règlement judiciaire) proceedings, even if they are insolvent and the

additional time will only drain money from the estate; providing that the Commission de Suivi

des Entreprises (CSEE) plays a quasi-judicial role, which tends to hamper pre-insolvency rescue;

lacking any confidential out-of-court procedures, which makes debtor businesses reluctant to file

for amicable settlement; prescribing redundant procedures between the two laws thereby

extending delays; limiting creditor’s rights with a weak and ineffective process for voting on

restructuring plans in the règlement judiciaire; extending a priority rank to tax claims held by the

Treasury in the distribution of proceeds minimizing creditor recovery; and imposing heavy

penalties, even for non-criminal activities, increasing the stigma associated with bankruptcy.

71. Policy Reform: In order to improve debt recovery and thereby strengthen the credit

environment and improve confidence between debtors and creditors, the Government has

committed to modernize Tunisia’s bankruptcy regime to safeguard viable enterprises while

allowing non-viable businesses to exit the market. It is finalizing a new Bankruptcy Law for that

purpose (which merges the Chapter IV of the Commerce Law and the Law N° 95-34). Both

existing laws are to be consolidated into one text.

Indicative Trigger #3 for GOJ-3 DPL on the reform of the Investment Incentives Code: The

new Investment Code (which consists of a complete revision of the Law N° 93-120 of 27

December 1993 “Investment Incentives Code” and its subsequent revisions) has been published

in the Official Gazette.

72. Rationale: The current investment code developed in 1993, and its accompanying

incentives regime, which was amended multiple times throughout the years, has increasingly

become a barrier to the development of the Tunisian economy. The dichotomy in the current

investment incentives regime between on-shore and off-shore firms, combined with the complex

23

The current legislation includes Book IV of the Code de Commerce setting out the 1959 bankruptcy law, Du concordat

préventif et de la faillite, and Law no. 95-34 (modified in 2003), setting out the provisions on business rescue, Redressement des

Entreprises en Difficultés Economiques.

31

administrative regulations afflicting on-shore firms, have resulted in an increasingly segmented

economy, with very limited backward and forward linkages between exporting firms benefitting

from the preferential regime, and the rest of the economy. Further, off-shore investment has

largely been limited to assembly-type activities, characterized by high import content from the

EU, low value addition in the country, and generating few jobs for skilled labor (at a time when

the supply of graduates has been increasing rapidly). Export oriented investment has also largely

been targeting the coastal area, exacerbating the economic disparity between the coast and the

lagging regions of the interior.

73. Policy Reform: In response to these issues, the Government has revised the current

“Investment Incentives Code” and its subsequent amendments and drafted a new “Investment

Code” that intends to create a better framework for investment in Tunisia.24

The main

characteristics of the new Code should be the following:

Clearer rules to access the market;

Clear statement of investors’ rights and guarantees;

A revised fiscal and non-fiscal incentive regime;

A revised institutional framework for investment with the aim of improving the investor’s

experience, streamlining the different functions (regulation, policy-setting, promotion,

incentive provision, etc.) and mapping them to institutions that have a clear mandate and

governance structure.

Indicative trigger #4 for GOJ-3 DPL on improving the legal framework for competition: The

new Competition Law (which revises Law 91-64 of 29 July 1991) has been published in the

National Gazette.

74. Rationale: Despite relatively non-restrictive trade policies, an uneven playing field has

limited private sector participation and reduced economic opportunities for growth. Private

sector participation is restricted in key markets due to the presence of dominant legal monopolies

(e.g. marketing boards for cereals and oils; air and railroad transportation; and port operations;

water and electricity distribution; etc.), which also generate substantial budget expenditure in the

case of loss-making public monopolies. Administrative control of market prices and margins

goes beyond circumstances where market forces fail to set prices efficiently (e.g. from bread,

milk, edible oils and flour to coffee, tea, alcohol, fruits, meat, beer, etc.), discouraging increased

production and diversification into higher-value adding activities. Lack of competitive neutrality

between state-owned enterprises (SOEs) and private companies is translated into state aid and

subsidies such as capital injections and guarantees for SOEs in financial difficulty, which are

24 In August 2012, the Government signed a cooperation agreement with IFC to provide technical assistance to reform the

investment framework in Tunisia with an emphasis on the review of the Code (Phase I) and the simplification of procedures for

investment (Phase II of the project). The reform measures are led by the Ministry of Planning and International Cooperation, with

strong participation from the Ministry of Finance and the Ministry of Regional Development and Planning, and representation

from the Ministry of Justice. Multiple diagnostics have been conducted to help carry on the reforms, including a cost benefit

analysis to quantitatively evaluate the effectiveness of the existing incentive regime, and an investor motivation survey to help

better understand the current policy/regulatory constraints and motivation faced by established investors as well as investors who

decided not to invest in Tunisia.

32

granted through an ad-hoc process instead of clearly defined criteria and often offers recurrent

bailing out to loss-making SOEs, putting pressure on the state budget. Preferential treatment of

nationals in the regulatory framework prevents the development of open and contestable

markets. Restrictions on foreign capital participation and additional administrative requirements

limit competition and entry in many sectors.

75. Policy Reform: The Government has decided to amend the current competition

framework but also increase the effectiveness of competition policy implementation in key areas.

The modification of the Competition Law aims at reducing ad hoc discretionary decisions and

increasing competitive neutrality by: (i) minimizing/eliminating unjustified exemptions to the

application of competition framework; (ii) abolishing excessive discretionary powers to line

Minister(s); and (iii) increasing administrative efficiency in the enforcement by eliminating

duplicating mandates of the two institutions in charge of competition.

76. The new regime would also increase transparency and effectiveness of competition

enforcement by clarifying certain criteria for the implementation of the Competition Law to

prevent anticompetitive practices. Secondary implementation legislation to complement the Law

should focus on (i) defining the presumption of market dominance; (ii) limiting exemptions; (iii)

addressing abuse of economic dependence; and (iv) reviewing the regulation on predatory

pricing. In addition, there is a need to define guidelines to identify the most suitable criteria for

fines and penalties in order to provide appropriate incentives for punishment and deterrence of

anticompetitive practices, guarantee principles of equality and proportionality, foster

transparency, flexibility and predictability on the application of fines to businesses. The new

competitive environment would minimize distortive effects of price controls through a

progressive rationalization process.

77. Expected results: As a result of these measures, the following results are expected to be

achieved at completion of the programmatic DPL series: (a) increase in creditor returns by 7

percent; (b) US$30 million increase in attracted foreign investments; and (c) elimination of at

least three uncompetitive practices.

SECOND POLICY AREA: Restructuring the financial sector

Progress on GOJ-1 DPL prior actions:

78. Following a one-year delay, the selection process of the firms for the strategic and

financial audits of the three public banks was finally completed in August 2013 and two of

the three audits have been concluded. In August 2012, the Minister of Finance issued the call

for Expression of Interest to commission strategic and financial audits of the three public banks,

namely the Société Tunisienne de Banque (STB), the Banque de l'Habitat (BH), and the Banque

Nationale Agricole (BNA) (Prior Action for the GOJ-1 DPL). The selection process suffered

substantial delays, notably due to resistance to open up the tender to international firms and the

complexity of the request for tender. Two of the three audits have been completed at end 2013

(STB, BH), while the third one (BNA) is expected to be completed at the end of the second

quarter of 2014. In parallel, the Ministry of Finance and the Central Bank are preparing a

strategy for the restructuring of the three public banks, considering a wide range of options.

33

79. In June 2012, the Governor of the Central Bank issued a Circular, introducing

stricter prudential regulations for the banking sector, gradually moving towards

international best practice. The Circulaire 09-2012 imposes more stringent prudential ratios

on banks. An initial assessment of the adoption of the new solvency ratios suggests that six out

of 21 commercial banks currently do not meet the target for the minimum solvency ratio of 9

percent.

Proposed GOJ-2 DPL prior actions and GOJ-3 DPL indicative triggers:

Prior Action #3 on improving the governance of State Owned Banks: Decree No. 2013-4953

dated December 5, 2013, on the modalities of management and governance of the three

publicly owned banks (Société Tunisienne de Banque, STB; Banque Nationale Agricole,

BNA; and Banque de l’Habitat, BH), has been published in the Official Gazette No.98,

dated December 10, 2013.

80. Rationale: The three state-owned banks suffer from an unfavorable strategic positioning

and an operating environment. For several years, public banks have been following strategic

directions that are not sustainable over the long term. Leveraged to serve economic development

policies (agriculture, housing, hotels) and also sometimes used for easy access to finance for

cronies of the pre-revolutionary regime, the public banks must at the same time meet profitability

targets (as listed companies), be financially sound (to guarantee the safety of their depositors)

and be in compliance with the prudential norms of the Central Bank. In addition, as public

entities, these banks are subject to the Law 89-9 on the State Owned Enterprises, which imposes

on them significant bureaucratic constraints, notably on procurement rules and staffing policies.

81. These constraints weigh heavily on the financial and economic performance of SOBs.

The ambiguity of the strategy for SOBs is directly and indirectly responsible for most of the

financial difficulties they currently face:

• Insufficient capital base: The solvency ratios remain positive in public banks to the extent

that the Central Bank has kept lax prudential rules on classification of NPLs and

provisioning ratios. Public banks have greatly benefited from these rules and have

avoided the materialization of financial losses.

• Deterioration of the loan portfolio quality: Alongside the gradual tightening of prudential

norms by the Central Bank, it is expected that NPLs that are already nearly twice as high

as among private banks (18 percent against 10 percent) will continue to grow rapidly in

the next few months, resulting in new provisioning (and therefore deeper financial

difficulties) and a decrease in cash flow (and therefore additional pressure on liquidity).

• Steady loss of their market share vis-à-vis private banks: This share has decreased from

42 percent in 2007 to 36 percent today (despite the increased funding of public

enterprises by public banks since the revolution). It is expected that, other things being

equal, the loss of market share continues at a rate of 1 to 1.5 percent per year.

82. Policy Reform: The Minister of Finance has issued a Decree (making use of the article 22

of the Law 89-9) in order to: (i) exclude the three State Owned Banks from most of the

administrative burdens; (ii) clearly delineate the division of responsibilities between the banks’

managements, their boards of directors and the State as shareholder; and (iii) establish a

transparent and competitive process for the hiring of the future board members. The Government

34

has also committed to renew at least 50 percent of the State-appointed board members of the

SOBs within the coming six months. It further committed to revise the remuneration criteria for

the board members in order to attract the required competencies. Implementation circulars are

being finalized to this end.

Indicative Trigger #5 for GOJ-3 DPL on the restructuring of State Owned Banks: Based on

the diagnosis provided by the public banks full audit, the Government has issued an Inter-

ministerial Committee decision on the restructuring of the three main public banks (search for

some strategic partners, merger, liquidation, privatization, recapitalization, etc.).

83. Rationale: The 2012 FSAP report highlighted the weak performance of SOBs and noted

the significant recapitalization needs of the three main public banks, and also pointed out

governance failures in their management. In fact, public banks are weaker than the private

banks. The three largest public banks have an average solvency ratio of 9.7 percent, an average

official NPL ratio of about 19 percent, and an average provisioning ratio of less than 36 percent.

These figures are significantly worse than the comparable averages for the private banks. The

weak performance of SOBs in Tunisia results from several conflicts of interest with a State that

is the main shareholder of the public banks, and their main customer (through public enterprises

which borrow from and deposit into the banks), while it also sets overall financial sector policy

and regulates the banking sector (with the Central Bank of Tunisia). After the revolution, the

SOBs significantly increased their credit to the State and the SOEs (their market share on this

segment increased from 6.6 percent to 49.7 percent). The dual identity shareholder/customer of

the bank can give rise to conflicts of interest and explains, in part, the poor performance of the

State Owned Banks as well as the banking sector as a whole. Mindful of these ongoing problems,

the Ministry of Finance, in agreement with the Central Bank, has commissioned strategic and

financial audits of these banks.25

84. Policy Reform: Based on the first diagnosis provided by the full audits of public banks,

the Government will issue a decision on the strategic orientation for the restructuring of the three

commercial SOBs (search for some strategic partners, merger, liquidation, privatization,

recapitalization, etc.). This strategic orientation will aim at addressing four objectives: (i)

strengthening financial soundness of the SOBs, (ii) improving governance and management, (iii)

improving human and operational capacities, and (iv) strengthening competitiveness and

efficiency in financing the economy. The restructuring strategy will build on various issues

noted in the 2012 FSAP and address a variety of questions including: (i) the role of the State in

the banking sector; (ii) the mandate of the public banks; (iii) the review of various restructuring

options for each public bank; and (iv) the role of public banks to support access to finance. The

Ministry of Finance has asked the Bank to advise the Steering Committee recently established

for this purpose.

