Tunisia has been among the emerging market economies hardest hit by the COVID-19 crisis, which caused the deepest economic contraction ever, with a heavy social cost. The vaccination campaign, which started slowly, gained momentum in summer 2021 but has seemingly reached a plateau more recently. The economic recovery will be soft due to lingering health and political uncertainty that weakens household and investor confidence, the slow return of tourists and insufficient progress in implementing structural reforms. In the context of the Ukraine war, rising energy and commodity prices weigh on purchasing power. Fiscal and external imbalances persist and made it necessary to seek external financing. Public spending is skewed towards wages of civil servants, subsidies, and transfers to state-owned enterprises (SOEs), leaving little room to finance physical and social infrastructure. Businesses, and in particular small ones, are penalised by conditions attached to access to finance, red tape and obstacles to competition. This chapter analyses the macroeconomic and social impacts of the pandemic and the policy responses necessary to ensure macro-economic stability and to resume income and well-being convergence towards the OECD levels.
OECD Economic Surveys: Tunisia 2022
1. Key policy insights
Abstract
To be fast and sustainable, the post-pandemic recovery should be built on sound reforms
In January 2011, Tunisia embarked on a political transition that has enabled several major achievements: Tunisia has become a democracy, with a new Constitution, fair elections and a broad range of de jure civil and political freedoms. Thanks to its success in organising the dialogues among all major political parties, the National Dialogue Quartet (Quartet du dialogue national), brokered by key civil society organisations, gained the Nobel Prize for Peace in 2015. Human rights are better protected than in other Middle Eastern and North African (MENA) countries. The 2017 enactment of a law aimed at combating violence against women was described as “historic” by the UN (UNWOMEN, 2017[1]). The share of the population that in 2020 felt safe in expressing their opinion was higher than in any other Arab country, a sign of the vibrancy of the Tunisian democracy (Figure 1.1).
Figure 1.1. The political transition has strengthened democracy
1. Aggregate refers to the total responses in the sample used to Arab-Opinion index.
Source: World Bank, World indicators of governance and WDI; Arab opinion index 2019-20; and The Economist Intelligence Unit.
Still, political instability has been high and damaging. With frequent changes in government (Box 1.1), public policies have often been unfinished in design and indecisive in execution due to institutional gaps. The political transition remains incomplete in some of its basic elements, such as the Constitutional Court. Uncertainty about the governments’ commitment to reform has slowed down growth, interrupted the long-term process of income convergence and drained economic resilience. Investment, as well as business dynamism, have been weak and the migration of highly-skilled professionals has resumed.
Box 1.1. Recent political developments
Tunisia is a semi-presidential regime, with a head of state elected by popular vote who must instruct the party that wins the legislative elections to form a government. Between December 2011 and July 2021, the country has had seven heads of government and none has been in the office for more than 3 ½ years. Kais Saied won the October 2019 presidential election run-off and appointed Habib Jemli of the Ennahdha Islamist party, who did not win the confidence of the Assembly of People’s Representatives (ARP). A technocratic government ruled in February-July 2020, before a new apolitical cabinet led by Hichem Mechichi and also consisting of non-party technocrats was sworn in on 2 September 2020. Prime Minister Mechichi announced a major government reshuffle in early 2021, but numerous appointments were not ratified by the President. On 25 July, President Kais Saied invoked emergency powers from Article 80 of the Constitution to dismiss the Prime Minister, grant himself full powers and suspend the ARP activities for 30 days. The latter decision was confirmed on 24 August until further notice. A care-taker government was formed on 2 August, although no Prime Minister was appointed.
The 22 September decree regarding exceptional measures states that the danger is “real, in particular within the People Representatives Assembly”. It extends sine die the Parliament suspension and grants the President the power to make laws through decrees that “cannot be challenged for annulation”. The Instance provisoire de contrôle de la constitutionnalité des projets de loi is suppressed. The President also exercises executive powers, with the “assistance” of the government, and is in charge of developing political reforms, aided by a commission, in view of establishing “a true democratic regime where the people is effectively sovereign”. The Prime Minister – a woman, for the first time in an Arab country – was appointed end-September 2021. Ministers were appointed two weeks later.
In December, the President laid out the timeline for constitutional reform. An online public consultation started in January 2022 and a committee of experts will be designated to draft a new Constitution, to be ready by June. The text will be submitted to a referendum that would take place on 25 July, while Parliamentary elections would be held on 17 December.
The COVID-19 recession has hit an economy that was already weak and resulted in an unprecedented real GDP contraction of 8.8% in 2020. High fiscal and current account deficits before the pandemic limited the scope for a stronger fiscal policy response. Although policy support helped to mitigate the shock, the most vulnerable groups such as informal workers, women and young adults were exposed to job cutbacks and income losses.
Resuming the growth process, creating more and better jobs, restoring macroeconomic balances and consolidating social stability and cohesion are all challenges in the context of a pandemic-induced recession. To achieve them, the main messages from this Survey are the following:
It is essential to conclude the political transition, put in place all the institutions of democracy and consolidate the foundations of good governance in order to accelerate structural reforms and restart growth to the benefits of all Tunisians. Lowering regulatory barriers to domestic competition and administrative burden for firms, removing barriers to international trade and reducing the tax burden on labour would foster business dynamism and formal job creation. Better education, professional training and active labour market policies will improve labour market matching.
In the short term, policies should focus on consolidating recent advances in the vaccination campaign and supporting hardest-hit households and firms until the recovery is well under way.
Over the medium term, it is essential to bring public finances on a sustainable pattern. Containing the public sector wage bill, reforming state-owned enterprises and the subsidy system, reducing corruption and enhancing tax enforcement could free resources to be used for growth-enhancing public investment in both physical and social infrastructures and well-targeted safety nets.
A quick policy reaction has helped mitigate the social and economic impacts of the pandemic
After the first COVID-19 case was confirmed on 2 March 2020, restrictions on social and economic activities were imposed, that became more stringent over time (Figure 1.2, Box 1.2). Even though COVID-19 underreporting is likely to be non-trivial (Redissi, 2020[2]), as of 20 March 2022, around 1 million cases and 287 000 deaths had been confirmed. Vaccination began in mid-March 2021, with vaccines sourced through the COVAX initiative. At the time, it was estimated that 15% of the population already had antibodies. The initial target was to vaccinate 3 million persons (around 25% of the population) by mid-year. The objective was achieved only in August due to problems in securing and distributing the vaccines, as well as cultural reticence. The campaign gained strong momentum since the summer. At mid-March 2022, 54% of the population had received two jabs and around 61% at least one. Nonetheless, progress in the number of people vaccinated has slowed down since the autumn.
Figure 1.2. The COVID-19 outbreak has hit Tunisia hard
Note : Benchmark countries include Chile, Colombia, Costa Rica, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Mexico, Poland, Slovakia, Slovenia and Turkey.
Box 1.2. Tunisia’s strategy to contain the spread of the COVID-19 virus
The containment strategy (Figure 1.3) has featured the following elements:
Foreign entry controls: A ban on the entry of travellers coming through all air, sea and land borders was in effect between 18 March and 27 June 2020. A colour-coded system was used to show which countries’ nationals might enter with and without restrictions. In May 2021, entry conditions were relaxed for fully-vaccinated travellers and cases older than six weeks; the loosening was reversed in July. Since 27 October, all foreign travellers, including those that have received two doses, must show a negative test performed in the 72 hours prior to entry in Tunisia.
Internal mobility restrictions: All domestic travel was forbidden in both 2020 and 2021 for the Aïd al-Fitr and Eid al-Adha festivities, traditionally marked by religious and social gatherings.
Large-scale social restrictions. In March-June 2020, public gatherings were prohibited and employers were required to use home working where possible; a curfew was introduced and confinement measures were applied. In summer 2020, business was still encouraged to make the widest possible use of remote working and commercial activities were subject to respect of social distancing rules. In January 2021, restrictions were reintroduced, with frequent adjustments made in terms of stringency, duration and penalties. Schools have remained closed between mid-April 2021 and the start of the new year in September. A curfew was in place in the whole country between mid-night and 5 a.m. until 24 September. Since 23 October, the health pass is mandatory to access public spaces, while mask-wearing is required in all public offices and covered spaces. Masks are also required for all mass events.
Figure 1.3. Restrictions on economic activities have become progressively tighter
Note: The stringency index is a composite indicator based on nine sub-indicators including school closures, workplace closures, and travel bans. Aggregate series are simple averages.
Source: Oxford COVID-19 Government Response Tracker.
