Reforms in Tunisia focusing on streamlining the economy and boosting foreign investment

One of the most developed and diversified economies in the region, Tunisia has for years attracted praise for relatively prudent management. With high urbanisation, well-maintained infrastructure, a strong education system, close trade links and a modest selection of natural resources, the country has an attractive macroeconomic profile.

However, Tunisia has suffered from reduced growth following the country’s 2011 revolution, which in turn has exacerbated a number of structural problems. A pair of terrorist incidents in 2015 further complicated the situation, dampening the performance of the tourism sector – a key employer – but hopes are high that 2016 will see something of a recovery in growth.

Furthermore, the government, with strong support from international donors, is pursuing a wide-ranging series of reforms aimed at streamlining the economy and boosting foreign investment in order to put the country on a strong and sustainable long-term development path.

Output & Growth

GDP stood at TD80.5bn (€36.9bn) in 2014 and TD62.8bn (€28.8bn) for the first nine months of 2015, according to latest available figures from the National Institute of Statistics (Institut National de la Statistique, INS). In real terms, GDP grew by 2.7% in 2014, and by 0.96% over the first three quarters of last year compared to the same period of 2014.

Year-on-year growth stood at 1.8% in the first quarter of 2015 but fell to 0.8% and 0.2% in the second and third quarters, respectively, which was widely attributed to two major terrorist attacks that took place in March and June and their impact on the tourism industry in particular.

On a quarter-on-quarter basis, growth was down in the first two quarters of the year, by 0.3% and 0.5%, before returning to positive territory in the third quarter, albeit of just 0.2%. While precise details of full year growth for 2015 were not available at the time of writing, the government in February 2016 said that the figure stood at between 0.2% and 0.3%. The IMF forecasts growth to improve to 3% in 2016, against a government prediction of 2.5%, and 4.7% by 2020.

Economic Makeup

Major economic sectors include tourism, agriculture, manufacturing of machinery and cables, textiles production, and the IT industry and IT-related outsourcing in particular. The country has significant oil reserves, but production has been declining over the past three decades, from around 120,000 barrels per day (bpd) in the mid-1980s to half that in 2013, due to natural decline and a more recent lack of investment on the back of low international oil prices.

Agriculture and fishing accounted for 9% of the country’s GDP in 2014, manufacturing for 15.5%, non-manufacturing industries for 12.6%, and the commercial services sector for 41%. Agriculture and fishing sector activity rose by 2.8% (in real terms) in 2014 and a further 6.3% in the first nine months of 2015, boosted by a strong harvest and high demand for olive oil, while private sector services expanded by 3.4% and 0.6% over the same two periods, respectively. However, both manufacturing and non-manufacturing industry activity fell, with the former sector having contracted by 0.5% in 2014 and 0.2% over the first three quarters of 2015, and the latter by 1.9% and 3.2% over the same two respective periods.

Valuable Visitors

The tourism sector is a major contributor to GDP and employment. The World Travel and Tourism Council put its total direct and indirect contribution to GDP at 15.2% in 2014, while total contribution of the sector to employment, including jobs indirectly supported by the industry, was 13.9%. However, the industry has suffered a series of substantial reversals in recent years, notably in the form of unrest following the 2011 revolution. Tourism receipts dropped by 31% in 2011 on the previous year, though recovered to similar levels by 2014 before falling 30.8% for 2015 as whole as a result of two terrorist incidents in March and June (see Tourism chapter). “Security is a major issue at the moment, as regards both the fight against terrorism and also problems that feed insecurity such as smuggling and the black market,” said Tarek Cherif, president of business representative organisation CONECT Tunisia.

Population & Per Capita Output

According to figures by the INS, the population of Tunisia stood at 11.2m as of July 2015, up from 10.6m five years earlier. The World Bank put GDP per capita at $4421 in 2014. This placed Tunisia approximately halfway between its Maghreb region peers Morocco, on a 2014 figure of $3190, and Algeria on $5484, and ranked the country 101st in the world – though it placed a higher 82nd in the gross national income per capita league once purchasing power was taken into account.

Unemployment

The World Bank put the unemployment rate at 13.3% in 2014 (out of a total labour force of 4.02m people), unchanged from the previous year but down sharply from a figure of 18.3% in 2011, when unemployment spiked following the revolution. The comparatively high figure is despite a labour force participation rate of just 51.3%, which is low by international standards but in line with regional figures, and which in turn is explained in large part by a very low female participation rate of 27%. The government aims to reduce the unemployment rate to 11% by 2020 under its five-year development plan for 2016-20.