25 Recently, the STB required a bail out. In 2011, STB ran a deficit that prompted the Minister of Finance to recapitalize the

bank. The recapitalization of STB was scheduled to take place between June 2012 and June 2013 thanks to (i) a capital injection

and (ii) the conversion of a debt in a non-refundable endowment. The General Assembly held on 14 May 2012 approved a capital

increase of TND 160 million (including TND 110 million in June 2012 and TND 50 million in June 2013). The debt equity swap

amounted to TND 117 million. As a consequence, the solvency ratio of this bank temporarily increased from 7.6 percent in

December 2012 to 10.2 percent in June 2012. According to the BCT, the bank’s capital adequacy ratio would fall to 9.8 percent

in December 2012 due to additional losses.

35

85. Expected results: Implementation of restructuring strategies for the three state-owned

banks will be initiated under supervision of the Ministry of Finance. This measure is expected to

improve banking sector competition and access to finance in the long run.

Indicative trigger #6 for GOJ-3 DPL on resolving non-performing loans in the tourism sector:

The Law establishing an Asset Management Company to deal with the debts in the tourism

sector has been published in the National Gazette.

86. Rationale: The tourism sector in Tunisia has been suffering from many structural

weaknesses that hampered its growth over the last 15 years, chief among these: (i) inappropriate

governance in the sector; (ii) a failure in financial sector governance (see above); and (iii) a poor

bankruptcy regime. The combination of these weaknesses translated into a steady increase of the

banking sector loans to the tourism sector along with a significant increase of non-performing

loans. This resulted in: (i) a negative impact on the profitability and the solvency of most of the

banks (and in particular STB, which is the largest State Owned Bank); and (ii) a credit crunch to

the tourism sector, as the banking sector has become very reluctant to extend any new credits to

the tourism sector.

87. In addition to creating a problem for banks, the situation is crippling the tourism sector as

uncompetitive hotels have remained afloat and practice unfair pricing. The sharp downturn in the

tourism sector in 2011, which saw a 33 percent drop in revenues, has compounded the situation.

Since tourism sector debt represents the largest percentage of non-performing loans (25.2

percent) on the balance sheet of the banking sector, its resolution will play a critical role in

strengthening the stability of the banking sector.

88. Policy Reform: In order to address the debt issue, the Government decided in August

2012 to adopt a Law to establish an asset management company (AMC) to deal with the debts in

the tourism sector. The purpose of this AMC will be: (i) to acquire problem loans directly to the

banks; and (ii) to implement restructuring schemes to individual loans. Individual rescue plans

would take the form of a change in use (for such purposes as hospitals, schools, social housing

units and offices) and/or financial/physical restructuring of a number of hotel units. The

restructured hotels would be sold, if necessary, to local or foreign hotel industry professionals.

89. Expected results: As a result of this measure, at least 15 percent of the problem loans in

the tourism sector will be transferred to the AMC at completion of the DPL series.

THIRD POLICY AREA: Improving the quality and accountability of social sector services

Progress on GOJ-1 DPL prior actions:

90. Only limited progress has been made in the operationalization of the reform of job

insertion subsidies. In September 2012, the Government approved a Decree to consolidate and

streamline job insertion programs financed by the National Employment Fund (Prior Action for

the GOJ-1 DPL) and established a monitoring and evaluation framework to assess the impact of

employment programs on beneficiaries’ labor market outcomes. The reform aimed at improving

36

the effectiveness of active labor market programs (ALMPs26

) by consolidating the existing five

programs into two streamlined programs supporting training and first-time employment of job-

seekers, and establishing a more robust monitoring and evaluation system. In parallel, existing

ALMPs would continue to exist until the roll-out of the new programs in early 2015. A pilot of

the first program (training voucher) is now scheduled to be implemented in 2014 for a 12-month

period. The main challenge faced by the Government is to mobilize (prospective) employers to

participate in the scheme. The operationalization of a second scheme, the wage voucher, is

lagging as a detailed procedure manual setting eligibility criteria is being worked out.

91. In contrast, the establishment of a functioning national health sector accreditation

agency is well under way and its assessment program will be launched in the first semester

of 2014. In 2012, the Government instituted in the health sector an autonomous auditing,

evaluation and accreditation system of the quality of health services using standards harmonized

with international accreditation bodies (Prior Action for the GOJ-1 DPL). The reform aims at

promoting better governance, quality enhancement and exports of medical services, in the public

as well as in the private sectors. A roadmap for a five-year implementation process was validated

in October 2012 following the decree prepared with technical assistance by the Bank. After

initial delays, the management of the responsible institution, INAS (Instance nationale

d’accréditation de la santé) has been appointed and the offices have been staffed, and it has

received an operational budget so that INAS can now be considered fully operational. A three-

year implementation plan has been approved and INAS includes a wide array of stakeholders,

including the private sector and civil society.

92. The operationalization of the education sector accreditation agency is, on the other

hand, lagging behind. In August 2012, the Government also established the National Authority

for the Evaluation, Quality Assurance and Accreditation of higher education (Prior Action for

the GOJ-1 DPL). The establishment of the INEAQA (Autorité nationale pour l'évaluation,

l'assurance qualité et l'accréditation) has been delayed significantly, however, partly due to a

slow decision making process about the governance of the accreditation authority. The

management of the Agency was appointed in July 2013 and offices have been identified, such

that the Agency will be operational in the first half of 2014, making it possible to achieve the

accreditation of 40 programs and three higher education institutions by end 2014.

Proposed GOJ-2 DPL prior actions:

Prior Action #4 on institutionalizing social accountability mechanisms: Decree No. 2013-3232

dated August 12, 2013, institutionalizing participatory, independent evaluation of service

delivery performance improvement under the national controller’s body, has been

published in the Official Gazette No.67, dated August 20, 2013.

93. Rationale: In 2011, the Interim Government launched reforms aimed at improving

accountability in public service delivery, including by adopting participatory approaches to

involving civil society in monitoring service delivery and improving transparency of information

on public sector performance. A key reform supported was the introduction of participatory

26 Active Labor Market Policies (ALMPs) are defined here as public programs to help unemployed workers find a job.

37

monitoring of public service delivery performance by third parties (Prior Action for the 2011 GO

DPL). This reform emphasized initial implementation in the social sectors given they make up

for over 60 percent of public expenditure but are fraught with inequities in access. This reform

was supported simultaneously with two additional reforms, including: (i) the revision of the Law

of Associations to remove discretion in the registration procedures; and (ii) the adoption of a

Decree-Law giving the public the right to access information held by public bodies, including

economic and social data. Efforts to strengthen accountability in social services were reinforced

by measures on the supply-side in 2012, through the above mentioned reforms that created

accreditation agencies for health and higher education.

94. As a result of the participatory monitoring reform, the Government and civil society

organizations started to launch participatory monitoring at a national and local level,

respectively. The approach allows systematic monitoring of the performance of the public

services and the joint development of recommendations and reforms through tripartite

assessments involving civil society, citizens and local service providers. The first national

scorecard launched by the Prime Ministry ("baromètre de qualité et de gouvernance des services

publics") sought public feedback on over ten public services during April 19 to May 4, 2012.

Approximately 8,500 citizens provided feedback and results were published online

(http://www.consultations-publiques.tn). A second national scorecard on services from the

National Health Insurance Fund was launched in 2012. However, as of end 2013 participatory

monitoring with involvement of civil society and roll-out at the local level remains limited, in

part due to a lack of clear institutional linkages between participatory monitoring and budgeting

and policy formulation.

95. Policy Reform: The Government has adopted a Decree to institutionalize the mechanisms

for participatory evaluation of public service performance improvement, as overseen by the

National Controllers Body for Public Services (Contrôle Général des Services Publics, CGSP) in

coordination with the Prime Ministry’s Department of Public Administration Reforms (Direction

Générale de la Reforme Administrative, DGRA) and concerned line ministries.

96. Specifically, the measure broadens the mandate of the CGSP to include participatory

monitoring in coordination with the DGRA and civil society systematically, jointly producing

options for reforms. The Decree includes four components of the reform: (i) the introduction of

participatory audits as part of the mandate of the CGSP to be overseen by a joint Government-

civil society coordinating committee; (ii) the adoption of international standards for participatory

monitoring; (iii) the stipulation that all evaluations be published for reinforcing access to

information and accountability; and (iv) the clear emphasis on neutrality, objectivity and

transparency of the CGSP’s mission.

97. Expected results: Institutionalizing participatory evaluation of performance improvement

will help strengthen mechanisms for holding service delivery providers accountable. It will

increase transparency of the strengths and weaknesses in service delivery and directly hold

providers accountable for showing improvement of services by routine monitoring of progress.

Enhancing transparency and participation of civil society in monitoring and reforms is expected

to have a positive impact on social accountability and public resource management in general. It

is expected that by December 2014 performance indicators for key sectors will have been

published by 24 governorates on an annual basis.

38

FOURTH POLICY AREA: Increasing transparency and accountability in public policies

and finance

Progress on GOJ-1 DPL prior actions:

98. Citizens are beginning to gain better access to information held by the

administration. In May 2012, the Government spelled out the procedures for the

implementation of the June 2011 Decree-Law on the right of the public to gain access to

documents held by government agencies. Progress was made during 2013, with the online

publication of information in the areas of statistics and budgetary management. In addition, in

line with the sequencing envisaged since the onset of this reform, the Government has prepared a

new organic law that creates an independent authority for access to information and strengthens

the legal reach and sustainability of the reform. A draft organic law is currently undergoing

public consultations.

99. Similarly, access to information on public finances is improving. In September 2012,

the Minister of Finance issued a Decision on the publication of key information on public

finances, including a Citizen’s budget and an online open budget platform giving citizen’s direct

access to detailed and timely public expenditure data. The Ministry of Finance has been

championing open access to information. Most of the documents and data previously identified

for open access are now available on the Ministry’s website. Delays are generally identified in

the production and validation of the documents themselves. A new version of the Ministry’s

website soon to be deployed will further increase volume of accessible information, and the

visibility of this policy.

Proposed GOJ-2 DPL prior actions and GOJ-3 DPL indicative triggers:

Prior Action #5 on improving the national public procurement system: Decree No. 2014-1039

dated March 13, 2014, on the national public procurement system, has been published in

the Official Gazette No. 22, dated March 18, 2014.

100. Rationale: Despite some improvements adopted in the aftermath of the revolution, the

Tunisian procurement system remains too slow, bureaucratic and unnecessarily procedural,

lacking transparency and accountability, and it is still characterized by an excessive number of

prior reviews and clearances and too much centralization, resulting in significant contract award

bottlenecks and delays (over one year in some cases). This was evidenced by the slow

implementation of the Government fiscal stimulus public investment plan in 2011 and 2012. In

addition, the procurement system has failed, especially before the revolution, to prevent political

interference and high level corruption.

101. In 2011, the Interim Government started to revise the legal framework for public

procurement to improve the efficiency and transparency of procurement procedures and to

shorten the decision process without compromising quality (Prior Action for 2011 GO DPL). In

June 2012, the Government again adjusted the public procurement Decree and regulations to

further simplify the rules for public procurement for urgent public investment projects. These

adjustments were limited in nature, pending a more structural reform of the entire system. In fact,

39

in parallel with the initial reforms above, the Government carried out in 2012 a holistic self-

evaluation of its procurement system using the OECD-DAC methodology and prepared a

detailed action plan.27 This self-assessment led to a detailed Action Plan which was endorsed by

the Council of Ministers in August 2012. This diagnosis and Action Plan were prepared with

technical assistance from the World Bank. Subsequent support, including to the drafting of the

new public procurement decree has been provided through a grant from the Institutional

Development Fund (IDF), which will continue to further support the reform process and address

capacity constraints related to the implementation of the decree.