Testing: Testing is free for patients with symptoms at a government hospital. Narrow testing has limited the ability to detect asymptomatic and mild cases. Open-air free testing campaigns have been organised in Tunis, but the numbers of tested individuals remained modest.
Tracing: In May 2020, “Ihmi” (Protect), a mobile app to trace and track confirmed or suspected cases, was launched. Uptake has been modest reflecting economic concerns, low trust, and stigmatisation fears.
Treating: There are around 500 beds in intensive care units distributed between the public sector (237 beds, or 0.5 per 10 000 inhabitants) and the private sector (around 280 beds).
High population and housing density in urban areas, as well as differences in the public’s response to containment measures, partly explain the dramatic course of the pandemic in Tunisia. In particular, in view of the proven efficacy of the test-trace-isolate policy, limits on this front have had a bearing on outcomes. Capacities and vulnerabilities in the health-care system also influence rates of infection and recovery (Figure 1.4). Health care spending per person fell by 14% between 2014 and 2018 and the number of healthcare personnel per 10 000 people is below the WHO-suggested minimum threshold. The annual number of medicine graduates is high – more than 1 500 since 2012 – but the National Council of the Order of Physicians estimates that 40% of its members practise abroad.
Source: Institut Pasteur (Tunis), OECD and WHO.
Figure 1.4. The public health capacity is generally well-funded and the vaccination rate advances
The global spread of COVID-19 disrupted Tunisia’s economic activity already in the first few months of 2020. Containment measures suppressed domestic supply and demand simultaneously. In addition, the lock-down in all major trading partners run amok with supply chains and halted foreign trade in parts and components, as well as tourism activity.
The 2020 emergency fiscal package amounted to TND 2.6 billion (2.3% of GDP) in direct measures. Around TND 950 million (0.9% of GDP) have supported households, including the deferral of social contributions and certain tax payments; cash transfers and free supply of electricity and running water to low-income and vulnerable households; and housing for homeless people. Aid to business (1.4% of GDP) have included granting sovereign guarantees on new credits to companies that committed to limit lay-offs; a support fund of TND 300 million for small- and medium-sized enterprises (SMEs); and a flexible investment fund managed by the Caisse des Dépôts et Consignations, a long-term public investor. The job retention scheme and state-guaranteed loans were renewed with the June 2020 economic recovery plan which also created a fund to support business reconversion. Exceptional measures have been taken to assist companies and professionals operating in all economic sectors, including tourism and crafts, with the extension until the end of September 2021 of the suspension period of credit maturities and to the end of 2021 of the maximum period for granting exceptional financing, with the possibility of admitting such credits as a counterpart to refinancing operations. A special vehicle, Fonds 1818, was established in March 2020 to collect citizens’ contributions to purchase medical equipment and pay salaries of health professionals. At end-2020, it had received TND 204 million (0.2% of GDP).
The Central Bank of Tunisia (BCT) lowered its main policy rate in March 2020 (by 100 bps, the first cut in nine years) and October (50 bps), injected TND 9.9 billion to increase bank liquidity and instructed banks to defer all loan repayments (Figure 1.5). The results of a stress test conducted in the second half of 2020 revealed a satisfactory level of resilience of the sector in the event of exogenous shocks. As a result, the BCT has revised the methodology for calculating the collective provisions used to cover latent risks to include a component related to the expected forward looking risk. In spring 2020 banks were instructed to suspend dividend payments. One year later, the constrain was lifted, subject to two conditions: i) the solvency and Tier 1 ratios must exceed the regulatory minima (10% and 7%, respectively) by at least 2.5%, net of the pay-out and ii) the pay-out itself cannot exceed 35% of the 2019 and 2020 profits.
Figure 1.5. Monetary policy has reacted promptly to the economic disruption
Source: BCT; and CEIC.
Tunisia has benefitted from its partners’ support to meet urgent fiscal and balance of payments needs and catalyse much-needed financing from international markets. In particular, Tunisia has been among the earliest beneficiaries of the IMF Rapid Financing Instrument and the second-largest recipient of EU support under the AMF (macro-financial assistance) programme, with funds disbursed in 2021. Tunisia requested a new IMF programme on 19 April 2021.
The pandemic hit most sectors and inflation rose again
The economy contracted sharply in the first half of 2020 and registered one of the deepest falls in the Middle East and North Africa (Figure 1.6 and Figure 1.7). Activity rebounded in Q3 2020, only to experience very low growth in the next four quarters, including a dip in Q2 2021 due to the virus resurgence. At the sectoral level, agriculture recorded positive growth, mechanical and electrical industries strongly rebounded with recovering demand in Europe, textiles limited the damage by switching production to personal protective equipment, and the commissioning of new fields in Nawara and Halk el Menzel in 2020-2021 boosted hydrocarbons production. Common to all sectors was a lack of domestic consumption, especially of durable goods, attributable to high unemployment and consumers’ falling purchasing power. At the aggregate demand level, investment has fallen to 13.3% of GDP in 2020, while gross savings shrunk by more than five points to 4% of GDP (Banque centrale de Tunisie, 2021[3]). In order to offset the income decline, many households turned to their savings, often complemented by remittance transfers, to finance their current spending.
Figure 1.6. GDP growth and export performance have been poor
Note: Benchmark countries include Chile, Colombia, Costa Rica, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Mexico, Poland, Slovakia, Slovenia and Turkey.
Source: INS; CEIC; and OECD Economic Outlook 110 database.
Figure 1.7. The COVID-19 recession was deep and the recovery is slow
Note: For Tunisia GDP is calculated from the supply (sectoral production) basis, while for OECD countries the demand (spending) approach is used.
Source: OECD Economic Outlook 110 database; CEIC.
Consumer price inflation declined steadily from early 2018 onwards, reaching 4.8% in March 2021, before bouncing significantly up to 7.5% in April 2022 (Figure 1.8). The demand contraction had initially offset the impact of supply chain disruptions generated by the health emergency and of wage pressures, especially in government and state-owned enterprises (SOEs) where unions have strong bargaining power. Since 2021, the firming of international prices of energy and agricultural commodities has put pressure on domestic prices. This dynamic, which is particularly penalising for the poorest households, is strongly affected by the Ukraine war (Box 1.3).
Figure 1.8. On the inflation front, new pressures are emerging
Note: headline inflation corresponds to the evolution of the Consumer Price Index (base year 2015), which covers 720 products and 5 174 variaties. The most important product clusters in the CPI basket are food and beverages (26%), housing and utilities (19%) and transport (13%).
Source: INS.
Box 1.3. The Ukraine war and its implications for Tunisia
Weak cereals storage capabilities, limited to three months, and the current unfavourable budget situation, as well as the three-year drought which affects agricultural production, make Tunisia very vulnerable to the on-going Ukraine conflict. Imports account for 84% of tender wheat needs, roughly 40% for durum wheat and 50% for barley. Ukraine was Tunisia’s main supplier and the production fall will make it necessary to adapt procurement strategies. Moreover, the jump in the price of cereals since the Russian invasion seems bound to persist, with considerable fiscal consequences due to the compensation scheme for the price of basic necessities, notably pasta, and cattle feed. As far as energy is concerned, a USD50 rise in the price of oil per barrel with respect to the USD75 assumption used in the 2022 Budget Law would multiply by two the amount devoted to the compensation regime for energy.
The war and the sanctions will also have a sizeable impact on the tourism sector. In 2019, Russian visitors accounted for 7% of total entries, making Russia the second most important market, only trailing France (9.5%), while Ukraine had a marginal presence (less than 0.5 %).
The current situation may also open some opportunities for Tunisia. An increase in European natural gas imports from Algeria using the pipeline that goes through Tunisia before reaching Italy would allow to source according to needs, thanks to the transit royalty. The need to adapt the location of supply chains of multinational enterprises due to disruptions in Ukraine, such as in the automotive industry, could also bring benefits to the country.
Source : IACE (2022), La Guerre en UKRAINE : Impacts et Mesures à prendre and OECD.
Stumbling imports and resilient remittances reduced the current account deficit.
Since 2019, the economic slowdown, a tightening of import restrictions and rising remittances have been reflected in a smaller current account deficit after a 15-year trend deterioration (Figure 1.9). Following an abrupt fall in 2020, both export and import values rose by well above 20% in 2021 to reach levels 6% higher and 1% lower, respectively, than in 2019, before the COVID-19 crisis. Remittances by overseas Tunisians rose by 3.2 percentage points to reach 5.6% of GDP in the first ten months of 2021, twice as large as foreign direct investment (FDI) flows.