Joblessness is concentrated in particular among young people – the rate for male and females in the 15- to 24-year-old demographic stood at 32.7% and 29.9%, respectively, in 2014 – and the less-developed interior regions of the country.

The unemployment rate is also high among university graduates, at 31.4% in early 2014, the highest level in Mediterranean countries. The problem is widely attributed to a mismatch between the skills of graduates and the requirements of the labour market, a problem the country’s five-year development plan seeks to address.

Inflation & Interest Rates

Average inflation stood at 4.9% in 2015, unchanged from 2014, according to figures from the central bank, Banque Centrale de Tunisie (BCT), but down from a recent peak of 5.8% in 2013. The IMF predicts the figure to fall to 4% in 2016. “Currently factors putting downwards pressure on inflation outweigh those pushing it up, or are at least equal to them,” Mohamed Souilem, director-general of monetary policy at the BCT, told OBG. “Levels of demand in the economy are down, and a new petrol-pricing mechanism due to be introduced in July 2016 is also likely to lower fuel prices,” he said – although he added that the impact of government salary rises (see analysis) could start to be felt in 2017, putting upwards pressure on the indicator.

The government is targeting an inflation rate of 3.6% by 2020. In October 2015 the BCT cut its policy rate by 50 basis points to 4.25%, citing the reduced inflationary pressures, having previously raised the rate from 4.5% to 4.75% in June 2014. As of early February 2016 the rate remained unchanged.

Currency & Reserves

The Tunisian dinar, which can only be traded within Tunisia, is pegged to a weighted basket of currencies including the dollar and yen but dominated by the euro.

The government has stated that it intends to introduce a greater degree of flexibility in the exchange rate regime and to reduce its interventions in currency markets (which it says are primarily aimed at smoothing out the exchange rate to compensate for occasional large transactions by energy firms), in line with IMF’s calls to do so.

The Tunisian dinar fell 8.4% against the dollar in 2015 but rose 3.4% against the euro, according to the BCT. Over the longer term, the local currency has been steadily losing strength against both the dollar and the euro for most of the past decade, in part due to recent moves to allow it to depreciate in order to boost local currency reserves as part of reform efforts agreed with the IMF. As of February 11, 2016 the dollar exchange rate stood at $1=TD1.999, while the euro rate was €1=TD2.262.

Official reserves (of foreign currency and securities and gold) stood at $7.05bn as of October 2015 (IMF data), down from $7.5bn at the end of 2014 and equivalent to approximately four months’ worth of imports. Reserve levels have been supported by a $1bn 10-year eurobond issue that was conducted in January 2015, and the authorities plan to issue more debt, including a sukuk ( sharia-compliant bond) in 2016.

Foreign Trade

The value of exports in 2015 stood at TD27.6bn (€12.7bn), down 2.8% from TD28.4bn (€13bn) the previous year, according to INS data, following rises in 2012 and 2013. Exports of basic agricultural and food products more than doubled, from TD1.14bn (€522.8m) in 2014 to TD2.62bn (€1.2bn). The large increase was down to a rise in the exports of olive oil, from TD315.3m (€114.6m) in the first 11 months of 2014 to TD1.84bn (€843.8m) in the same period a year later, due to a bumper harvest as well as an outbreak of disease that reduced European olive oil production and pushed up international prices during the year. The EU also raised its import quotas for Tunisian oil by approximately 50% and lifted other import restrictions in an effort to boost the economy following the Sousse attacks.

However, this was offset by a sharp fall in the value of exported energy products, from TD3.74bn (€1.7bn) to TD1.99bn (€912.6m), due to lower oil prices, and in mining products and phosphates, from TD1.62bn (€742.9m) to TD1.11bn (€509m). Phosphate production at the country’s state-owned phosphate producer Compagnie des Phosphates de Gafsa fell to 650,000 tonnes in the first five months of 2015 from 1.3m tonnes during the same period of 2014, owing to disruptions from protesters seeking employment. Such demonstrations have been a repeated feature of the post-revolutionary landscape.

However, in spite of the pressure on exports, the trade deficit actually shrank in 2015 as imports also fell that year, from TD42bn (€19.3bn) in 2014 to TD39.7bn (€18.2bn) in 2015, again after having risen in both of the previous two years. The decline was largely down to a drop in the value of imported energy and mineral products, due to the decrease in global oil and commodity prices. This resulted in a trade deficit of TD12.1bn (€5.5bn), down from TD13.6bn (€6.2bn) a year earlier.