102. Policy reform: Based on the Action Plan mentioned above, the Government has

developed and approved a new public procurement decree, aiming at:

Improving the legal and regulatory framework, by including provisions that promote

transparency of procedures, assign and define institutional responsibilities among the public

actors involved at all stages of the procurement process in Tunisia.

Strengthening public procurement activities and market practices through: (i) introduction of

modern electronic procurement methods for goods; and (ii) the introduction of more

transparency and of the mechanisms for resolution of disputes or complaints between public

administrations and bidders, with a reference to arbitration (however, it remains a challenge

that arbitration is also governed by other legal texts that need to be updated).

Electronic publishing of procurement processes, from advertising to award that will

contribute to the transparency of the entire process.

103. Expected results: The reform is meant to tackle structural problems facing the

procurement system (bureaucratic, slow, excessively centralized institutional set-up and

procedures characterized by bottlenecks, and too many layers of redundant prior reviews and ex-

ante controls). Average duration of the contract award process is expected to be reduced from

200 days in 2012 to 140 days at completion of the DPL series. It will have a direct beneficial

effect on the economy by ensuring that public procurement is conducted with due attention to

economy and efficiency and value for money; instead of 18 months to trickle down to the field,

any economic stimulus through public investment should have a quicker impact. The Decree lays

the foundation to establish a clear legal, institutional and regulatory framework: (i) defining

competencies limits; (ii) managed by knowledgeable and motivated staff in a decision enabling

environment with clear accountability; (iii) provided with efficient appropriate tools and

procedures, including electronic modern tools and procedures through e-procurement; (iv)

leading to more economic provision of public services, goods and works, accurately responding

to the public needs and shorter procurement award process; (v) ensuring efficient and timely

treatment of complaints cases or disputes, thus building private sector trust and increased

competition potentially leading to better prices; and, (vi) enabling increased transparency and

fight against corruption.

104. More efficient use of public investments and transparent purchase of public services are

expected to limit corruption or cronyism, and allow public funds to be allocated more rapidly and

27 This self-assessment was conducted with the support of World Bank and the African Development Bank.

40

effectively. This will also meet the strong demand of the population for a visible change in

practices to be perceived as contributing to more social justice. Civil society has expressed

vocally the aspiration to see a stop to the corrupt practices of the former regime and have greater

transparency via access to procurement information on the use of public funds. For such impact

to materialize the implementation of the Decree will be essential and related challenges should

not be underestimated, including difficulties to adapt to the new system within the

administration. The Bank will support change management and communication processes to

facilitate an effective implementation of the reform.

Indicative trigger #7 for GOJ-3 on access to information: The Organic Law on Access to

Information has been published in the National Gazette.

105. Policy reform: In order to further enshrine access to information, the Government

prepared a draft organic law on access to information, aimed at (i) consolidating and elevating

the provisions from the initial decree-law; (ii) overriding contrary provisions remaining in the

country’s legal and administrative framework; and (iii) introducing the legal basis and key

organizational principles for an information commission. This draft organic law has been

finalized and submitted for online consultations.

106. Expected results: It is expected that requests for information receiving a reply will have

increased by at least 50 percent following the adoption of the organic law on Access to

Information, up from the 80 received in the first semester of 2013.

Analytical Underpinnings

107. The proposed reform program builds on existing analytical studies as well as on the

extensive work undertaken as part of the Tunisia Development Policy Review (DPR) since

2012. A detailed summary of relevant analytical studies and technical assistance reports was

presented in the Program Document for the GOJ-1 DPL, which is also relevant for this operation

and not repeated here. The recent DPR report provides the analytical underpinning for most of

the reforms program supported by this series. It argues that the Tunisian economy failed to

generate sufficient good quality jobs because it is burdened by a system of rents and privileges

that thrives on the pervasive web of regulations and restrictions introduced with the

interventionist economic policies since independence. These policies served Tunisia well until

the 1980s but have now resulted in a system which stifles competition and protects privileged

firms, obstructing the development of a dynamic economic environment. Further, this economic

context leads to highly inequitable outcomes - as the current institutional infrastructure creates an

‘insider-outsider’ culture - and this inequality of opportunity is at the core of the social tensions

which triggered the 2011 revolution. On this basis the report recommends actions to remove

rents, increase competition, simplify the regulatory system, and open up the economy to bring

opportunity to all Tunisians. In addition, as discussed in the Program Document for the GOJ-1

DPL, the Bank-Fund 2012 Tunisia Financial Sector Assessment Program (FSAP) and the 2012

Tunisia Procurement System Self-Assessment using the OECD/DAC methodology also provide

analytical underpinnings to the reforms supported by this proposed operation.

41

Prior Actions Analytical underpinnings:

First Policy Area: Promoting private investment and establishing a more competitive

environment

Prior action #1: The President of INT has issued and

published on the INT website, Decision No.

165/2013 dated November 15, 2013, to reduce the

access tariffs to the submarine cables landing stations

by at least sixty (60) percent with respect to the offer

approved by INT in October 2012.

Prior action #2: The President of INT has issued and

published on the INT website, Decisions No. 149 and

150, both dated June 13, 2013, approving technical

and price offers by the main holders of alternative

fiber optic backbone infrastructure (Société Nationale

de Chemins de Fer Tunisiens (SNCFT), and Société

Tunisienne d’Eléctricité et de Gaz (STEG)) to lease

capacity to licensed operators on a non-

discriminatory and cost-oriented basis and to provide

connectivity across borders.

Draft Development Policy Review (forthcoming)

Mimeo: “ TUNISIE: Comment déverrouiller le

potentiel du développement des TIC pour répondre

aux impératifs de la compétitivité axée sur

l'innovation », (July 2012).

Broadband Networks in the Middle East and North

Africa – Accelerating High-Speed Internet Access, The

World Bank, 2014

Second Policy Area: Restructuring the financial sector

Prior action #3: Decree No. 2013-4953 dated

December 5, 2013, on the modalities of management

and governance of the three publicly owned banks

(Société Tunisienne de Banque, STB; Banque

Nationale Agricole, BNA; and Banque de l’Habitat,

BH), has been published in the Official Gazette

No.98, dated December 10, 2013.

Aide Mémoire on the identification of the major

corporate governance constrains preventing State

Owned Banks’ boards and management from working

efficiently (April 2011).

Aide Mémoire on State Owned Entities Governance in

Tunisia (July 2013).

Aide Mémoire on measures to be adopted in order to

reform the governance of the State Owned Banks’

(August 2013)

Mimeo on the Governance of State-owned Enterprises

(July 2013)

Third Policy Area: Improving the quality and accountability of social sector services

Prior action #4: Decree No. 2013-3232 dated August

12, 2013, institutionalizing participatory, independent

evaluation of service delivery performance

improvement under the national controller’s body,

has been published in the Official Gazette No.67,

dated August 20, 2013.

Tunisia Public Service Quality and Governance

Survey (Mimeo, July 2012)

Consolidation and Transparency: Transforming

Tunisia’s Health Care for the Poor (January 2013)

Tunisia Social Insurance Report (Mimeo, July 2012)

Benchmarking University Governance Study (2012)

Energy Subsidy and Social Protection Reform

Assessment (Mimeo, 2013)

Fourth Policy Area: Increasing transparency and accountability in public policies and

finance Prior action #5: Decree No. 2014-1039 dated March

13, 2014, on the national public procurement system,

has been published in the Official Gazette No. 22,

dated March 18, 2014.

Rapport final sur l’évaluation du système national de

passation des marchés publics en Tunisie (Juillet

2012)

42

4.3 LINK TO THE INTERIM STRATEGY NOTE AND OTHER BANK OPERATIONS

108. The World Bank Group's engagement in Tunisia grew significantly since the

January 2011 revolution. In the course of the past decade, demand for the Bank financing was

gradually declining as Tunisia had achieved investment grade status and was able to access

capital markets. Following the 2007/8 global economic crisis, however, Bank lending to Tunisia

sharply increased from US$6 million in FY08 to US$336 million in FY09. The January 2011

revolution triggered a further need for Bank involvement as the first interim Government reached

out to the WBG seeking advice on how to set in motion key reforms to "break away from the

past", with the aim to take advantage of the WBG's solid knowledge base, financing and

convening power to leverage additional donor financing to quickly respond to the population's

aspirations. This process resulted in reaching agreement among the Government and other key

donors (EU, AfDB, and France), on a set of reform measures that promoted governance,

transparency, accountability that also comprised a forward looking element of promoting reforms

conducive for private sector interest and investment. The Bank-financed US$500 million, single

tranche multi-sector Governance and Opportunity Development Policy Loan (GO DPL)

mentioned earlier leveraged another US$800 million of donor financing in support of the

Government's post revolution reform program. The Bank commitments in FY11 reached a record

US$590 million. In FY12, another Development Policy Loan, i.e. the first in the current

programmatic series, amounting to US$500 million (GOJ-1 DPL) was approved by the Bank's

Board of Directors.

109. The WBG program set out in an Interim Strategy Note (ISN) for FY13-14 is tailored

to Tunisia's post revolution context to help contribute to the Government's short and

medium-term employment creation objective with a focus on openness, opportunity and

accountability. The program aims at promoting private sector-led recovery and job creation

with large focus on the transparency and accountability angle. The WBG program is framed

around three areas of engagement: (i) laying the foundations for Renewed Sustainable Growth

and Job Creation; (ii) Promoting Social and Economic Inclusion; and (iii) Strengthening

Governance: Voice, Transparency and Accountability. The 2011 revolution also provided a

great opportunity for the World Bank Group to strengthen the Bank/IFC collaboration to achieve

the ISN objective of private sector-led growth. IBRD and IFC colleagues have joined forces to

provide technical advice to key reforms supported by the proposed operation as well as the two

prior operations to support Tunisia's post revolution reforms in areas such as investment code

development, tourism debt restructuring, and education for employment.

110. Three investment operations are expected to be presented for Board consideration

in FY14: Competitiveness and Export Development Project (US$50 million), Urban

Development and Local Governance Program for Results (US$300 million); and an additional

financing of US$100 million to the ongoing Micro, Small and Medium Enterprise Development

project.

111. The GOJ DPL programmatic series aims to help Tunisia meet its financing needs

while implementing its economic reform program. The proposed GOJ-2 DPL is the second

operation in the programmatic DPL series started in November 2012. The reform program

supported by this series focuses on measures to bolster competitiveness, promote exports and

43

create employment, as well as to further strengthen governance, the transparent and effective

delivery of public services, and transparency and accountability mechanisms.

4.4 CONSULTATIONS AND COLLABORATION WITH DEVELOPMENT PARTNERS

112. The Government had consulted broadly on the reform program supported by the

programmatic DPL series, which has been published online for public comments. The main

areas of reform are explicitly referred to in the Government’s 2012-2013 programs, which was

presented at the National Assembly in April 2012, and published online on the government

internet portal in May 2012 (http://www.pag2012.gov.tn). In addition, in September 2012, the

Government published online the detailed reform program supported by the development

partners. In light of the volatile political climate prevailing in 2013, however, the Government

has further consulted on the specific measures supported by the DPL in a public hearing in

October 2013. The consultation which included participants from public sector, civil society and

the private sector resulted in agreement on the proposed measures. Participants further

emphasized the overall need for administrative simplification throughout the reforms being

supported (public procurement, investment code, etc.).

113. In addition, the Bank has also undertaken consultations with key civil society

organizations. These consultations confirmed that the content of the program enjoys broad

support and there was no major dissenting voice as regards the specific prior actions of the

proposed DPL. The policy areas targeted by the DPL series are widely seen as critical for

Tunisia’s economic transition. Several organizations also emphasized the need to support

regional development and to tackle the perceived growth in the informal economy as future areas

of priority. Most organizations acknowledged the importance of Bank leadership as the

economic and political transition goes forward amidst a challenging macroeconomic

environment.