Figure 1.9. The current account deficit is primarily financed through loans
Source: CEIC; BCT; and INS.
Tunisia has a large diaspora, estimated at around 1 200 000 adults (when also including holders of double nationality) on the basis of national data. Total outflows, that were particularly intense in the mid-2010s, were slowing down before the pandemic. The majority of migrants live in Europe, and more than half in France, although North America is attracting an increasing number of qualified leavers (OECD, 2018[4]).
Recent labour market developments have been unfavourable
Since 2011, about 40 000 young Tunisians join the working age population every year. Sluggish economic growth in recent years has added to structural and institutional factors that make it difficult to generate the number of jobs needed to keep unemployment stable, let alone to make a dent on the jobless rate. Equally concerning is the low employment rate (46.9% in the third quarter of 2021), which strongly differs between men and women. The labour force participation rate stands at 29% for women and 67% for men (INS, 2021[5]).
Due to the COVID-19 crisis, unemployment increased from 14.9% in the fourth quarter of 2019 to 18% in the second quarter of 2020, a level last reached in 2011. It receded marginally in the second semester but rose again to 18.4% in the third quarter of 2021. The jobless rate is much higher among youngsters (42.4%) and university graduates, particularly for women. Informality increased to 47% of total employment and affects mainly men working in agriculture, construction and retail. The participation rate for women, which had increased by 17 percentage points (p.p.) in 2011-2019, compared with + 5 p.p. for men, has fallen by 1.4. p.p. in 2020.
The recovery will gain some momentum in 2022, but risks loom large
After an abrupt fall in 2020 (-8.8%), GDP is projected to recover slowly (Table 1.1). Economic activity may return to pre-pandemic levels no sooner than late-2023. Tighter containment measures in the first half of 2021 due to rising infections have particularly affected labour-intensive services sectors and the situation will remain fragile. High unemployment will weigh on household income and damp private consumption, whereas investment could climb back with the realisation in 2022 of projects that were initially planned for 2021. Inflation should exceed the 6% mark in 2022, due to wage pressures in the public sector, global commodities developments and supply chains bottlenecks. Unemployment will fall but will remain higher than before the crisis. Certain groups – women, youth and tertiary graduates – will still struggle to find stable and quality jobs. The current account deficit will remain high as tourism receipts underperform and despite phosphates exports’ recovery.
The principal upside risk is that the recovery of tourism happens earlier and proves stronger than assumed. In the medium run, production disruptions in the wake of the COVID-19 crisis and the Ukraine war and possible global trade tensions may also lead to relocalisation (‘reshoring’ and ‘near-shoring’) of value chains by EU-based firms and create new opportunity for Tunisia. On the other hand, there are various downside ones. The steep increase in global energy and agricultural prices due to the Ukraine war could persist over the projection period, lead to higher inflation, depress purchasing power, and adversely affect both the fiscal balance and the current account. Despite the recent rise, the vaccination rate remains low and new COVID-19 waves cannot be ruled out, with associated renewal of containment measures. Lack of progress in reforming institutions, insufficient jobs creation and worsening social indicators could unleash social conflicts that would dampen investors’ confidence and accrue political uncertainty. Regional inequalities are huge and in certain zones poor security still poses a risk. The economy may also have to face external shocks with potential repercussions that are difficult to integrate into forecasts (Table 1.2).
Table 1.1. Recent developments and projections
Note: Contributions to changes in real GDP from 2019 until 2023, effective volumes for 2018 in the first column. Tunisia has recently changed the base year of the Statistics of National Accounts to 2015 and has revised GDP data, which leads to revisions for annual GDP growth (for example, provisional GDP growth in 2020 is -8.7 %). However, as the recently-published data is not complete yet, this Survey uses the previous data vintage.
Source: OECD Economic Outlook, No. 110.
Table 1.2. Events which could affect economic performance
The COVID-19 crisis has exacerbated macro-financial vulnerabilities
Foreign debt is growing
Financial markets have become edgier towards Tunisia since 2020 (Figure 1.10), as reflected in the interest rate spread and rating agencies’ downgrading decisions (Figure 1.11). Sovereign loans, partly concessionary, represent the main source of Tunisia’s external financing and external debt has been trending upwards (Figure 1.9). The public sector is responsible for over ¾ of the external debt. More than 70% of total central government debt is external, mostly in Euros (Figure 1.12). External debt servicing reached 8% of GDP in October 2021, an all-time high. Against this background, authorities have found it difficult to build up foreign exchange reserves. They stood at 131 days of import in late January 2022 (against 160 days one year earlier), despite the allocation by the IMF to Tunisia of special drawing rights.
Figure 1.10. Recent developments in financial markets
Source: CEIC; Central Bank of Tunisia; IMF, Financial soundness indicators; and Refinitiv.
Figure 1.11. External debt and risks have increased
Note: Spread is the difference between Tunisia and the United States in yields on 10-year government securities.
Source: CEIC.
Figure 1.12. Public debt is a source of vulnerability
Banks face a challenging environment
The pandemic has worsened the fiscal outlook and the operational performance of banks, under the double burden of increasing holdings of government securities and direct lending to the state (three syndicated loans have been issued between January 2020 and February 2021, for EUR 972 million and USD 280 million) and growing government liabilities. (Fitch Rating, 2021[6]) estimates that the banks’ exposure to the sovereign hovered around 15% of assets at end-November 2020. Additionally, the banks are highly exposed to SOEs, with credits adding up to around 20% of GDP (IMF, 2021[7]). Dealing with the risks to financial stability requires reinforcing the tools for stress testing and the crisis management framework.
Support measures for companies and self-employed, such as the exceptional financing of the exploitation cycle, are applied until the end of December 2021. The burden of non-performing loans is considerable by international standards (Figure 1.13) and the capital adequacy ratio of some public-sector banks is vulnerable to challenging operating conditions and high unreserved impaired loans. In addition, the move to IFRS (International Financial Reporting Standard) 9 from end-2021 is likely to weaken reported asset quality metrics and require additional provisioning. With the goal of solving the NPL issue, the BCT has established a programme that is focused on reinforcing the banks’ prevention capacities, reviewing and improving the bankruptcy procedures and the legal recovery framework, as well as activating the corresponding budgetary resources.
Figure 1.13. The incidence of non-performing loans is high
Source: IMF, Financial soundness indicators; and BCT.
Fast-growing consumer credit is a concern (Banque centrale de Tunisie, 2021[3]) and household debt could also become a source of instability. Part of it is backed by real assets, as the housing ownership rate is relatively high (Figure 1.14). Housing prices have increased by 43% since 2015. Almost half of households take a loan to cover basic needs (43% of households according to (INC, 2019[8]), and the incidence is higher among low-income households. The recovery rate for the outstanding obligations to micro-finance institutions (MFIs) has also suffered due to the recession.
In theory, the high degree of market fragmentation (the largest three banks each account for about 12% of assets and the five largest combined for about 57%) should encourage banks to compete and innovate, with a positive impact on the functioning of capital markets. In practice, competitive pressures are weak, as reflected in the strong weight of banking commission in net product and the quasi-perfect alignment of banking fees, which reflects various forces (OECD, forthcoming[9]). Governance of state-owned banks is prone to interferences (despite some improvements since the mid-2010s, with the appointment of better-qualified directors and executives). The regulatory and supervisory framework is outdated (Basel II is not fully implemented and supervisors makes incomplete use of risk-based methodologies). Interest rate caps limit competition and the bankruptcy and collateral regimes have proven rather inefficient. Supporting the consolidation of the banking sector, developing credit bureaux and collateral registries and integrating micro-finance institutions (MFIs) into formal credit reporting systems (see below) could improve the quality of financial intermediation.
Figure 1.14. Most households own their house
Note: No data on “Owner with mortgage” available for Tunisia.
Source: OECD calculations based on European Union Statistics on Income and Living Conditions (EU SILC) survey 2019 except for Iceland, Ireland, Italy, and the United Kingdom (2018) ; the Household, Income and Labour Dynamics Survey (HILDA) for Australia (2019); the Canada Income Survey (CIS) for Canada (2017); preliminary data from National Administrative Department of Statistics DANE-ECV for Colombia (2019), Encuesta de Caracterización Socioeconómica Nacional (CASEN) for Chile (2017); the Korean Housing Survey (2019); Encuesta Nacional de Ingresos y Gastos de los Hogares (ENIGH) for Mexico (2018); American Community Survey (ACS) for the United States (2019); and Recensement general de la population et de l’habitat 2014: Volume 6, Logements, menages et technologies de l’information et de la communication (TIC) for Tunisia (2014).