Souilem told OBG he expected phosphate and oil production to pick up in 2016, as social tensions in phosphate-producing areas eased. However, olive oil exports are nearly certain to fall substantially from their high levels in 2015.

Low rainfall in early 2016 could also impact the country’s agricultural harvest, pushing up imports and putting further pressure on the deficit, though the president of the Tunisian farmers association told press in early February 2016 that he remained hopeful that better rains in February and March could still save the season.

Trading Partners

Europe is the country’s most important regional trade partner by far, accounting for 77.2% of Tunisian exports in 2014 (latest available figures from the INS) and 67.4% of imports. At the country level, France was both the largest market for Tunisian exports and the largest source of Tunisian imports, on 28.4% and 16.3% of total exports and imports, respectively, followed by Italy on 19.1% and 14.6% respectively. Germany was the country’s third-largest export market, accounting for 10.2% of total exports, while China was the third-most-important importer to Tunisia, supplying 7.2% of goods purchased abroad by the country. Tunisia’s exports to Europe are dominated, in descending order of importance, by machinery and transport equipment, clothing and textiles, mineral products and agricultural goods.

Unsurprisingly, given the fact that regional trade comprises less than 10% of overall trade volumes among North African countries, exports to neighbouring countries were low by comparison to trade with Europe, with sales to Libya and Algeria respectively representing 4% and 3.7% of total Tunisian goods sold abroad. Algeria accounted for a more substantial 6.3% of Tunisian imports, though imports from Libya for the year were negligible. Africa as a whole represented 11.8% of exports and 8.6% of imports in 2014.

Current Account

The current account deficit stood at 8.7% of GDP in 2015 according to BCT figures. This was down slightly from 8.9% in 2014, the highest in over two decades due to factors such as falls in the value of phosphate and oil exports.

The fall reversed a five-year trend of growing current account deficits, exacerbated by the recent eurozone slowdown and consequent drop in demand from Tunisia’s main trading partner. The government’s goal is to reduce the current account deficit to 6.8% of GDP by 2020.

Foreign Investment

Inflows of foreign direct investment (FDI) stood at $1.06bn in 2014, according to latest available data from the UN Conference on Trade and Development, down from $1.12bn in 2013 and an average of $1.49bn for the previous four years. According to preliminary local currency figures from the country’s Foreign Investment Promotion Agency (Agence de Promotion de l’ Investissement Extérieur, APIE), FDI rose 9.2% in 2015 to reach TD1.97bn (€903.4m), of which the energy sector accounted for 51.7%.

The current investment regime divides the country into two broad sectors, namely a so-called offshore sector, which applies to companies in which foreign shareholders have an ownership stake of 66% and 70% or more of the output of which is exported, and the onshore sector, which applies to the domestic market. Foreign ownership of companies acting in the onshore segment is capped at 49% in most non-industrial companies, but may exceed this for some kinds of industrial projects. However, the US State Department notes that labour restrictions in the onshore segment tend to confine foreign firms to offshore investments, the energy industry and low value-added projects.

Offshore firms benefit from a number of tax advantages, however, the government intends to gradually converge tax rates for the two sectors under its tax reform plan. There have also been indications that the new investment code (see analysis) could further reduce or even abolish the distinction between the two, though it is yet to be finalised and passed into law.

Martin Henkelmann, director-general of the German-Tunisian Chamber of Industry and Commerce, said that the manufacturing sector remained a particularly alluring investment option for European firms. “Labour costs remain attractive despite recent increases, and productivity is good by regional standards,” he told OBG. “Overall costs are low for a location that is so close to Europe, offering good opportunities for companies that want just-in-time deliveries,” he said.

Another area of strength is the ICT sector and outsourcing activities in particular. “Tunisia has lots of well-educated engineers who also speak good English. Furthermore, productivity is high compared to Morocco and prices compare well to India,” Fausi Najjar, Tunisia expert at Germany Trade and Invest, told OBG.

Structural Reform

The authorities are working on a range of structural economic reforms, including fiscal reforms such as changes to the country’s energy subsidy regime, tax reform, new investment rules and incentives (see analyses) and efforts to improve the health of the country’s ailing major public banks, which have high levels of non-performing loans (see Banking chapter).