114. The Bank continues to have excellent collaboration with the European Union (EU),

the African Development Bank (AfDB), as well as United Nation Agencies and other

bilateral partners such as the French Development Agency (AFD) and the Japanese

International Cooperation Agency (JICA), all of whom have a strong local presence in

Tunisia. Relationships existed prior to the revolution and consisted mainly in parallel financing

or co-financing of investment projects (with AfDB and AFD) and budget support (with AfDB

and the EU). They intensified after the revolution with the joint preparation of the GO DPL in

2011 and the GOJ-1 DPL in 2012, with coordinated missions and intense cooperation during

discussions with the Government. In fact, the World Bank team also expanded to fully benefit

from IFC expertise. In 2013, the deceleration in the pace of reforms coupled with the political

turmoil has led to a loosening of the coordinated approach among the budget support partners

(World Bank, AfDB and EU), but efforts are being undertaken to re-intensify the partnership in

the context of the preparation of the proposed DPL.28 Building on the successful experience of

28 The AfDB is facing constraints related to the exposure towards some borrowers of its non-concessional window, including

Tunisia. The EU, in the context of the ongoing political tensions prevailing in Tunisia, has scaled down its initially proposed support and is shifting the instrument to the ‘State-building Contract’, which conditions focus mainly on political governance

measures.

44

2011 and 2012, therefore, the proposed operation has been jointly prepared by the World Bank

Group and the EU with close cooperation from the AfDB and the IMF.

116. The relations with the IMF are also excellent. Prior to 2013, the Fund had been

undertaking one Article IV mission every year and provided technical assistance, notably to the

Central Bank on monetary policy issues. Since December 2012, the Government has started to

work more closely with the IMF to set up a two-year SBA program approved in June 2013. Since

early 2013 the IMF also has a resident senior economist based in Tunisia. The Bank and the

Fund have collaborated very closely during the preparation of this programmatic DPL series

since its inception, notably closely coordinating support to the authorities in the financial sector

reforms. Collaboration was also very close during the preparation of the Fund SBA, to ensure the

complementarity of both programs. The IMF program concentrates on macroeconomic

stabilization, fiscal and external resources buffer restoration, including tax reform and energy

subsidies reform and foreign exchange policy, as well as financial sector stabilization and

restructuring, and supporting reforms to improve the investment climate.

5. OTHER DESIGN AND APPRAISAL ISSUES

5.1 POVERTY AND SOCIAL IMPACT

117. The poverty and social impacts of the policies supported by the GOJ-2 DPL are

expected to be positive. Many groups of stakeholders are likely to benefit from the policy

measures supported by this program through several channels, in particular related to growth,

investment and financial stabilization, which in turn should improve job creation prospects, in

quantity and quality.

118. In addition to the direct benefits in terms of consumer welfare arising from the

reduction in the price of international telecommunications, the reform on international

telecommunications and extension of the fiber optic backbone infrastructure will improve

the competitiveness of Tunisian companies, benefiting SMEs and large companies alike across

the country, and also significantly increase the attractiveness of Tunisia as an offshoring

destination. ICT companies employ a larger share of women than many other sectors. Regional

decentralization of private businesses—such as Business Process Outsourcing (BPO) providers

and call centers—is likely to disproportionately benefit female employment. Women in Tunisia

are less mobile than men in terms of work, and among tertiary graduates unemployment rates are

significantly higher for women in remote regions of the country. Increased fiber optic backbone

infrastructure and capacity will benefit in particular the inland regions, thus enabling those

regions to take advantage of economic opportunities.

119. The measures on improving governance of public banks and preparing a

restructuring strategy for public banks are not expected to have any negative poverty and

social impact. On the contrary over the medium term it will allow public banks to become more

efficient and all banking actors to benefit from the same equal set of rules. A more efficient

banking sector is expected to lead to increased financing for the economy and thereby contribute

to improve Tunisia’s economic performance.

45

120. The measure to institutionalize participatory, independent monitoring of public

service delivery performance is expected to have a positive poverty impact. In particular, the

measure focuses on strengthening social accountability for service delivery improvement in

health, social and employment services, which will have a particularly high impact in the poorer

regions. Monitoring improvements in critical health services will help ensure greater

accountability in addressing high maternal mortality in Tunisia’s poorer, western governorates.

Similarly, independent and routine evaluations of improvement in access to social assistance

such as cash transfers will also more rapidly identify vulnerable groups that may be at risk. By

institutionalizing social accountability for performance improvement through one of Tunisia’s

supreme audit institution, a greater likelihood of holding public service providers to account for

improving access to services notably among the poor is therefore expected.

121. The measure on procurement is expected to have positive poverty impact. An

improved procurement system will help increase the efficiency of the Government’s fiscal

stimulus to support growth and will accelerate the implementation of public investment projects,

especially in lagging regions, with positive effects on investment and employment generation. A

large part of these projects are effectively labor intensive and require low or unskilled labor,

which still constitute the largest number of unemployed.

122. In sum, the specific policies supported by this GOJ-2 DPL are not expected to have

negative distributional and social impacts. Positive impacts are likely expected as a result of

increased citizen voice in the management of public services and improved competition and

investment environment, which will create the conditions for firms’ growth and jobs creation.

This will benefit especially young unemployed and women, who are the most impacted by

current market distortions.

123. The Bank’s Development Policy Review has highlighted the impact of poor

governance and rent seeking on economic growth and shared prosperity. Reforms

supported by the GOJ DPL series have therefore been particularly scrutinized from this

perspective. The reforms supported directly target legal, regulatory or administrative loopholes

that have been the source of cronyism. For instance, the reform on the governance of public bank

precisely aims at introducing transparent selection criteria for Board members based on sole

professional competence. Similarly, the measure on participatory evaluations promotes

engagement of the emerging and increasingly vibrant civil society in the assessment of the

effectiveness of public services. The procurement code introduces transparency requirements to

deter discretionary behavior in the awarding of public contracts. The telecommunication

measures frontally address rent extraction by dominant market players. In the case of past

reforms establishing new institutions that could be principally subject to cronyism, governance

safeguards have been introduced for instance related to the multi-stakeholder composition of

oversight boards (e.g. of the higher education and health service accreditation agencies supported

by GOJ-1 DPL).

5.2 ENVIRONMENTAL ASPECTS

124. The institutional and policy framework for environment is generally strong and well

defined in Tunisia. The Ministry of Environment and Sustainable Development is the key

player in defining and implementing environmental policies and strategies. An annual report on

46

the state of the environment is published yearly and action plans to address various

environmental issues (incl. water, solid waste, biodiversity, natural resources, urban planning,

etc.) are being implemented. Regarding water quality management, Tunisia continues its efforts

for the establishment of a water quality monitoring network covering both surface and ground

water. In parallel, the Government initiated a new program to improve the environmental

performance of wastewater treatment facilities. The national program on the reuse of treated

wastewater, which is also among the priority of the new five-year development plan, has been

launched and several development and financial institutions are expected to join efforts with the

Government for its implementation. The Bank is working to help the Government to develop

and implement appropriate policies in the areas of natural resources, environment and adaptation

to climate change.

125. Tunisia has a well-established Environmental Impact Assessment (EIA) system. In

2007 it has been selected to pilot the use of country system (UCS) in the solid waste sector. As a

result of the successful implementation of this pilot, it has been decided to extend the scope of

the use of the country system at the national level. All activities that may result in a significant

impact on the environment are subject to an Environmental Impact Assessment, which has to

precede the issuing of licenses and investment activity.

126. The reforms supported in this GOJ-2 DPL operation are not expected to have any

positive or negative effects on the environment, forest and other natural resources. The

DPL supports policy actions that by themselves do not have an environmental impact.

5.3 PFM, DISBURSEMENT AND AUDITING ASPECTS

127. The Public Finance Management system, together with the Government’s

commitment and plans to reform, are adequate to support this operation. Public finance

management in Tunisia is generally regarded as sound, transparent and well organized. The

Tunisian system is based on the principle of segregation of responsibilities and separation of the

roles between the payment authorizer (ordonnateur) and public accountant, and on the principles

governing ex ante expenditure control and internal and external audits. The main weakness of the

public financial management system was the lack of transparency and consultation in the

process, notably in the preparation of the budget. Prior actions included in the 2012 GOJ-1 DPL

supported reforms to help address these issues.

128. The 2010 Public Expenditure and Financial Accountability assessment (PEFA) and

IMF PFM Technical Assistance in 2013 concluded that the legal and administrative

framework for public financial management is sound and offers a solid level of assurance

regarding the reliability of information and a strong control environment; however, the

report also identified transparency and accountability weaknesses. The most recent PFM

diagnostic reports confirmed that the PFM system supports the achievement of aggregate fiscal

discipline, strategic allocation of resources and efficient service delivery. On the other hand, the

reports also highlighted several shortcomings, notably in the field of financial information and

reporting, public procurement, the tax authority, internal and external financial controls. In recent

years the administration has followed-up on ongoing PFM reforms and introduced measures to:

(i) move to a performance based budgeting framework; (ii) develop a Medium Term Expenditure

Framework (MTEF) to assist in fiscal sustainability; (iii) modernize its accounting framework;

47

and (iv) improve revenue management. This reform effort will nevertheless have to be revived

and strengthened in terms of coherence and operational impact.

129. Fiscal reporting has made notable progress29, even if the quality of fiscal data should

be improved through accounting reform. Reconciliations of banking and fiscal records are

done satisfactorily on a monthly basis, facilitated by efficient computerization. Financial

control is ensured by effective and reliable control systems—both internal and external, as well

as ex-ante and ex-post. Financial controllers, who are part of the Directorate-General of

Financial Control (DGDP), carry out the ex-ante control of expenditure commitments and report

to the Prime Minister’s Office. The Court of Accounts carries out good quality external audit and

the international standards on autonomy, scope and quality are met. The proposed budget and

financial management reform program currently focuses on the implementation of sector MTEFs

(which will be, in principle, framed by an aggregate MTFF and an MTEF that will frame the

inter-sectoral resource allocation) and performance monitoring. It covers a range of PFM issues

and includes a proposed training program, the implementation of a new budget classification, the

finalization of the chart of accounts and the preparation of a new organic budget law.

130. The first-time safeguards assessment of the BCT undertaken in 2012 by the IMF in

the context of the preparation of the SBA, found an adequate control environment for the

day-to-day operations, but oversight, autonomy, and transparency need strengthening. The

BCT publishes its audited financial statements, but disclosure information should be enhanced.

Action is needed to mitigate risks to the BCT balance sheet that would result from a significant

increase in liquidity lending operations. Development of the internal audit function will need

capacity building and oversight by the newly established Audit Committee. The BCT confirmed

its commitment to implementing the recommendations of the safeguards assessment, some of

which, such as the improvement of its collateral framework, were already part of its reform

agenda.

131. The proposed loan will follow the Bank’s disbursement procedures for development

policy lending and will be disbursed in a single-tranche. After the loan has been approved by

the World Bank’s Board of Executive Directors and becomes effective, the proceeds of the loan

will be disbursed in compliance with the stipulated release conditions as defined in the Loan

Agreement and in a single installment. The proceeds of the loan will be deposited by IBRD in a

dedicated account designated by the Borrower and acceptable to the World Bank at the Central

Bank of Tunisia at the request of the Borrower, upon submission of a signed withdrawal

application. The Borrower should ensure that upon the deposit of the loan proceeds into said

account, an equivalent amount in local currency is credited in the Treasury current account at the

Central Bank. The conversion will be based on the prevailing exchange rate on the date that the

funds are credited to the Treasury Account.

29 Every budget, regular and supplemental is published in the official journal upon approval, and it is also made available on the

Ministry of Finance web portal (for instance the 2014 budget and the 2013 supplementary budget are available at the following

link: http://www.finances.gov.tn). Budgets since 2003 are available online. In line with the reforms supported by the GOJ-1 DPL,

the Government is committed to further expand the publication of information related to the budget and public finances,

including a more accessible “Citizen’s budget”.

48

132. The Borrower will report to the Bank on the amounts deposited in the foreign

currency account and credited to the budget management system. If the proceeds of the loan

are used for ineligible purposes as defined in the Loan Agreement, IBRD will require the

Borrower to promptly upon notice refund an amount equal to the amount of said payment to

IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The loan proceeds

will be administered by the Ministry of Finance. The flow of funds (including foreign currency

exchange) is subject to standard public financial processes. The Government budget is

comprehensive, unified and subject to centralized Treasury account. The Government of Tunisia

will provide a written confirmation to IBRD within thirty days of disbursements. The

confirmation will include the local currency amount credited to account that is used to finance

budgeted expenditures, the exchange rate applied and the date of the transfer.