Monetary authorities’ pursuit of macroeconomic stability is hampered by structural fault lines
Monetary policy’s primary objective is maintaining price stability and the BCT also contributes to financial stability, thereby sustaining economic growth. Albeit reverted in 2020 due to the pandemic, tightening of both monetary and macroprudential policies in 2018 signalled concerns with inflation and credit supply growth. It was successful in containing inflation pressures and reinforced the credibility of the BCT. The BCT has also signalled its support to the transition toward a sustainable economy by joining the Central Banks and Supervisors Network for Greening the Financial System.
Adoption of explicit inflation targeting would clarify the monetary policy framework and make it more efficient. Building a stronger anchor for inflation control has been proposed since the early 2000s (Boughrara, 2007[10]) and advances have been made in the 2010s, such as implementing an interest rate mid-corridor system, developing macro-forecasting models and introducing foreign exchange auctions (El Hamiani Khatat, End and Kolsi, 2020[11]).
Some necessary conditions for the successful implementation of inflation targeting (i.e. an ability to carry out an independent monetary policy and to develop a empirical analytical framework linking policy instruments to inflation) are yet to be completely fulfilled. On the one hand, the growing debt/GDP ratio induces the central bank to pay increasing attention to reducing the costs of serving the public debt (so-called fiscal dominance). On the other hand, a weak bank-centred financial system is an additional hindrance, insofar as it makes it difficult to model the monetary transmission mechanism with accuracy (Przystupa and Wróbel, 2016[12]), although the pass-through from the policy rate to the money market rate has increased (El Hamiani Khatat, End and Kolsi, 2020[11]).
It will be important to adopt a roadmap for implementing an inflation targeting regime that spells out the milestones and the condition to satisfy – in particular, a transparent and credible communication strategy; to develop a model or methodology to produce inflation forecasts on the basis of various indicators; and to draw a forward-looking operational procedure that allows to adopt monetary policy according to the appreciation of inflation expectations (Jahan, 2012[13]). It will also be necessary for the BCT to acquire the appropriate tools for measuring households’ inflation expectations. In addition, certain institutional interventions could prove useful. The BCT – that enjoys a lower degree of independence than central banks in other countries, in particular in terms of the appointment of members of the monetary policy council (Figure 1.15) – could start communicating its medium-term inflation targets with the aim of helping the markets understand the reference disinflation pattern. It could also publish in advance the annual calendar of monetary policy meetings.
Figure 1.15. The Central Bank of Tunisia enjoys a lower degree of independence than its peers
Index of central bank independence, 2017
Source: (Romelli, 2022[14]).
Monetary policy alone, however, cannot offset the structural deficiencies affecting the Tunisian economy and producing long-term imbalances. Given the large outstanding debt and the weight of sovereign paper in the banks’ balance sheets, any build-up of inflationary pressures requiring higher interest rates may impact financial stability. Given the large share of debt in foreign currency, exchange rate movements also weigh on financial stability (Figure 1.10). The central bank has adjusted the exchange rate strategy over the years (Figure 1.16), while capital controls have remained rather strict. In the 1990s, it pursued a constant real exchange rate rule, that accompanied a strong economic performance but became less effective as the opening and liberalisation process advanced and the build-up of net foreign assets led to a significant real appreciation (Fanizza et al., 2002[15]). This phase came to an end with the political transition in the early 2010s, that caused capital outflows and prompted the move towards a de jure floating exchange regime, more adequate for Tunisia. De facto it appears that the approach was more akin to a crawl-like regime, as it is indeed classified by the IMF, with the implicit weight of the US dollar becoming higher than the Euro since 2017 (Bouabidi, 2020[16]).
Figure 1.16. The exchange rate regime has changed over time
Note: changes and resulting reclassifications of Exchange Rate Arrangements, based on available information on members’ de facto arrangements, as analysed by IMF staff. For the real exchange rate series, an upward mouvement corresponds to a depreciation.
Source: IMF AREAR database; and CEIC.
In the 1990-2020 period there have been frequent misalignments between the nominal and the real effective exchange rate (Derbali and Eugène-Rigot, 2021[17]). The real appreciation of the dinar has weighed on Tunisia’s competitiveness. Nonetheless, a nominal depreciation to make exports cheaper would have larger costs, in terms of imported inflation and higher costs of debt servicing, than benefits. The CBT has progressively reduced the amount of its foreign exchange interventions, now exclusively aimed at supporting price discovery. Further efforts to liberalise the capital account are welcome to strengthen investment and attract foreign investors, though the sequencing matters. The experience of other countries suggests that this phase should be preceded by trade and product market liberalisation.
Monetary authorities face considerable challenges in pursuing price and financial stability, in a context of fiscal imbalances and political instability. BCT financing of the fiscal deficit was exceptionally authorised in 2020 within the TND 2.8 billion (2.5% of GDP) limit. Money supply, as measured by M1 (currency held by the public + transaction deposits at depository institutions) experienced as result a sizeable increase, to reach in October 2021 +12.9% on an annual basis. The weight of government securities in the BCT balance sheet rose from 14% to 22% in one year. The BCT has warned that debt monetisation would lead to three-digit inflation and possibly a major crisis (El Abassi, 2021[18]).
Reigniting income convergence and reducing macro-economic imbalances requires rebooting structural reforms
Tunisia has experienced a marked growth slowdown in the 2010s, a process of income divergence vis-à-vis OECD countries – but also comparable emerging market economies – that can be attributed to structural reforms insufficient to accelerate structural transformation (Figure 1.17). Structural transformation is a feature of high-growth economies and takes the form of a fundamental shift in a country’s methods of economic organization, in particular the reallocation of factors of production among the different sectors and activities. From this perspective, Tunisia seems to be experiencing “premature deindustrialisation” (Rodrik, 2016[19]) and (Mouelhi, 2020[20])), while the growth of services in GDP is more due to a bloated public administration than to the dynamism of high value-added tertiary activities. The institutional and policy setting does not allow Tunisia to fully exploit new opportunities, notably the ICT revolution. Resource reallocation towards promising and more productive activities is limited, which explains the weak dynamics of production and job creation.
Figure 1.17. Income convergence stalled
Note: Benchmark OECD includes Chile, Colombia, Costa Rica, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Mexico, Poland, Slovakia, Slovenia and Turkey.
Source: Feenstra et al. (2015).
Private business’s weak dynamism, the rising public wage bill, inefficient state-owned enterprises (SOEs), regressive and costly subsidies and tax incentives, poor tax enforcement and growing informality combine to put enormous pressures on the fiscal balance and public debt. Much needed public infrastructure investment has been cut to compensate other, rigid expenditures, thus reducing the growth potential of the economy and limiting the flexibility of launching counter-cyclical fiscal policy. A rising share of public debt is financed by domestic banks, crowding out private investment and raising their exposure to sovereign debt risks and therefore their own soundness. When the currency depreciated during 2017 and 2018, the current account deficit even increased, as export supply has not been able to react to higher relative export prices. Reducing macro-economic imbalances and returning on the convergence path hinges on rebooting structural reforms.
The gains from reforms would be sizeable and their quantification could facilitate social dialogue. Simulations based on the OECD long-term growth model (Guillemette and Turner, 2018[21]) suggest that reforms which move Tunisia closer to the peer group of OECD EMEs would accelerate the recovery and pay off in terms of equity (Table 1.3). Reducing regulatory barriers to firm entry and growth, entrepreneurship, and trade, raising the quality of institutions and reducing corruption, improving education outcomes and reducing the tax burden on labour would produce an average annual per capita growth dividend of 1% over 15 years (Figure 1.18). Stronger growth implies that per capita GDP could be 15% higher after 15 years and 39% higher at mid-century. Although the growth effects of improving the quality of education and governance will take more time to materialise compared to the other two reform scenarios, the magnitude of these effects is substantial in the long-run (Table 1.3).
Table 1.3. Some structural reforms would kick-start growth
Estimated impact of selected reforms on real GDP after 15 years
Note: These estimates were obtained on the basis of the OECD Long-term growth model (Guillemette and Turner, 2018[21]). Scenario A assumes that institutional quality, as captured by the rule of law index (Kaufmann, Kraay and Mastruzzi, 2010[22]), converges to the current OECD emerging market economies 5-year average by 2041. Scenario B assumes reaching OECD emerging market economies’ PISA average score over 20 years (on the basis of the conversion of three years of extra schooling into 90 additional PISA scores). In Scenario C, the tax wedge decreases by 10 ppt. Scenario D assumes aligning product market regulations (PMR) as captured by the OECD PMR indicator with the current OECD emerging market economies’ 5-year average by 2026. The individual reform effects do not sum up to the effect of the ambitious reform Scenario ABCD due to non-linear effects in the model.
