Chedly Ayari, Governor, Central Bank of Tunisia (Banque Centrale de Tunisie, BCT): Interview

Interview: Chedly Ayari

To what extent will the BCT improve liquidity within Tunisia’s financial sector?

CHEDLY AYARI: Improving the liquidity of the financial system and relieving some of the pressure on the foreign exchange market will depend on the recovery of Tunisia’s most distressed sectors, which include mining, oil and gas, and tourism — Tunisia’s main traditional sources of foreign currencies. Until late 2010 the savings generated by institutional entities such as state-owned companies and social security funds constituted a significant share of bank deposits. However, deposits from these sources have since gradually eroded, and thus affected bank liquidity. Nevertheless, the issue goes beyond the scope of the banking system. The other components of the financial system — the stock exchange, non-financial corporations, etc. — have suffered from the depressed economic activity.

In this difficult context, the BCT has continued to support the banking system with the liquid funds it needs, while respecting its mission to maintain price stability. As of late 2016 the BCT has been responding to the lack of liquidity and the widening current account deficit with an expansionary monetary policy. In particular, the BCT has increased the money supply by increasing the amount of physical currency in circulation and intervening with over TD7bn (€3bn) in the money market. However, improving the liquidity of the financial system depends not only on actions taken by other stakeholders and their ability to carry out reforms, but also on creating a business climate that attracts both domestic and foreign investors.

How will the BCT provide forward guidance?

AYARI: Naturally, the BCT is constantly working to improve its communication policy. In an effort to provide markets with prospective guidance, the BCT has published the minutes of executive board meetings since 2004, and has published memoranda on monetary and medium-term forecasts since May 2016. Nevertheless, the BCT does not yet provide forward guidance in the way that the central banks of the most developed countries do. However, the BCT is working towards developing an effective communication strategy capable of helping the bank achieve its goals of price stability and financial stability.

What is the inflation target, and what tools can the BCT utilise to achieve this rate?

AYARI: The Tunisian monetary policy regime is currently such that the BCT does not target a predetermined inflation rate. The post-revolutionary situation demands that the BCT adopt a gradual and prudent approach with regard to the implementation of inflation-rate targeting. For now, the BCT must prioritise certain prerequisites like the stabilisation of the macroeconomic framework, the solidity of the banking system and the deepening of markets. Today, the BCT’s monetary policy strategy is based on an implicit, undeclared inflation target of about 4%, which is merely the long-term average inflation in Tunisia. Moreover, the interbank market acts as the main operational target of monetary policy. The BCT’s monetary policy decision-making process is based on a detailed analysis of the economic situation and medium-term projections for growth and inflation.

What is the importance of the new regulatory framework for Islamic banking?

AYARI: The new regulatory framework governing Islamic banking activities, outlined in the new 2016 banking law, has taken inspiration from other countries similar to Tunisia and has been adapted to the realities of the country’s banking sector. The framework aims to diversify the supply of banking services and products to meet the needs of different kinds of clients. Implementation of a regulatory framework and the interest in expanding Islamic banking activities shown by local banks are two factors that boost financial inclusion, especially given the potential of this market niche.