133. Although an audit of the use of the funds may not be required, IBRD reserves the

right to ask for a transaction audit. This audit, when asked for, will cover the accuracy of the

transactions of the dedicated account, including accuracy of exchange rate conversions;

confirming that the dedicated account was used only for the purposes of the operation where no

other amounts have been deposited into the account. Also the auditor will have to obtain

confirmation from corresponding bank(s) involved in the funds flow regarding the transaction.

The time period for submission of the audit report to the Bank is six months from the date a

request for such audit is issued.

5.4 MONITORING AND EVALUATION

134. Implementation and coordination responsibilities: The responsibility for

implementing the program in the Government rests with the State Secretary for Development

and International Cooperation at the Ministry of Economy and Finance, which coordinates all

relevant activities with other Ministries. Given the importance and the visibility of the program

the Prime Minister’s cabinet is also deeply involved in the monitoring of the program

implementation.

135. Supervision by the Bank: Regular supervision allows the Bank to continue providing

policy advice and technical assistance to the institutions involved in the implementation of the

program of reform, notably thanks to its staff based in the field. The Bank maintains continuous

dialogue with the relevant Government ministries and will conduct regular reviews in close

collaboration with other partners. This will take the form of joint missions with the AfDB and

the EU and shared analytical underpinnings, an approach which has been followed since 2011.

Supervision by the Bank (and associated donors) is organized with a wide approach, including

the implementation follow up and assessment of measures and reforms supported as part of the

2011 GO DPL and the 2012 GOJ-1 DPL.

136. Monitoring and Evaluation: The monitoring and evaluation of the program and its

expected results is based on the Government’s regular monitoring and evaluation (M&E)

activities. The Bank and other development partners will continue to provide support to the

Government to strengthen M&E, improve data quality and management and enhance capacity

for using development outcomes to inform policy making.

49

6. SUMMARY OF RISKS

137. The risks to this operation relate to: (i) renewed political uncertainty from unmet or

conflicting political aspirations; (ii) uncertainty of the economic outlook; (iii) risks to the

stability of the financial sector; and (iv) risks related to the design and implementation of the

program of reform measures. Details for each of these areas are provided below:

138. (i) Risks related to renewed political instability from unmet or conflicting political

aspirations: High political tension was experienced in January-February 2013 and again in July-

September 2013, following the assassination of two opposition political leaders, which also had

an impact on the pace of implementation of the reforms. Although the adoption of the

Constitution has cemented a renewed sense of consensus, political tensions may again become

more volatile in the run-up to the planned elections. In the same vein, poor economic

performance could spur social discontent in the form of strikes for instance. While enjoying

broad support at the time of its nomination, the technocratic government’s actions could become

the target of political feud if the tensions rise.

139. It is not impossible that the next elections could bring a more fractious political

leadership, less able or willing to carry through the reform agenda or sound macroeconomic

policies. A benevolent international framework, including financial and political support from

the international community and outreach in the media, will help mitigate these political risks.

140. (ii) Risks related to the uncertainty of the economic outlook: In addition to domestic

social tensions, uncertainty about the economic outlook related to the impact of the Eurozone

crisis and the stabilization process in Libya, as well as the pressure on the fiscal deficit and the

balance of payments, all pose significant risk to economic and political developments in Tunisia.

Lower growth and additional pressure in the labor market could lead to renewed social tensions

and reinforce a sense of lack of economic opportunity. To mitigate these risks, the authorities

have accelerated public investment projects, notably in lagging regions, scaled-up social

interventions, and support to enterprises during this transition. The Government is also exploring

mechanisms to improve the targeting of food and fuel subsidies. The measures supported by this

operation also aim to facilitate both public and private investments. The generally satisfactory

implementation of the SBA with the IMF contributes to restore some confidence among

international investors about the willingness of the Government to implement a sound reform

program and intensify the dialogue with the international community.

141. (iii) Risks to the stability of the financial sector: The negative shock on the tourism sector

(both from the revolution and the Libyan crisis) and the sensitivity of the exporting sectors to

growth variations in Europe both translate into higher credit and liquidity risks in the banking

sector. These risks will further aggravate the already relatively tight liquidity and weak asset

quality of the banking sector. The measures supported by this operation aim to help reinforce the

banking sector and reduce the risks of financial instability. The SBA with the IMF approved and

signed in June 2013, is also likely to help mitigate this risk.

142. (iv) Risks related to the implementation of the program: the actual implementation of the

reforms supported in 2011 and 2012 has proven difficult and longer than expected. Political

attention was distracted by a fraught constitutional process. Now that the Constitution has been

50

successfully completed, there is strong sense in society that time has come to mainly dedicate

efforts to the economic aspects of the transition. The Bank’s Development Policy Review

highlights risks of state capture and subsequent disconnect between reforms on paper and real

change on the ground for citizens and firms. While many of the reforms supported by the GOJ

DPL series aim at empowering them to obviate this risk, the Bank itself is investing considerable

effort in awareness-raising and consensus-building. To this end, it has engaged in a broad-based

consultation and dissemination effort of the DPR’s findings and recommendations. The Bank is

also supporting a public awareness project, using local media, so as to spur and feed the national

debate on key social and economic issues faced by Tunisia.

51

ANNEX 1: POLICY AND INSTITUTIONAL REFORMS MATRIX AND RESULTS FRAMEWORK

Policy and Institutional Reforms

Results framework

Indicator Baseline

2012

Current status Target

2016

GOJ-1 DPL 2012 GOJ-2 DPL 2013/4 GOJ-3 DPL 2014

FIRST PILLAR DEVELOPMENT OBJECTIVE: PROMOTING PRIVATE INVESTMENT AND ESTABLISHING A MORE COMPETITIVE ENVIRONMENT

Investment climate Decree No.2012-1682 (“Décret relatif à la

mise en place d’un processus participatif

pour l’évaluation et la révision des procédures administrative régissant

l’exercice des activités économiques”) dated

August 14, 2012, institutionalizing a systematic and participatory reform process

of business formalities, based on

streamlining of procedures, transparency, and reduction of arbitrary and discretionary

behavior; and committing to deliver

concrete reforms within 9 months of its publication, in the areas related to private

investment, has been published in the

National Gazette No.72 dated September 11, 2012.

The new Investment Code (which consists of a complete revision of the Law N° 93-

120 of 27 December 1993 and its

subsequent revisions) has been published in the National Gazette.

Quantitative estimate of

compliance cost

savings (in US$) (only covering few

priority business

formalities)

Increase in foreign investments

attracted (US$)

No savings

US$ 1.5 billion (average FDI in

past 10 years)

US$ 1.0 billion

(2013)

US$ 3.6 million

US$ 30 million

increase in FDI at

GOJ-3 DPL closing date

The new Bankruptcy Law (which merges

the Chapter IV of the Commerce Law

and the Law N° 95-34) has been published in the National Gazette.

The new Competition Law, (which revises Law 91-64 of 29 July 1991) has

been published in the National Gazette.

Increase in

creditor returns

(%)

Number of anticompetitive

practices

prevented/eliminat

ed

Estimated value

of cases filed:

US$ 50 million

0

Increase by 7%

3

52

Telecommunications

The President of the National Telecommunication Authority has issued

Decision No.67/2012 (“Décision No.

67/2012 de l’Instance Nationale des Télécommunications en date du 4 Octobre

2012 portant sur le complément de l’Offre

Technique et Tarifaire d’Interconnexion de la Société Nationale des

Télécommunications pour l’année 2012,

relative à l’accès à la station terrienne d’atterrissement des câbles sous-marins »)

dated October 04, 2012, to open up access to the landing stations of international

telecommunications cables to more

operators in addition to Tunisie Telecom.

The President of INT has issued and

published on the INT website, Decision

No. 165/2013 dated November 15, 2013, to reduce the access tariffs to the

submarine cables landing stations by at

least sixty (60) percent with respect to the offer approved by INT in October

2012.

The President of INT has issued and

published on the INT website, Decisions No. 149 and 150, both dated June 13,

2013, opening up the market for fiber optic backbone infrastructure by

approving alternative providers (Société

Nationale de Chemins de Fer Tunisiens (SNCFT), and Société Tunisienne

d’Eléctricité et de Gaz (STEG)) to lease

capacity to licensed operators on a non-discriminatory and cost-oriented basis

and to provide connectivity across

borders.

The Government has revised the decree

specifying the schedule of obligations

(cahiers des charges) for Mobile Virtual Network Operators (M/VNOs) and

granted licenses to [x] M/VNOs with

international gateway access

Price of

international

telecommunications (Skype

Termination Rate

to Tunisia in cents/min)

Available

international

bandwidth

39.5 US

cents/minute

2011 = 37.7

Gbps

No change

90 Gbps

-50% , or 20 US

cents/minute

220 Gbps

SECOND PILLAR DEVELOPMENT OBJECTIVE: RESTRUCTURING THE FINANCIAL SECTOR The Governor of the Central Bank has

issued Circular No. 2012-09 (“Circulaire

aux établissements de crédit No. 2012-09 relative à la division, couverture des risques

et suivi des engagements”), dated June 29,

2012, revising the Circular 91-24 dated December 17, 1991 outlining stricter

prudential regulations for the banking

sector.

The Law establishing an Asset Management Company to deal with the

debts in the tourism sector has been

published in the National Gazette.

Minimum

solvency ratio for

banking system (CAR)

Percentage of problem loans in

the tourism sector

that have been transferred to the

AMC

Minimum 8%

None

Six banks out of

twenty are below 9%

as per September, 2013 (average

solvency ratio

12.8%)

None

Minimum 9%

At least 15% of the tourism sector loans

classified 4 and 5

by the CBT are transferred to the

AMC.

The Minister of Finance has issued the call for Expression of Interest to contract one or

more firms to carry out strategic and

financial audits of the three public banks, namely Société Tunisienne de Banque

(STB), Banque de l'Habitat (BH), and

Banque Nationale Agricole (BNA).

Decree No. 2013-4953 dated December 5, 2013, on the modalities of

management and governance of the three

publicly owned banks (Société Tunisienne de Banque, STB; Banque

Nationale Agricole, BNA; and Banque

de l’Habitat, BH), has been published in the Official Gazette No.98, dated

December 10, 2013.

Based on the diagnosis provided by the public banks full audit, the Government

has issued an Inter-ministerial

Committee decision on the restructuring of the three main public banks (search

for some strategic partners, merger,

liquidation, privatization, recapitalization…).

Restructuring plans for STB, BH

and BNA

None The audits of the public banks have

been completed for

two of the three Banks.

Implementation of restructuring

strategies for STB,

BH and BNA has been initiated under

supervision of the

Minister of Finance.

53

THIRD PILLAR DEVELOPMENT OBJECTIVE: IMPROVING THE QUALITY AND ACCOUNTABILITY OF SOCIAL SECTOR SERVICES

Decree No. 2369 (“Décret No. 2012-2369

fixant les programmes du Fonds National

de l’Emploi, les conditions et les modalités de leur bénéfice”) dated October 16, 2012,

which revises Decree No. 349-2009 dated

February 09, 2009, setting the programs of the National Employment Fund, has been

published in the National Gazette No 82

dated October 16, 2012

Decree No. 1709 (“Décret No. 2012-1709 portant création de l’instance nationale de

l’accréditation en santé et fixant ses attributions, son organisation

administrative, scientifique et financière

ainsi que les modalities de son fonctionnement”) dated September 6, 2012,

establishing a National Authority for the

Evaluation and Accreditation of Health Services and setting its administrative,

financial and operational modalities, has

been published in the National Gazette No.72 dated September 11, 2012.

Decree No. 1719 (“Décret No. 2012-1719 fixant la composition de l’instance nationale

de l’évaluation, de l’assurance qualité et de

l’ accreditation et les modalities de son fonctionnement”), dated September 14,

2012, establishing the National Authority

for the Evaluation, Quality Assurance and Accreditation of higher education, has been

published in the National Gazette No.73

dated September 14, 2012.

Decree No. 2013-3232 dated August 12,

2013, institutionalizing participatory,

independent evaluation of service delivery performance improvement

under the national controller’s body, has

been published in the Official Gazette No.67, dated August 20, 2013.