Source: OECD calculations.
Figure 1.18. Lifting growth through structural reforms is possible
Note: Scenario “PMR” improves product market regulation to the average level among Benchmark countries over five years. Scenario “Education” simulates an improvement in educational outcomes to the average level of Benchmark countries during the next 20 years. Scenario “Institutions” raises the quality of institutions to the average level of Benchmark countries over 20 years, and scenario “Tax wedge” reduces the tax wedge to the OECD average as of 2022.
Source: OECD Long-Term Model.
While only indicative, these simulations may be helpful in convincing stakeholders that the reforms, some of which might be politically challenging due to opposition from certain interest groups, are implemented in the pursuit of the common good and social development. The Australian experience (Box 1.4) shows clearly how progress in implementing market reforms depends on achieving greater awareness of the societal benefits, to counter the public influence of those groups facing adjustment costs and generate the necessary domestic commitment to resist backsliding. Insofar as distributional effects can make reforms derail, it is important for Tunisia to develop tools of ex ante evaluation that assist policy-makers in identifying losers and winners and design appropriate and cost-effective compensation policies. Similarly, an ex post assessment can assuage fears that unanticipated adjustment difficulties will be left unaddressed.
The sequencing of reforms is another important issue. The international experience suggests that, during a crisis, it is easier to launch a large programme that puts together ambitious measures in different domains. This has the advantage of compensating winners and losers. This strategy is even more effective when the government has just been appointed, since it enjoys a “honeymoon” period with public opinion. Under more normal conditions, maximising the success chances of the reform programme requires a clear identification of the constraints – notably State capacity and the strength of the interest groups that oppose the reforms – and the viability of finding allies to overcome resistance. Sequencing is equally important. The priority should be to strengthen the condition for domestic competition, notably by reducing entry barriers for markets and investment. In addition, foreign trade liberalisation should precede that of financial exchanges. In the case of SOEs that operate in imperfectly competitive markets, it is necessary to introduce updated regulation ahead of changing the shareholders’ structure.
Another important lesson is to maintain an open and relatively well-informed debate on what may prima facie appear to be highly technical issues. Political representatives themselves play a pivotal role, since they are best placed to sell reform to the community at large (Banks, 1998[23]). Their attitudes and actions shape the environment in which stakeholders’ expectations are formed. In Tunisia, the National Council for Social Dialogue (Conseil national du dialogue social) was envisaged in the January 2013 contrat social between social partners, but it only became reality in July 2017. Its ample mandate and credibility in the eyes of stakeholders could accelerate the approval of major economic and social policy measures, but in practice the Council first met in November 2018 and its activities were suspended due to the pandemic.
Various other factors may delay or even impede progress in reforms, despite the appeal of substantial gains, and the clear socio-economic cost of the current stalemate. The approval process for any ambitious reform is complex, as it entails the sequential participation of the tutelage ministry, of the Council of ministers in different configurations, and of Parliament (Assemblée des Représentants du Peuple, ARP), again both in the policy-specific commission and in the plenary. Once a framework law is promulgated, the implementation regulation (décret, circulaire, etc.) must be written. The cycle is very long and, at each stage, it is vulnerable to pressures from interest groups. Groups that resist change are usually smaller, well organised and dispose of the necessary means, including media influence, to influence public opinion.
Box 1.4. Structural adjustment insights from Australia’s experience with broad-based reforms
Over the past three decades, Australia has implemented an extensive range of structural reforms. Foreign trade, the exchange rate and the financial sector have been liberalised, labour market regulation made more flexible, the public sector monopolies that dominated the supply of basic infrastructure services have been eliminated, anti-competitive regulation has been reviewed and reformed through a comprehensive “national competition policy”.
The reforms have generated a range of benefits across the economy. They have also often created adjustment costs for specific firms, workers and regions. While these pressures have typically been concentrated on relatively small groups and been evident from the outset, the benefits have usually been dispersed throughout the community and have taken time to accrue. This highlights the perennial difficulty of achieving support for worthwhile reform.
The Australian experience also highlights the importance of macroeconomic stability in creating an environment which is conducive to successful policy reform and structural change. However, it also shows the importance of addressing adjustment issues and implementing appropriate adjustment policies. Some key lessons from the Australian experience are noted below.
Effective policy evaluation processes are fundamental. Decision-makers need information and analysis of whether a proposed structural reform is in the overall interest of the community, having regard to its expected benefits and costs and any significant distributional consequences. Where appropriate, different implementation strategies need to be examined and the basis for particular policy choices made clear.
Independent review processes can facilitate acceptance of the need for reform. Governments and communities need to understand the rationales and consequences of different policy choices. Review bodies that operate at arm’s length from government and interest groups and whose processes provide for extensive consultation and public scrutiny can help governments “sell” reform and enhance community understanding that the benefits will outweigh the costs.
Broad-based reforms can reduce adjustment costs. Notwithstanding the substantial challenges involved, undertaking reforms concurrently across different policy areas can reduce resistance to change. This is because those adversely affected by one reform may receive offsetting benefits from others. For example, modelling undertaken by Australia’s Industry Commission of tariff, electricity, telecommunications and public sector reforms demonstrated that, although trade liberalisation would reduce manufacturing employment by 0.3%, the net effect of all four reforms would be to increase employment in that sector by about 1.2%. A broad-based reform programme also made it harder for individual industries to argue for exemption.
Reliance on generally available adjustment measures, wherever feasible. The advantages of general social safety nets – such as the social security/tax transfer system, job search assistance and training programmes – are that they treat individuals in similar circumstances equally, target assistance to people in genuine need and support people rather than particular industries or activities. Even so, such measures cannot handle all contingences and additional measures may be needed. There are, however, few hard and fast rules for determining when additional assistance might be warranted and what will work best.
Other industry-specific adjustment assistance needs case-by-case evaluation. Special assistance packages have been used to ease the transition to lower levels of assistance for Australia’s dairy, passenger motor vehicle, and textile, clothing and footwear industries. Specific adjustment measures should facilitate rather than hinder change, be targeted to adjustment problems, be cost-effective and compatible with general safety net arrangements, involve an equitable sharing of financing costs and be transparent, with clear lines of accountability. The risk with special industry “deals” is that they can create incentives to hold out for compensation (thereby slowing adjustment) and encourage other firms and workers to seek favourable treatment.
Incremental reform can facilitate adjustment. One implementation strategy that can ease adjustment pressures is the phasing of reform. It has distinct advantages when gradual, sequential changes would smooth the transition path by allowing affected parties time to adapt to a new policy environment and when there is limited information on the adjustment capacity of different groups of workers and firms. For example, phasing has been used in Australia’s programmes of reform for tariffs, subsidies and public utility pricing. The graduated introduction of reforms can delay receipt of the benefits, however, and in some cases may increase the scope for policy reversal.
Ex post evaluation can help keep reforms on track. The ability of policy makers to identify and address possible adjustment or distributional problems in advance is often limited. Difficulties associated with a reform might only emerge during implementation. Consequently, there is a role for ex post assessment and, where appropriate, associated modification of reforms. This can help reassure the community that unanticipated adjustment difficulties will be addressed.
Source: Australian Productivity Commission.
A fragile fiscal situation requires interventions on spending, revenues and State-owned enterprises
The 2020 fiscal deficit widened to over 10% of GDP, due to lower revenue, additional transfers to SOEs and emergency support to firms and households (Figure 1.19). Despite ad hoc provisions putting limits on hiring, promotions and overtime hours in non-priority areas, the civil service wage bill grew to 17.5% of GDP. The 2021 budget aimed to narrow the deficit to 6.6% of GDP, but not all specific cost-cutting measures required to reach this target have been activated. The 2021 supplementary budget law (LFR-21) reports a sizeable increase in budget receipts (+13% year-on-year) and an even faster increase of public spending (+13.7%), primarily due to the large resources devoted to capital reimbursement, as well as to the dynamics of the wage bill and social outlays. For 2022, the budget law (LF-22) foresees that the fiscal deficit would equal 6.7% of GDP. The assumptions used in LF-2022 are 2.6% for GDP growth and average oil price at USD 75 per barrel. Financing needs would remain stable at TND 20 billion, which includes public debt reimbursement. LF-22 includes tax and non-tax measures that aim at helping some suffering sectors, such as agriculture, tourism, air transport and public works, as well as in support of digitalisation and of the strengthening of the public administration and tax controls. From the viewpoint of structural interventions, the introduction of an early retirement plan in the public administration, at 57 years over three years, is a first step to reduce the wage bill. The budgetary process would gain in transparency from the adoption of a comprehensive communications strategy.