The efforts have faced a number of delays in the past – in part due to changes in government – and the IMF in its most recent Article IV consultation report described progress on reforms as challenging. However, following the establishment of the most recent unity government in February 2015, momentum appears to be picking up. The government has passed new laws on competition and public-private partnerships, and the authorities in mid-2015 successfully recapitalised two of the country’s major public banks – the Banque de l’Habitat and Société Tunisienne de Banque (see Banking chapter) – and restructured their management. Reforms to the investment code as well as a new automatic pricing mechanism for petrol are due to come into effect in 2016. Henkelmann told OBG that other priority areas include administrative and Customs reform, with investors reporting that heavy red tape in both areas causes delays to trade and investment activities.

Some of the structural reforms that have already been passed, including the new competition law, are also still awaiting the decrees and by-laws needed to implement them. In order to deal with this issue, the government has adopted a strategy of passing reforms and their implementation mechanisms at the same time, an approach that it plans to use for the new investment code.

Labour Issues

CONECT Tunisia’s Cherif said that another area in need of major reforms was the country’s labour legislation, which is a sensitive subject and does not currently appear to be on the government’s agenda. “People are reluctant to discuss labour reform but they shouldn’t be as it would be possible to create a win-win situation for both employers and employees,” Cherif told OBG. “Workers should be accorded their full rights and the country can remain competitive with higher salaries, but at the same time there is a need for greater productivity and to reduce absenteeism rates, and to achieve that all the parties involved need to sit down and discuss the issues without any preconditions,” he continued.

Development Plan

In September 2015 the government released an outline of its five-year development plan for the period from 2016 to 2020, which aims to raise GDP growth to 5% annually. The strategy calls for a change in approach to the economy, arguing that while the country had seen strong average growth of around 4.5% annually between 1984 and 2010, such growth did not boost employment or reduce poverty levels by significant amounts. The government also regards the model this growth was based on, relying on comparative advantages in a number of sectors such as tourism and textiles, had run out steam.

The new strategy is based around several major themes, including transforming the country from a low-cost economy to an “economic hub” through measures such as diversification towards labour-intensive sectors, improving the business environment and promoting the digital economy; the development of the country’s economically marginalised interior regions, which it notes suffer from limited infrastructure and a lack of good connections to main cities and ports, via measures such as investment promotion, decentralisation and developing a system of regional financing (among other moves, the government plans to launch a Bank of the Regions in 2016 to finance development projects in the interior of the country, with a particular focus on small businesses); sustainable development (the plan states that environmental degradation costs the country around 2.7% of GDP); and improved governance.

Among the various concrete actions and targets envisaged under the five-year development plan include tripling the size of the country’s motorway system to 1200 km and linking the provinces of South Kairouane, Kasserine, Sidi Bouzid and Medenine by rail to Tunis by 2020, as well as raising investment as a share of GDP from 18% currently to 25%, building 100,000 social housing units, and raising labour productivity by 2%.

Foreign Support

Foreign and multilateral donors have provided a steady stream of support to the country, looking to bolster what has thus far been one of the most successful post-Arab Spring economies. The US has provided the country with $700m of aid since 2011, including $250m of security assistance. The US government has also said it was ready to consider providing Tunisia with another loan guarantee worth up to $500m if needed to support economic reforms, having provided two previous guarantees in 2012 and 2014 worth a combined $1bn.

In 2013 the IMF also granted the government a $1.7bn credit line, which was due to expire in June 2015, however, the fund extended it for a further seven months. In September of that year Chedly Ayari, the head of the Tunisian central bank, said that the country was seeking another loan of at least the same size and possibly more, which it hoped to be in place by March 2016.

More recently, the World Bank in October 2015 approved a loan of $500m to support economic reforms, while the following month the African Development Bank agreed to provide the country with a combination of six loans and grants worth a total of €377m, including an €183m loan to upgrade local government administration and boost decentralisation efforts as well as tackle unemployment. However, the authorities say that a great deal more foreign support is needed, and the government in October 2015 requested a five-year $25bn economic aid programme from the G8.

Outlook

Providing that the government can maintain stability and continue to push through and implement its reform agenda, on which the IMF says the medium-term economic outlook depends, factors such as the country’s well-educated workforce and proximity to Europe should help to attract more investment and boost long-term growth levels. The country’s establishment of democratic rule should also be a major boon as regards creating a positive business environment characterised by the strong rule of law. “Despite the problems it faces, Tunisia has a major advantage over other countries in the region in the form of its successful political transition,” said Najjar.