(i) Number of beneficiaries

of the Labor Market

Programs, (of which female %)

(ii) Insertion rate of the

Labor Market Programs (as measured by share of

individuals who get a

contract after program

completion)

Number of hospitals that have conducted and

published results of evaluations of hospital

services and have instituted

improvement plans (among regional and university

hospitals, n=55)

Programs and institutions

evaluated and accredited

Annual publication of performance indicators at

the governorate level

(i) 45,000 (in

2011) (of which

59% female)

(ii) 14% (in

2011)

0

33 programs

have been

evaluated 0 institutions

have been

accredited 0 programs have

been accredited

0

No change

0

Participatory

evaluations have

been piloted in three municipalities

(municipal services at

large), and two central ministries

regarding their access

to information policies

0

(i) 45,000 beneficiaries

(of which 60% female)

(ii) 20%

At least 5

At least 40 programs

have been evaluated

At least 3 institutions have started the

accreditation process

24 governorates publish indicators on an annual

basis with a focus on

priority sectors

54

FOURTH PILLAR DEVELOPMENT OBJECTIVE: INCREASING TRANSPARENCY AND ACCOUNTABILITY IN PUBLIC POLICIES AND FINANCE

The Head of Government has issued

Circular No. 25-2012 (“Circulaire No. 25

[concernant] l’accès aux documents administratifs des organismes publics”),

dated May 5, 2012, specifying the

procedures for the implementation of the Decree-Law 41-2011 dated May 26, 2011

which aims at promoting transparency and

harmonizing the means and procedures regarding public access to documents held

by public agencies.

The Minister of Finance has issued Decision

No. 278 (“Note [concernant] la publication

des données et informations relatives aux Finances Publiques”), dated August 25,

2012, mandating the publication of key

information on public finances, including a Citizen’s Budget providing an online open

budget platform which allows citizen’s

direct access to detailed and real time public expenditure data.

.

Decree No. 2014-1039 dated March 13, 2014, on the national public procurement

system, has been published in the Official Gazette No. 22, dated March 18,

2014.

The Organic Law on Access to

Information has been published in the

Official Gazette

Number of

information

request responded to

Information on

public finances

is published on the Ministry’s

website

Average time needed to award

a contract (from

bid submission to date of contract

signing)

None

The draft budget

and the budget

execution reports are not regularly

published.

Public expenditure data is not available

online.

200 days

80 (H1 2013)

Adopted budgets

are published online as well as a

few other

documents (from a list jointly

determined with

the MOF). A citizen’s budget

has been published

for the first time in early 2014.

No change

50 percent increase

from H1 2013

figure

The draft budget

and the budget execution reports

are published on a

regular basis. Public expenditure

data is available

online, including the mapping of

regional investment

projects

140 days

55

ANNEX 2: LETTER OF DEVELOPMENT POLICY

56

57

58

59

60

61

62

63

64

65

66

67

68

69

70

71

72

73

74

75

Republic of Tunisia

The Ministry of Economy and Finance

March 7th

, 2014

Mr. Jim Yong Kim

President of the World Bank Group

The World Bank

1818 H Street, NW

Washington DC, 20433

United States of America

Letter of Development Policy

Mr. President of the World Bank Group

As it enters its fourth year of post-revolutionary era, Tunisia is still strong with the

revolution’s achievements, and continues striving to successfully lead the political transition

process, which remains one of the most stable in the region despite the multitude of

underlying risks, the turmoil and the acute social tensions. Tunisia has also demonstrated

good economic resilience in the face of the magnitude of shocks and the weakening of

economic fundamentals.

As you may know, early 2014 has constituted a milestone for the transition in Tunisia, with

the promulgation of our new Constitution, the establishment of a new Supreme Independent

Electoral Commission and the nomination of a new “competency” Government, as the result

of a prolonged and successful national dialogue process, building consensus across all

stakeholders on the constitutional, electoral an governmental dimensions, during which civil

society played a major role and pivotal role in the political and public debate. These

achievements have already installed a renewed climate of trust and have brought about better

foresight for the population and the economic actors, which is likely to provide a new

stimulus to our transition.

The policy of the new Government, which is characterized by its partisan independence,

ambitions to be flexible and pragmatic, focusing on both the cyclical and structural

dimensions of public policy, with a view to ensuring stability, and laying the ground for the

necessary structural reforms promoting the resolution of development issues faced by the

country.

With respect to cyclical developments, the Tunisian economy has experienced a difficult

year in 2013, characterized by security and political challenges. GDP growth is estimated not

to have surpassed 2.6 percent, after having shown encouraging signs of post-revolutionary

recovery in 2012. Indeed, the 2013 modest pick-up in the manufacturing sector, and the

relatively strong growth in the services sector, did not offset the sluggishness, or even the

decline recorded in other sectors like agriculture, mining, and non-manufacturing industries.

Total investment grew by 3.6 percent only in nominal terms, representing 20.7 percent of

GDP.

76

The unemployment rate decreased to 15.3 percent in the fourth quarter, however, after having

reached 16.7 percent at the end of 2012 at the end of 2012, despite the persistence of graduate

unemployment, thanks to the efforts to stimulate new hiring notably in the administration.

The fiscal policy has maintained a generally expansionary stance starting from the revolution

and until 2013, through an exceptional increase in the public sector wage bill of 11%

compared to 2012, and in food and energy subsidies expenses, which represent 7.2 % of the

GDP, as well as investment expenditure amounting to 4,344 million Dinars. On the other

hand, the monetary expansion, which maintained low real interest rates, led to a substantial

contribution of total consumption and public investment to economic growth.

Accelerating economic growth in the coming period will depend on rebuilding trust among

economic agents, the improvement of the security situation, speeding up the pace of

implementation of public investment projects notably in non-coastal areas and the return to

normal levels of activity in depressed sectors.

The economy also remains surrounded by weaknesses and risks, which undoubtedly require

adjustment efforts on the structural front to restore the strength of economic fundamentals

and avoid jeopardizing the sustainability of growth in the medium and long terms.

These risks relate mainly to the amplification of financial imbalances in 2013, as evidenced

by a budget deficit that exceeds the threshold of 6% of the GDP (on a commitment basis,

excluding grants), a current account deficit that has surpassed the threshold of 8 %, an

inflation rate persisting at 6%, a public debt of around 45% of the GDP and foreign exchange

reserves covering just above three months of imports.

These risks also concern the downgrading of Tunisia’s sovereign rating of Tunisia by the

rating agencies, which would lead to a possible increase in the cost of financing on

international capital markets.

Disbursements under external loans have been weak in 2013. They amounted to about TND

3,390 million, of which TND 1,052 million only accruing to the State budget.

External financial resources represent a major challenge for accelerating the recovery of

growth in the country, and continuing the initiated reforms, which are also essential to

minimize the risks and vulnerabilities mentioned above and successfully complete the

transitional period, all the more than external financing requirements for 2014 would reach

exceptionally high levels surpassing TND 10 billion.

The intervention of development partners is needed. In this context, Tunisia concluded in

2013 a precautionary stand-by arrangement with the IMF, which has resulted in the approval

of a program of 1.7 billion over 2013-2015. This reform program aims to (i) maintain

macroeconomic stability by strengthening fiscal and external margins of maneuver, (ii)

encourage a stronger, more inclusive growth through measures of structural policies in the

private sector and regional development, and (iii) protect vulnerable groups through

mechanisms of social assistance and systematic assessment of the social impact of the

proposed reforms. The initial implementation of the program resulted in the completion of the

first and second review of the stand-by agreement by the FMI Board of Directors on January

29, 2014.

77

From its approach, the program described here is a continuation of budget support programs

financed jointly by the World Bank, the African Development Bank and the European Union

since 2011. These programs highlight the consistency of the external financing framework

and the harmonization of donors support, as well as the relevance of the reforms included in

the program.

At the structural level, the Government has initiated a good dynamic of structural change

through a program of consistent reforms. This program, which has been subject to profound

reflection since 2011, aims at supporting the vision of medium and long terms, increasing the

growth rate to higher levels, and reducing unemployment in the interests of regional balance

and inclusive development.

Several reforms have already been initiated since the revolution and are continuing in the

present period. They have focused mainly on strengthening the institutional, regional, social

and economic dimensions of development. The Government intends completing the most

urgent structural reforms, while accompanying them with a series of concrete actions having

an immediate impact on economic activity.

Among the completed reforms, it is worth pointing out the establishment of a social contract

between the various economic and social partners, the amendment of the Law on

Associations, the institutionalization of access to administrative documents held by public

bodies, the revision of the regulations governing public procurement, the development of an

open administration, the adoption of a participatory mechanism allowing citizens to assess

the performance of public services, the strengthening of development interventions in the

regions, the revision of eligibility criteria and of the weighting method for social assistance

programs directed to needy families, the amendment of the law on competition and prices, the

launching of a financial audit, the development of a system of monitoring and evaluation of

employment programs financed by the National Employment Fund, and the strengthening of

the regulations governing the financial sector.

The main efforts of the Government in 2013 were focused on areas related to the

improvement of the business environment, mainly through the organization of extensive

consultations with all the stakeholders on the new investment code and the tax and subsidies

systems, in addition to the further simplification of administrative procedures and the

strengthening of the financing system and of access to information.

Substantial progress has been made in respect of public and fiscal transparency, evidenced by

the creation of an open data portal and the establishment of an agreement with civil society,

in addition to the progress achieved in the implementation of the management by objectives

approach in budget management. Measures have also been taken to improve the obligation of

the executive to be accountable to national oversight institutions.

Nevertheless, several challenges persist despite the unwavering determination to establish a

legal and institutional framework for good governance, and to reform the country’s economic

and social structures. In fact, the corruption prevention measures remain limited, the

employment challenge is still the governments’ main concern, the functioning of the

administration is not up to the expectations, the country is not attractive enough to investors,

and the socioeconomic disparities remain high in the interior regions of the country.

78

Aware of all the cyclical and structural challenges, the Government is seeking to remove the

present uncertainties through the restoration of security and the establishment of conditions

conducive to the organization of the next presidential and parliamentary elections, which will

introduce a new momentum towards the socio-political and economic stability and lead to the

establishment of a new development model in tune with the revolutionary aspirations.

I. Development Strategy and Prospects

The emergence of new priorities in post-revolution Tunisia, namely, youth employment,

regional balance, economic competitiveness and the improvement of living conditions,

particularly in the interior regions of the country, urge for an in-depth overhaul of the current

development model.

Besides the pursuit of democratic transition and further normalization of the security

situation, the policies objectives for the remaining period of the transition will center on the

restoration of security, the support of the election preparation process and the establishment

of favorable conditions for the economic recovery and the generation of employment.

Hence, the government’s program includes a strong socio-economic component in order to

pursue the reforms undertaken since the revolution, meet the immediate requirements to

stimulate growth, and lay the foundations for Tunisia’s medium-term development, based on

a strategic vision of a business model and an innovative approach to inclusive social and

regional development.

In terms of priority, the action will be focused during this period of transition on three pillars:

(1) stabilizing the economy and of fundamental balances, notably on the fiscal front; (2)

implementation of a strategy aiming at an improved social and regional inclusion; and (3)

accelerating structural reforms, that are most adequate to trigger economic transformation in

Tunisia towards a modern economy, developing value chains that are diversified and

integrated in the global economy and that create qualified jobs for our youth. In this spirit, the

Government will develop its action starting from the corpus of reforms adopted since the

revolution, putting special emphasis on their implementation, so that they can bring about

tangible results for the population. In addition, the Government will undertake a number of

short-term actions, the impact if which will be immediately measurable. Finally, it will lay

the foundations for reforms that are urgent, but which require a medium-term effort, like for

instance in the areas of tax or social security reform.

1. Restoring macroeconomic stability.

In view of the deteriorating fiscal and external accounts, as well as the rise in the general

price level and debt level during the past three years, it has become imperative to induce a

recovery of the macroeconomic situation starting from 2014. This recovery would strengthen

the environment for sustainable economic growth, driven mainly by the private sector, over

the medium and long terms. The control of inflation will slow the erosion of the population’s

purchasing power, while improving the fiscal accounts would help encourage productive

investment. The Tunisian economy requires an effort of finely measured stabilization, which

impact should be fairly distributed until the state of the economy regains its balance. It

remains essential to ensure the preservation of the social situation.