Figure 1.19. The fiscal deficit is large
Note: In the EO 110 (December 2021) round, the OECD projects the central government financial balance to be -8.2% of GDP in 2021.
Source: Ministry of Finance.
The recession-induced fiscal expansion increased the public debt ratio from 72% of GDP in 2019 to 89% of GDP in December 2021. Assuming the primary balance improves progressively and the long-term interest rate rises gently from current levels (a relatively benign baseline scenario), the debt ratio would reach 100% in 20 years. Economic policies would make a substantial difference to debt sustainability by both recalibrating public spending and boosting economic growth. In the structural reform scenario (see above), debt-to-GDP could steadily decline over the same time horizon (Figure 1.20). Were structural reforms also be accompanied by a more ambitious fiscal consolidation effort, the debt situation could improve even faster. On the other hand, a one-off depreciation of the currency would immediately bring about a jump in the ratio, which would then continue to rise further.
Figure 1.20. With ambitious structural reforms to spur growth, public debt to GDP may start diminishing
Note: The baseline scenario assumes that the primary balance deficit (equal to -0.8% of GDP in 2019) is reduced from -5.5% of GDP in 2021 to -1% of GDP by 2029 and stays constant from 2030 on. The structural reform scenario includes reforms that raise the growth potential of the economy, such as easing product market regulation, raising the quality of education, improving governance and the rule of law, and lowering the labour tax wedge (see above), which also raises tax revenues and reduces the primary deficit compared to the baseline. The scenario “structural reforms plus fiscal adjustment” includes additional cuts in public spending which result in a surplus in the primary balance of 0.3 % of GDP in 2025, staying constant thereafter. The scenario “Exchange rate devaluation” adds a devaluation of 15% in 2022 to the baseline scenario, and the scenario “Interest rate increase” models a 0.5 percentage point higher interest rate on public debt than in the baseline scenario. The simulations do not include ageing-related public finance costs, as the necessary data was not available.
Source: OECD calculations based on BCT, Ministry of Finance and the OECD Long-Term-Model.
In order to stabilise public debt and bring it on a downward trajectory it will be necessary, if structural reforms are implemented correctly, to generate a small primary surplus (0.3% of GDP) by the middle of the decade, as assumed in the debt simulations above. Taking as reference the 2019 primary deficit of -0.8% of GDP, this would imply a total fiscal adjustment of 1.1% of GDP. There is also a strong case for public policies to boost human capital investment (by expanding spending on training and some well-targeted social benefits to reduce inequality and poverty) and infrastructure. Assuming additional spending of around 1.5% of GDP on these items, and lower revenues of 0.4% of GDP due to the halving of import taxes and duties, the total fiscal adjustment would need to be around 3% of GDP.
This adjustment could be achieved without raising tax rates or introducing new taxes (Table 1.4). Instead, there is ample scope for raising spending efficiency without jeopardising social and economic objectives (World Bank, 2020[24]). This could include better managing public payroll expenses, phasing out some current expenditures that are no longer priority or have proven ineffective, and trimming tax expenditures that create distortions without generating much benefit. Finally, there is scope to reduce the waste of public resources due to corruption and avoid pork-barrel spending aimed at building political consensus.
Table 1.4. Fiscal impact of recommendations
Note: Numbers in this table are estimates and are subject to considerable uncertainty. Implementation would take several years.
Fiscal imbalances cast a shadow over the solvency of Tunisia in the medium run and make it a priority to adopt a credible strategy. In particular, there would be great value in the introduction of a fiscal rule that ties down gradually the growth of current spending, notably by conditioning it upon the level of public debt, as for example in Costa Rica (see Box 1.5).
Box 1.5. Fiscal rules to put public finances on a sounder footing – the experience of Costa Rica
Costa Rica passed a historic fiscal reform law in December 2018, after two decades of preparatory works and under a complex social situation, including a three-month public sector strike. A critical element in the reform is the introduction of a fiscal rule that ties down gradually the growth of current spending (Table 1.5).
Table 1.5. The fiscal rule in Costa Rica
Note 1. Or the current expenditure-to-GDP ratio is below 17%.
The spending of all non-financial entities of the public sector. i.e. the central government, all deconcentrated bodies, the legislature, the judiciary, local governments or non-financial public companies, are subject to the rule. Exceptions are the Costa Rican Social Security Fund (CCSS), the Costa Rican Oil Refinery (Recope) and state-owned enterprises, concerning the part of their activities subject to competition.
The Finance Ministry is in charge of ensuring that the formulation of the budget for central government and deconcentrated bodies is compliant with the fiscal rule. For the central government, the General Comptroller will verify during the budget approval phase that the budget is in line with the law. At the end of the fiscal year, the General Comptroller will also verify if the fiscal rule has been met. The independent fiscal council will also make an assessment on this. A final report on compliance will be delivered to the General Comptroller Office in April of the following year and published on the website of the Ministry of Finance. The General Comptroller Office will verify that the budget of state-owned enterprises is in accordance with the law.
Source: OECD (2020), OECD Economic Surveys: Costa Rica 2020.
Government spending is dominated by current expenditures, leaving little space for financing social policies
The composition of public spending reflects the view of “the State as a provider of jobs and of subsidized goods and services” (World Bank, 2020[24]). Since the early 2010s, the steep increase in personnel outlays (Table 1.6), reflecting both headcount additions and salary increases (IMF, 2021[7]),has been the main factor behind the worsening of the fiscal deficit (Figure 1.21). This, in turn, has made it necessary to issue more debt both to finance current expenses and debt service, leaving insufficient resources available to strengthen the quality of infrastructure and public services. Implementing recommendations from (OECD, 2018[25]) would be helpful (Table 1.7). In particular, putting public debt back on a sustainable track requires a combination of gradual fiscal consolidation, focused on the volume of public spending and the systematic assessment of fiscal incentives, with structural reforms that can support growth. Tax justice must be strengthened and the bias of subsidies to better off households must be corrected.
Table 1.6. Composition of government spending and revenue1 (in % of GDP)
1. Central government, excluding revenues and expenditures of the social security system.
Source: Ministry of Finance.
Figure 1.21. Social spending is low relative to total expenditure
Source: World Bank, ASPIRE database.
Table 1.7. Past recommendations on macroeconomic policies
The public sector wage bill is one of the highest in the world
Since 2011, public sector (including SOEs) employment and the wage bill have grown significantly (Figure 1.22). Job creation in the public administration and public enterprises, for low-qualified and long-term unemployed individuals, has partly been used to avoid an excessive increase in unemployment and related social tensions. The 2011 general amnesty led to the reintegration of civil servants that had been fired for political reasons, recreating their career path including all promotions. While the legal framework provides for competitive recruitment and promotion, there is in practice little use of adequate performance evaluation and financial incentives. In light of this situation, and also of the relatively high degree of system centralisation, it is very hard to take organisational needs and workforce characteristics into account in the recruitment process.
Figure 1.22. The public sector is a large employer and pays well
Source: ILOSTAT database; IMF, WEO database.
In the medium term, deeper reforms are needed to improve operational performance and reduce the costs of the public sector, such as suspending derogatory, non-competitive hiring and promotions, making it mandatory to publish vacancies, and applying uniformity, equity, fairness and transparency principles to strengthen career-long review processes of civil servants. Similar reforms that earmarked operational expenditure for savings have been implemented in some OECD member countries (Box 1.6). Greater digitalisation would also potentially make public administration more efficient. Resistance to change, however, remains very strong. In May 2021, in particular, trade unions rejected a government plan to trim the wage bill through attrition and voluntary departures.
Box 1.6. Reforming the public sector: the Slovenian and Estonian experiences
In Slovenia, the public sector salary system had evolved into a complex, opaque structure. In 2010, the government implemented a new public sector salary system, after drawn out negotiations with representative trade unions for public employees. The government was innovative and resourceful in the way it managed both the reform process and the required bargaining. The freezing of salary increases, creating a virtual pool of unallocated salary increases available for re-distribution, was probably a decisive factor enabling an agreement. Another lesson is that continued and sustainable reform should include the strengthening of a professional central public employer office. This is critical to ensuring a coherent system. The new function should be empowered to represent the public employer in collective bargaining.
Estonia testifies to the potential of e-government. Citizens can do basically anything online except for a very few things like getting married or divorced and selling or buying real estate. The X-road, the secure communication protocol underlying e-government services, was built on the same principles as the block chain, even before the word block chain was invented. Estonia is also a leader in digitalising public procurement, one of only four OECD countries with a full range of functions built in to its e-procurement systems. During the COVID-19 emergency, it implemented innovative solutions in the way health care services are provided, encouraging electronic consultation.
Source: OECD (2012), The Public Sector Salary System in Slovenia.; OECD (2021), Government at a Glance 2021: Country Fact Sheet Estonia.
State-owned enterprises play a dominating role in the economy
SOEs have played an important role in the Tunisian economy since independence in 1956, when the government took over many firms. However, by the 1980s they had become in most cases inefficient, loss-making and debt-accumulating, contributing to the liquidity crisis that in 1986 forced Tunisia into a structural-adjustment programme overseen by the IMF. That programme included the gradual withdrawal of the state from "non-strategic" sectors. About 144 SOEs were fully privatised between 1987 and 1999, including cement factories and banks.
There are multiple reasons why SOE governance is a crucial issue for Tunisia’s socio-economic development. First, SOEs dominate various sectors -- such as transport, banking and energy – that have an important weight in the cost of living and provide important inputs for firms. They also account for a sizeable share of the economy and in particular represent most of the country’s large enterprises – with SOE share of the total turnover of the 100 largest companies in Tunisia exceeding 50% (Figure 1.23). Second, the bad financial performance of SOEs worsens the state of public finances and their contingent liabilities are considerable (14% of GDP according to (World Bank, 2020[24])). And third, SOEs were a cornerstone of crony capitalism before the political transition and the creation of a fairer and sustainable economic and societal system hinges on making them more transparent.
Figure 1.23. SOEs occupy a central role in the business landscape
Source: OECD elaboration from L’Économiste maghrebin, « Classement annuel des entreprises tunisiennes », various years.
SOEs tend to suffer from poor management, perform badly, pose fiscal risks and ultimately distort markets. The state currently runs 110 enterprises (Ministère de l'économie, des finances et de l'appui à l'investissement, 2021[26]) (the OECD average is about 13), which together have sales equivalent to almost 10% of GDP. SOEs’ average annual net losses between 2013 and 2016 have been TND 400 million, despite close to TND 5 billion (4.5% of GDP) in operating subsidies (World Bank, 2020[24]). At the end of 2019, the 30 biggest SOEs had aggregate debt equivalent to 40% of GDP, including debt to local banks equivalent to 17% of GDP (IMF, 2021[7]). Moreover, debt equivalent to 15% of GDP was covered by government guarantees, which poses a risk to fiscal stability. SOEs have large arrears and cross-arrears with each other, the government, social security funds and private entities. At the end of June 2020, arrears by the SOEs to the government equalled 5.6% of GDP, whereas the government's arrears to SOEs amounted to 7.9% of GDP and SOEs' arrears to private firms was around 3% of GDP.
SOEs typically enjoy a monopoly in their fields of operation, which reduces incentives to improve productivity, creates extra costs on the private sector and opens opportunity for corruption (Ades and Di Tella, 1999[27]). A very simplistic performance indicator (sales per employee) shows Tunisian SOEs not doing particularly well even in the MENA context (Figure 1.24). The case of state power utility company STEG is an example. STEG controls 91.5% of the country’s installed power production capacity and produces 81% of the electricity. However, as a result of delays in power plant construction, there is scarce excess generation capacity and brownouts are frequent (AfDB, 2019[28]). STEG is hard-pressed to meet peak summer electricity demand, let alone keep up with Tunisia’s annual 5% growth in power consumption. Since 2011, STEG expansion in generation capacity has slowed down by 3.5% compared to the previous decade, while increasing theft and lower customer payment discipline have weighted on financials (World Bank, 2019[29]). On the other hand, the payroll has grown from 9 260 people in 2010, to 12 753 in 2013 and 13 467 in 2019.
Figure 1.24. Utilities perform rather poorly
Source: OECD Secretariat based on company reports.
SOE governance could be improved
OECD analysis reveals that all STEG board members are either civil servants or STEG employees. Indeed, in the boards of the nine of the 10 largest SOEs for which data are available, no fewer than 92 out of 106 directors can be classified as politically exposed persons (i.e. have been entrusted with a prominent public function) and/or are company insiders. This governance structure without independent directors encourages collusion and groupthink and limits the contribution of external competences. Most recent reforms have added layers of formal obligations (on issues such as internal appointments, working conditions, or investment and procurement decisions), which in turn introduce additional reporting requirements. It would be better to design an improved set of incentives that are consistent with the goal of aligning the behaviours of managers and directors with the interests of the state as shareholder.
Various consequences of this reform blockade are exemplified by the case of air transport. The EU launched the process of creating a wider Common Aviation Area with its eastern and southern neighbours in the 2000s. While Morocco saw the Euro-Mediterranean Aviation Agreement as an opportunity and the flag carrier has managed to restructure and benefit (Box 1.7), Tunisia has repeatedly cited concerns on the ability of its flag carrier (Tunisair, 62% state-owned) to operate in a liberalised environment. As a result, the adjustments ahead of the Open Skies convention with the EU were delayed. The agreement, which was signed in December 2017, has not been ratified yet and remains a simple project, which has generated considerable opposition, in particular by Tunisair trade unions. In the meanwhile, the airline has accumulated debts and losses, had frequent changes in top management, recorded a low punctuality rate (53% in 2020), and remains heavily overstaffed with 280 employees per aircraft, as against an international norm of 80.
Box 1.7. Market liberalisation and SOE turnaround – air transport in Morocco
Royal Air Maroc (RAM) was established in 1957 and from its hub at Casablanca Mohammed V International Airport operates an extensive domestic and regional network within Morocco and Africa, as well as services to Europe, the Middle East, China and the Americas. It is one of only five African airlines to belong to a global alliance (in this case oneworld, which it joined in 2020).
Morocco signed the 2006 Open Skies agreement with the EU to support tourism in the aftermath of the May 2003 Casablanca terrorist attack and the war in Iraq, presented RAM with an almost existential threat. In Casablanca, the capacity share of low-cost carriers (LCCs) more than tripled from about 12% in 2006 to 40% in 2011, much higher than at neighbouring airports like Algiers (0.6%) and Tunis (1.5%).
The Arab Spring, the bombing of a Marrakesh café and the Euro zone debt crisis depressed the tourist market and brought RAM to the brink of collapse. Facing a negative outlook of declining passenger numbers and increase operating costs, primarily fuel, the 2011 RAM contract programme with the Directorate of Public Enterprises and Privatization (DEPP) of the Ministry of Finance helped to drive the company towards profitability by reducing the scope of its activities, while offering compensation for unprofitable yet essential public services. RAM halved staff from 5 352 to 2 737 in 2014 through a voluntary redundancy plan approved by the trade unions, thus cutting wage costs by 34%. It also launched an extensive fleet renewal programme. RAM has recorded a profit since 2013, with rising revenues. In 2012 the government announced that it would sell a 44% stake, although this partial privatisation did not advance.
COVID-19 provoked a major crisis, with revenues falling by 70% (from MAD 16.5 billion to MAD 5 billion) and losses amounting to MAD 3.5 billion. The government granted a MAD 6 billion (USD 600 million) financial assistance package in August 2020, conditional upon a draconian cost-cutting effort.
Source: OECD and World Bank.
The first priority moving forward is to develop a proper ownership strategy accompanied by concrete measurement and management indicators. State ownership has been justified as a means of protecting "strategic” industries and their workforces from competition or predation. Keeping SOEs on life support in sectors as varied and as non-strategic as advertisement, poultry farming, stevedoring, and cement does not contribute to achieving development goals. From the social welfare angle, the best solution for the state should be either to sell or liquidate them, in tandem with restructuring of liabilities with lenders, lessors and other stakeholders. While both options may be difficult in the current environment, muddling through is a worse alternative. Little progress has been made over the past decade in terms of transparency, performance, governance and sustainability. While non-binding performance criteria (contrats de performance) have sometimes been adopted, they are not made public – like they are for instance in Uruguay (OECD, 2021[26]). The Unité de surveillance de la productivité des entreprises publiques lacks technical expertise (World Bank, 2014[30]). The quality of financial reporting must be improved: currently, many SOEs submit their accounts with considerable delay and qualified opinions by the auditors are far from uncommon (World Bank, 2020[31]).