In budgetary terms, the action will be focused on the gradual control over the budget deficit,

while improving the composition of expenditure towards public investment and priority

79

sectors to serve social equity. Current expenditure will be reined in through improved wage

bill control and moderation of recruitment in the public service. Moreover, the burden of

spending on energy subsidies will be reduced by gradual and targeted reforms in the

framework of the program concluded with the IMF. On the revenue side, and pending the

start of a comprehensive tax reform, measures have been taken under the 2014 Finance Act to

reduce exemptions, and increase the tax base for tax collection.

The objective of the monetary policy remains controlling inflation while maintaining a

healthy credit growth for the private sector. The Central Bank of Tunisia continues to monitor

the liquidity needs of the banking sector. A gradual exit strategy of massive liquidity

injections has been initiated. This strategy will further reduce the dependence of banks on

funding from the central bank and will eliminate an increasingly structural phenomenon. The

lending rate of the Tunisian Central Bank has been increased by 50 basis points in order to

harmonize the lending rate with the money market conditions.

With regard to foreign exchange, the goal consists in easing constraints on foreign exchange

reserves, through the pursuit of a flexible exchange rate policy by strengthening market

mechanisms and limiting the central bank’s frequent interventions.

Apart from the aforementioned macroeconomic policies, the macroeconomic framework in

the medium term (2014-2016) is based on other hypotheses relating to:

Improved general confidence among the economic agents due to the completion of the

transitional period, the stabilization of the political situation, the revival of the

security situation and improving foresight.

Implementation of major structural reforms actions, which would undoubtedly impact

the dynamics of private investment, such as the new investment code, the law on PPPs

and the harmonization of the onshore - offshore regimes.

Improved foreign demand due to the expected recovery of the economic situation in

the euro zone countries.

The main objectives of the macro-economic framework in the medium term are:

Growth of the GDP rates to 4.5 % in 2015 and 2016. This dynamic is underpinned by

a recovery in both the domestic and external demands.

The gradual recovery of the investment effort leading to and investment rate of 23%

by 2016. This growth is mainly driven by private investment.

The reduction of financial imbalances: the current account deficit would be contained

to around 5.5 % of the GDP at the end of 2015 and the inflation would be around

4.8% in the same year.

These objectives will be supported by the pace and extent of economic reforms to be

implemented.

2. Promoting enhanced inclusion and regional development

Developing social justice: by reforming the energy subsidies system to ensure effective

targeting and limit leakages, starting the reform of social insurance (retirement pensions,

health insurance) in order to ensure the system’s financial viability and social equity,

improving the education and training systems quality, strengthening the role of the national

research and innovation system, and improving the performance of the public health system.

80

Reducing regional disparities. The first step in this development dimension is improving

governance at the regional and local levels by establishing real decentralization, reviewing

the power and modes of organization and functioning of regional development institutions,

and strengthening the mechanisms of equitable transfer of resources at the regional and local

levels.

Second, it is important to strengthen the business climate and support investments in the

regions by boosting incentives for investors in the interior regions, simplifying the regulatory

and institutional processes to benefit from the incentives, and developing the economic

sectors, the infrastructure and public services in disadvantaged areas.

Third, the action should focus on the development of private and public financing

mechanisms in the regions in order to boost job creation. This can be achieved through the

consolidation of micro-finance and of the regional funding structures, like the development of

regional public ownership through the creation of regional investment funds.

Preserving the environment for sustainable development, by improving environmental

governance and promoting a local development approach (decentralization, local

governance). The establishment of a strategic planning framework for sustainable

development (green economy, social responsibility of organizations, innovation and

environmental technologies) would be of crucial importance in the search for new sources of

economic growth. This process will be strengthened by the ongoing national program for the

prevention of pollution, environmental upgrading and waste management, as well as the

improvement of the spatial planning and urban development strategy.

3. Accelerating economic structural reforms for an inclusive growth and enhanced

competitiveness.

The focus at this level is on modernizing the national economy structure by promoting

activities of high added value and high knowledge content, by implementing a strategy for

the development of the digital economy and innovation.

The reform’s objective consists also in improving the business environment by strengthening

transparency, the rule of law, accountability, the judiciary system, and by reforming the tax

system, modernizing the administration, enhancing the productive sectors, strengthening the

transport and logistics infrastructure, and reducing the gap between the offshore and the

onshore sector etc.

The reform process includes the deliberate deepening of integration into the global economy,

in particular through progress towards the completion of a Deep and Comprehensive Free

Trade Agreement (DCFTA) with the European Union, and the associated “rapprochement”

towards the acquis communautaire, the establishment of a more balanced geographical

structure of international trade through access to new markets on different continents, the

improvement of the structural competitiveness of the national product, and the sectoral

diversification of foreign direct investment.

Particular attention will be directed to the development of the financial sector by aligning the

banking practices with international standards, enhancing banking supervision and bank

recapitalization, improving banking data reporting, restructuring public banks, strengthening

micro-finance, and boosting the financial markets.

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II. Measures of the 2011-2014 economic recovery support program backed by budget

support

The actions planned in the economic recovery support program (ERSP), including those

sustained by the third economic recovery program discussed in this Letter of Development

Policy, fall within the framework of the continuity of previous interventions (see previous

Development Policy Letters).

They evolve around four main themes: (i) stimulating investment, competitiveness and job

creation, (ii) strengthening the financial sector, (iii) improving the social services and their

accountability, and (iv) the good governance of public policies.

The measures adopted since the beginning of the ERSP are quickly reviewed below.

Considering the whole program and initial lessons learned from the program, the Government

stresses that reaching the objectives of the program, while fully justified in responding to

revolutionary aspirations, has proved to be a challenge in terms of implementation,

particularly due to the political uncertainties and exogenous shocks that have marked the year

2013. In response, the Government attaches equal importance to accelerating the

implementation of the adopted measures and to pursuing the program of new priority

reforms.

The government has focused on improving the business environment, which was until the

revolution marked by lack of transparency, permanent anti- competitive situations and

unjustified rents extraction.

The actions within this framework consist in reducing the administrative constraints and

authorizations, limiting the possibilities of discretionary decision-making, enhancing the

transparency of investment-related procedures, and reducing monopoly or oligopoly

situations.

The Government has therefore adopted a decree launching a reform to simplify

administrative procedures in the field of business environment (in all the areas related to

private sector investment and activity), and reduce the discretionary power of administrative

executives in the application of these procedures. After an exhaustive inventory of the

procedures and formalities in several key ministries, the reform adopted under the ERSP 2 in

2012 went through a pilot implementation phase in 2013, at the departments of the Ministry

of Finance (taxes, customs, public accounting). The 2014 reform will be accelerated to launch

clear and tangible signals to the companies and investors of the government's willingness to

reduce the administrative burden weighing on them.

The reforms undertaken since the revolution are deeper, and include other key elements of

the business climate:

• The revision of the Investment Incentives Code to align with international standards.

This revision, which will be a comprehensive review of the law, will in particular aim to

streamline the tax and non- tax incentives, reduce the disparities between the "offshore " and

" onshore " sectors of the economy, and facilitate domestic and foreign investment in some

sectors hitherto closed or controlled by superfluous authorization schemes. A bill regulating

Investments was prepared, and application decrees identifying the sectors open to investment

are being finalized.

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• Furthermore, in order to promote and increase local and international investments, the

government wishes to encourage the development of public -private partnerships. In this

context, a new law expanding the PPP terms, now limited to concessions, was deposited at

the National Constituent Assembly. A decree governing concessions has also been reviewed.

• The reform program also includes actions allowing for the reform of the conditions of

competition between the economic actors. In fact, many sectors are overregulated, which

represents an important obstacle to investment. Therefore, the government has reformed the

competition law in order to reduce its discretionary application and increase the transparency

of the work of the Competition Council. The increased competition will also go through the

extension of automatic approvals of foreign franchises, particularly in the food sector.

• The Tunisian economy is primarily an economy of SMEs. Many of these enterprises have

been heavily affected by the crisis, and undertaking a restructuring effort has become

essential. Improving the business environment requires a reform of the bankruptcy

framework regulation, which will facilitate their restructuring, alleviate the burden of non

performing credits, and free up financing for healthy companies. The law on this reform has

been finalized and submitted to the National Constituent Assembly for consideration.

• Even if tax reform represents a medium term effort, it must be pursued for the purpose of

greater efficiency, predictability and transparency, from the perspective of businesses in

particular.

The revival of growth can be accelerated by increasing competition in specific sectors which,

in the current context, negatively impact the competitiveness of the Tunisian economy. This

is particularly true for the telecommunications and air transport sectors. Supplementary

measures will also be considered in sectors that play a backbone function for the economy,

such as maritime transport and logistics.

The telecommunications sector is a key sector for enhancing productivity of the Tunisian

economy, and improving connectivity, which represent the true backbone for enterprises.

This sector is also an important source of potential jobs in istelf. The reforms undertaken after

the revolution have helped increase competition in the mobile telephony market, and promote

access to the internet. However, the competition conditions remain weak in other segments,

such as data exchange, broadband access, and international telecommunications, where rates

remain very high and markets non-competitive. Similarly, the infrastructure in the interior

regions of the country is not used optimally. Measures have been taken within the ERSP 2

to open access to International Telecommunications terminals of Tunisie Telecom. The

alternative infrastructure operators (STEG, SNCFT ...) can rent their excess capacity and provide cross-border connectivity.

In the air transportation sector, the restrictive licensing system limits the country’s tourism

potential by raising the transport costs. The Liberalization of the transport sector is thus an

important competitiveness issue. It falls particularly within the framework of the 2016

tourism strategy that the government has adopted. The Government therefore wishes to move

towards opening its airspace and will launch negotiations for a regulatory harmonization

with the acquis communautaire, towards the "Open Skies" agreement with the

European Union.

ERSP 3 measures:

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The current program is aiming at promoting the implementation of actions allowing greater

competitiveness in the telecommunications sector, pursuing the modernization of the

financial sector and establishing an environment conducive to investment and good

governance.

(1) Competitiveness in the telecommunications sector

Reform actions in this context are intended to allow for the possibility of revising the price

offer submitted by Tunisie Telecom in order to encourage other operators’ access to the

terminal of Bizerte. These reforms also concern the adoption of progressive prices reduction

for international calls by at least 50 percent.

The first measure consists in allowing owners of public telecommunications networks to

lease excess capacity at tariffs approved by the regulator, INT. This has resulted in the

publication of:

Decision No. 149 of the National Telecommunications Authority dated June 13, 2013,

approving the technical and pricing terms of rent of the passive infrastructure of the

Tunisian Electricity and Gas Company (STEG) for 2013. Under this decision, the

STEG has the right to lease to operators of public telecommunications networks the

excess capacity it has on its network after exploiting the resources necessary for its

needs;

Decision No. 150 of the National Telecommunications Authority dated June 13, 2013,

approving the technical and pricing terms of leasing the dark optical fibers of Société

Nationale des Chemins de Fer Tunisians (SNCFT) for the year 2013; Under this

decision, the SNCFT has the right to lease to operators of public telecommunications

networks the excess capacity it has on its network after exploiting the resources

necessary for its needs.

The second measure relates to the regulation of access to the head of the submarine cable.

Thus, the introduction of this measure resulted in a consultation conducted by the INT dated

11 September 2013, following which the INT has entrusted a consultancy organization to

conduct an assistance mission for controlling access to the head of the submarine cable.

Following this report, the INT has issued the Decision 165 of 15 November 2013, lowering

landing prices with 60 percent on average.

The National Telecommunications Authority will continue its efforts to impose a progressive

and significant reduction in the costs of international pricing of Internet exchanges and

international calls. Finally, the government will clarify the roles and responsibilities of

different actors, especially the National Telecommunications Forum and the ATI.

(2) Modernization of the Financial Sector

The Government will pursue its work in this sector, on the basis of reforms undertaken since

2011 at the levels of the banking sector, the diversification of financing tools (markets,

Deposits and Consignment Bank), and the development of microfinance and private equity

investment. The actions foreseen in the financial sector will help strengthen the financial

position of banks (and in particular public banks), refine risk analysis, insure financial

stability, develop the regulatory framework and improve the functioning of capital markets in

accordance with the international best practices and standards.

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The first challenge consists in the stability of the banking sector, which problems go

beyond non-performing loans in the tourism sector. Indeed, due to the governance that is

weak and subject to many political pressures, this sector, and especially the state-owned

banks, has accumulated large stocks of non-performing loans with very low provisioning

rates. Decisive actions should be taken so as to allow the sector to play once again its role in

financing development and growth. Public banks are particularly concerned. The first steps

were taken in 2011 with the introduction of stress tests by the Central Bank and the evolution

of governance rules. The Government will continue its efforts in coordination with the

Central Bank.

The tourism sector, which concentrates a large part of non-performing bank loans, should be

dealt with in a specific manner and with a strong commitment from the state, the banks and

the sector’s professionals. Indeed, the structural crisis that this sector has been undergoing for

several years has been compounded by the aftermath of the revolution. The least profitable

hotel units, while staying active, have degraded the image of the sector and weakened its

competitiveness, in addition to weakening the banking sector. To address the issue that this

sector is facing, the government is preparing to create an "Asset Management Company",

which will be responsible for restructuring unsustainable units. The law establishing this

assets management company exists in draft form, and will be extensively discussed with

professionals from the concerned sectors.

In addition, through the three strategic audits conducted for the three public banks (STB,

BNA and BH), two of which are being completed, the government intends to launch a

comprehensive process of restructuring the public banking sector, including recapitalization

of public banks.

ERSP 3 measures:

In the context of their future restructuring, the process of strengthening governance in public

banks is an essential preliminary step.

The reform focuses on the following areas:

- Release the three public banks from the constraints imposed by Act 89-9 of 1 February 1989

on investments, businesses and public institutions.

- Ensure better representation of the State as shareholder in the boards of directors of public

banks.

To this end, the Government adopted a decree pursuant to Article 22b of the above -indicated

89-9 Act, which exempts public banks of the obligations provided under various sections of

the 89-9 Act, and improves the selection procedure of the board members representing the

State.

The decree adopted by the Government on 5 December 2013 mainly aims to:

- Establish a contractual relationship between the banks and the supervising authority through

a strategic plan which includes the managerial action. This plan will be subject to periodic

review;

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- Reduce the weight of the supervising authority, and strengthen the role of the boards of

directors by entrusting them with the procedure of approval of their actions in accordance

with the Companies Code;

- Provide public banks with the ability to set their recruitment policies and human resources

management methods;

- Exempt public banks from the application of the rules governing public procurement;

- Transform the a priori control function exerted a priori by the State comptroller to a support

function.

- In the publication of the decree, take into account the prerequisites of the new governance

mode, namely, the development and approval by the boards of directors of the procedures

manuals relating to the management of human resources and procurement procedures.

For a better representation of the boards’ members representing the State, a selection

committee is created with the task of determining the criteria for selecting the boards’

members representing the State and the methods of assessing their performances.

A decree on the composition of the committee responsible for establishing the selection and

evaluation criteria of the boards’ members representing the public participants, and the

selection procedures for state representative, will be released upon publication of the decree

on the governance of banks, which already provides for the creation of this committee. The

selection committee will start working immediately upon the publication of the decision, and

will start recruiting representatives in the boards of directors under the new procedure, with

50 % of the boards’ members representing the State will be concerned with this new selection

process in the first half of 2014.

In parallel, with the aim of achieving the new board members selection process, the

compensation system for board members representing the State will be reviewed, so as to

allow for remuneration consistent with the responsibilities and required qualifications of

these board members. Finally, concerning the separation of the functions of CEO and

Chairman of the Board, a change of status by an extraordinary general assembly of the three

state-owned banks, will be carried out during the first half of 2014 in order to dissociate those

functions. This measure will coincide with the results of the full audit.

(3) Social Services and Social Accountability

The expected results of reforms in the social field include strengthening the accountability

and the quality of public services and investments, particularly in disadvantaged areas.

Reform actions undertaken in 2012 were related to the strengthening of arrangements for

monitoring the quality of health services, through the adoption of decrees on the creation of

independent bodies for accreditation / certification of health and higher education structures

and services. The relevant structures have been established, and their staff has been recruited.

It is expected that they will be fully operational during 2014.

The consecration of social accountability goes through the establishment of a participatory

process of systematic monitoring of the public services performance by the society, citizens

and service providers, particularly in the social sectors (health, education, social protection,

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employment etc...). This will be accomplished by publishing the performance and governance

indicators, in a participatory and transparent manner, at the level of all 24 governorates, for

the social sectors having priority (school failure, access to services, waiting time, absenteeism

of services providers, budget execution rate, access to information, etc.).

It is with this aim, that the Government adopted a Decree, dated August 12, 2013,

establishing the transparent and participatory performance audit of public services within the

framework of the mission of the General Control of Public Services.

In 2014, the Government also plans to launch the preparation of important reforms in the

social sectors, including starting a diagnosis on the financing of social insurance, and

introducing further reform to the welfare system by establishing an integrated database

allowing for better targeting of beneficiaries. At the institutional level, these reforms will be

the subject of the social dialogue established under the Social Pact signed in 2013 by the

main social partners and the Government. To institutionalize this approach, the National

Council of Social dialogue will be established soonest.

(4) Governance

Since 2011, the authorities have launched a vast program of reforms in this direction

(freedom of association, access to information, publications, statistics...). These public

policies should now be widely disseminated, and the simplification actions should continue.

The planned reforms in this area aim to strengthen the principles of transparency and

accountability by encouraging the administrative and financial control, improving the

regulation of public procurement, facilitating access to information within the "open

government" framework, and reforming the judicial and media systems. These reforms affect

all the aspects of governance and fight against corruption.

Adopting a proactive and transparent public finance policy, based on the dissemination of

information, is likely to ensure public confidence in the Government, foster a fruitful debate

over public decisions, and increase public participation in national orientations, choices and

priorities, directly, or indirectly through the Parliament.

One of the government measures in 2012 was to inform all the administrations, through a

government circular note, and within the framework of multilateral partnership "Open

Government", of the terms of implementation of the decree-law adopted in April 2011

concerning the access to administrative documents held by public bodies. As part of this

partnership, the departments of the Ministry of Finance were instructed to proceed with the

publication of key documents such as the budget framework, the proposed government

budget and budget reports. At the end of 2013, the Government has also published its first

citizen-budget, under the aforementioned reform. The Government has also indicated its

intention to participate in the International Partnership for Open Government (" Open

Government Partnership ").

In the area of public procurement, essential for both the revival of public investment and the

fight against corruption, the current government will continue the work undertaken to review

the regulatory framework, in accordance with the international standards and

recommendations of the OECD / DAC evaluation report, and will determine the resulting

action plan in December 2012.

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The reform of the public procurement rules has been deepened towards the revision of Decree

No. 2002-3158 of 17 December 2002 regulating public procurement in accordance with the

ODCE method. This reform aims to improve the public procurement system in Tunisia, in

order to develop an effective and efficient tool for the consecration of good governance, and

the strengthening of transparency, integrity and the fight against corruption.

This revision of the organization of the public procurement system aims to:

• The strengthening of the role of procurement in achieving development goals,

• The contribution of the system to the good governance of public spending by giving the

example with regard to transparency, integrity, efficiency and quality.

The revision of the legal framework aims to:

• The consolidation and prioritization that restore its coherence, clarity and unity;

• The reorganization of the bodies responsible for its governance at the level of the most

advanced best practices based on the separation of the regulation and control functions, the

involvement of the private sector and civil society, and the strengthening of the authorities

independence and powers;

• An overhaul of the legal framework which establishes this institutional consolidation and

reorganization, while refining and softening the procedures, enriching them with new

dimensions focusing on social equity and environmental sustainability in addition to the

concerns of performance and efficiency, modernizing the procedures, and shortening the

timeframes through the legal recognition of dematerialization.

This proposed amendment was introduced after full assessment of the public procurement

system in Tunisia by the Organization for Economic Cooperation and Development (OECD).

The OECD has identified significant shortcomings of the current system, and produced a

number of recommendations that have been consolidated in an action plan approved by a

Council of Ministers in August 2012. These recommendations concern in particular the

unification of the legal framework governing the public procurement system, the introduction

of governance, integrity and transparency as well as elements of sustainable development and

capacity building of stakeholders in this field, the development of appeal mechanisms, and

the organization of structures responsible for the governance of public procurement.

The new draft governing public procurement aims to simplify the procedures and approval

deadlines, and to enhance transparency and integrity through good governance reflected in

institutional arrangements recommended in this context.

Moreover, it should be noted that procurement reform is an action that has started in 2012

and resulted in the first overhaul of the regulatory framework. The Tunisian Government will

continue the reform gradually, while accompanying the administrative structures at all levels

(national, regional and local) with actions to strengthen the administrative capacity, and to

ensure proper aptitude and ability to develop and implement public procurement in a

competitive environment with maximum independence, transparency and integrity. In this

context, the Government will continue the efforts to review all control plans in order to

further reduce a priori controls.

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The implementation of these reform actions in the context of short-term stimulus, and the

creation of conditions favorable for boosting the ongoing democratic transition, reducing

social vulnerabilities through better implementation of development projects, restoring the

confidence of investors and future growth, involves increased mobilization of financial

resources.

It is in this context that we seek financial support from the World Bank for an amount of 250

million U.S. dollars, backed by the economic recovery support program described above.

[Signed

The Minister of Economy and Finance

Hakim BEN HAMMOUDA]

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ANNEX 3: FUND RELATIONS ANNEX

IMF Executive Board Completes First and Second Reviews Under the Stand-By Arrangement for Tunisia and Approves US$ 506.7 Million

Disbursement Press Release No.14/32 January 30, 2014

On January 29, 2014, the Executive Board of the International Monetary Fund (IMF)

completed the first and second reviews of Tunisia’s economic performance under a two-year

program supported by a Stand-By Arrangement (SBA). The completion of the review enables

an immediate disbursement of SDR 329.1 million (about US$ 506.7 million), bringing total disbursements to SDR 427.9 million (about US$ 658.8 million).

The 24-month SBA in the amount of SDR 1.146 billion (about US$ 1.76 billion, or 400

percent of Tunisia’s quota at the IMF) was approved by the Executive Board on June 7, 2013 (See Press Release No. 13/202).

In completing the first and second reviews, the Executive Board approved the authorities’

request for waivers of non-observance on Net International Reserves (NIR) and Net

Domestic Assets (NDA) performance criteria based on corrective actions taken. A waiver of

applicability was granted for the end-December primary fiscal target as final data is not yet available.

Following the Board discussion on Tunisia, Ms. Nemat Shafik, Deputy Managing Director, and

Acting Chair, said:

“Tunisia is going through a protracted political transition and is facing a challenging domestic

and regional environment. Nonetheless, the economy has continued to grow, albeit at a

moderate pace, inflationary pressures are contained, and the external position has stabilized.

The recent approval of a new constitution and the appointment of a new government to

oversee the upcoming elections are important steps forward.

“Performance under the Fund-supported program has been mixed. Lower external financing

weighed on reserve targets and high liquidity needs led to a monetary target being missed.

The end-December primary deficit was lower than programmed, mostly because of under

execution of the budget and deferred cash payments. Structural reforms have been

progressing, but at a slow pace.

“Fiscal consolidation for 2014 has been postponed to allow space for pro-growth spending,

but remains essential to reduce vulnerabilities. The increase in electricity tariffs, together

with measures to protect poor households, is welcome. Further reduction in energy subsidies

and strict control of the wage bill would improve the fiscal position and strengthen budget

composition. Revenue and public financial management reforms will also help in that regard.

More efforts should be made to avoid under-spending on public investment and social programs, which are important to promote growth.

“Monetary policy could be tightened further should the inflation outlook and pressures on the

exchange rate worsen. The policy transmission mechanism will be enhanced by removing

caps on bank lending rates. Greater exchange rate flexibility is also important to strengthen reserve buffers.

“Banking system vulnerabilities should be tackled decisively. Recent measures to improve

financial reporting, strengthen banking supervision, and reform the governance of public

banks are welcome. A strategic vision for public banks, an asset management company, and a new bank resolution framework are key priorities.

“Accelerated implementation of structural reforms is needed to reduce unemployment.

Putting in place a well-targeted social safety net as fuel subsidies are phased out would

protect the most vulnerable segments of the population and reduce inequality.”