For public utilities, the search for international partnerships may advance faster, provided the government commits not to interfere with the new owners and managers. Reserving a minority stake to employees may also assuage fears that a takeover would immediately lead to redundancies. The international experience since the 1980s is also unambiguous in highlighting the benefits from pro-competitive regulation, managed and overseen by independent economic regulators (OECD, 2016[32]). Outside of the financial system, Tunisia’s only such authority is the Instance Nationale des Télécommunications (with a second one for radio and television, Haute autorité indépendante de la communication audiovisuelle, HAICA, that is not an economic regulator). The creation of a sectoral regulator would be a major advance for developing electricity self-production using renewable sources (Rassaa et al., 2020[33]).
The government’s reform plan submitted to the IMF envisages setting up a Public Enterprise Restructuring Fund to recapitalise SOEs, bringing all SOEs under a single public shareholding agency and selling at least some "non-strategic" businesses. While a variety of different ownership structures and governance arrangements co-exist in OECD countries, there is a continuing trend toward vesting the ownership rights and responsibilities with one entity (OECD, 2021[34]) (Box 1.8), which is consistent with the recommendations of the OECD SOE Guidelines. While it operates under the tutelage of the government, which sets the operational guidelines, it is crucial that the state shareholding agency be autonomous in the portfolio management in order to maximise the financial interests of the state and encourage exemplarity regarding transparency, remunerations, equality and social and environmental responsibility. Indicating the financing sources for the restructuring effort would increase the credibility of the government plan.
Box 1.8. Centralising the exercise of ownership rights can improve SOE governance
The desire to improve SOE performance and efficiency without relinquishing public control of the underlying assets is not unique to Tunisia. Various OECD Member countries have adopted centralised ownership model which is characterised by one central decision-making body carrying out the mission as shareholder in a majority of companies and organisations controlled by the State. Financial targets, technical and operational issues, and the process of monitoring SOE performance are all conducted by the central body. Board members are appointed in different ways but instrumental input comes from central unit.
France: Agence des participations de l'État (APE, Government Shareholding Agency)
APE was formed in 2003 in order to exercise the mission of the government as shareholder separately from the different roles of government as a supervisor and regulator. APE employs 55 people and has an annual budget of EUR 12.4 million.
As a central administration department reporting directly to the Minister of Economy and Finance, it provides shareholder monitoring of 88 state-owned or state-invested companies (the list of enterprises is established by a government decree) as well as their subsidiaries. A number of smaller companies focused on the delivery of public policy objectives are not monitored by the APE, but by the relevant line ministries. APE manages the government budget accounts for all revenue and expenditure relating to State financial participations – except for the dividends from companies in the APE portfolio which are paid directly to the general state budget. As the shareholder, in each SOE APE also appoints one or more directors. At the third Haut conseil de cooperation franco-tunisienne, held in 2021, France agreed to offer technical cooperation on this matter.
Finland: Ownership Steering Department (OSD)
The 2007 Resolution on State Ownership Policy outlines the main principles and operating practices of the State's ownership steering. The corresponding duties are carried out by the Ownership Steering Department (OSD) within Prime Minister's Office (PMO) in accordance with guidelines and recommendations approved by the Cabinet Committee on Economic Policy. The OSD nominates the State’s candidates to SOEs’ boards, prepares other matters connected with the Annual Shareholders’ Meeting and monitors the company during the year.
Costa Rica’s Presidential Advisory Unit (PAU)
PAU was established in 2018 to manage and co-ordinate State shareholdings and autonomous institutions. It is tasked to assist the President and the Executive in exercising ownership rights in an active and informed manner and professionalise the appointment process of board members. PAU officially began operation in September 2018 and issued an ownership policy and a first aggregate report on the SOE sector in 2019. It is headed by the Secretary of the Council of Ministers and has an annual budget of approximately USD 100 000, which also includes the Council of Ministers.
Lithuania’s Governance Co-ordination Centre (GCC)
GCC performs monitoring and forecasting functions, reports on SOE and municipally-owned enterprises compliance with the requirements of governance, transparency and execution of indicators and provides recommendations and consultations to institutions implementing rights and duties of the State (shareholder ministries). Major roles include board member selection, SOE target setting, strategies and other governance practices.
Chile’s Public Enterprises’ System (Sistema de Empresas Públicas, SEP)
SEP is a committee of CORFO (Production Development Corporation). It acts as a technical advisory body, with authority to centrally oversee the management of the majority of CORFO-owned SOEs (23 out of 33 SOEs). Some SOEs are profit-seeking entities, for others the mission is at least partly to pursue social goals. SEP over-arching task is to appoint and remove SOE directors, on the basis of the corporate governance code, a specific code of conduct, and the annual assessment of directors’ performance. SEP itself is overseen by a nine-member governing council and is managed by an Executive Director recruited from the private sector.
Source: OECD.
Better protecting the neediest
The pandemic presents the authorities with new challenges since some of the remarkable gains made in reducing poverty in previous decades (OECD, 2018[25]) are likely to wane. The estimated increase in the percentage of the population that is poor depends on the poverty line, being very small in the case of extreme poverty (expenditure threshold of USD 1.90 per-day), but higher (the increase is 5.4 percentage points) for those “vulnerable” to fall into poverty (i.e. population living with USD 5.50 per-day). The emerging middle class that alimented consumption in the past two decades (CESAO, 2014[35]) now faces déclassement risks. Fieldwork by the INS and the World Bank has revealed changes in eating habits among poorer households, which have been pushed into reducing quantities consumed or switching consumption towards less preferred foods (Kokas et al., 2020[36]). Women seem more affected, due to pre-existing wage and income inequalities that worsened during the crisis, a period that also saw women spend more time performing unpaid family chores. A more encouraging diagnostic derives from two synthetic indicators of social progress, the Social Progress Index (Social Progress Imperative, 2021[37]) and the global multidimensional poverty index (UNPD, 2021[38]). Tunisia is in relatively good positions in both rankings, which gauge respectively the ability of countries to fulfil their citizens’ social and environment needs and the share of the population that suffers from different forms of deprivations that touch them in their daily life, such as health threats, insufficient education and poverty.
To cope with rising food prices or to make up for jobs losses, households drew on their savings, received help or borrowed money from relatives, in particular those living abroad, and deferred payment of their obligation. Moreover, since mid-2020, the deteriorating economic situation combined with the large role of the informal sector has also been reflected in the increasing number of Tunisians who leave the country crossing the Central Mediterranean route (Figure 1.25).
Figure 1.25. Migration to Europe has risen
Source: Cruscotto statistico giornaliero, Dipartimento Libertà Civili e Immigrazione (interno.gov.it).
Policies should quell the costs of the pandemic for households along different dimensions: labour and non-labour income, consumption and the continuity of services. The contingency plans implemented in 2020 provided in-kind assistance and emergency cash transfers to 1.1 million households, for a total amount of TND 287 million. This aid is differentiated according to the level of poverty and/or vulnerability. Needy families received an additional exceptional assistance of TND 50 in April 2020 and TND 60 the following month. Exceptional monetary assistance of TND 200 was granted in April and May 2020 to low-income families eligible for discounted healthcare cards and to families hosting a person without family support (disabled, elderly or orphaned child). The same amount was paid in May 2020 to vulnerable families not listed in the DSS database. Recipients of low retirement pensions also received an exceptional aid of TND 100 in May 2020. In 2021, in response to the resurgence of the pandemic, new measures were adopted to protect those hit hardest by the pandemic and poor and vulnerable households. The social protection project is supported by a USD 300 million loan from the World Bank.
The 2020 emergency programmes have revealed some issues regarding targeting, with cash transfer going to non-eligible better-off households, as well as failures to reach a significant share of the poorest households (World Bank, 2020[24]). This underscores the urgency of using a new targeting method (proxy means test) to improve the new AMEN Social cash transfer programme (which has replaced the PNAFN, Programme National d’Aide aux Familles Nécessiteuses) and which could reach up to 900 000 households. The Organic Law on Social Policies revises the method of targeting, which will henceforth be based on the concept of multidimensional poverty which, beyond income, also considers health, education, employment, living conditions and access to public services. This requires the full implementation of the digital individual identifier to link different data sources. Improved targeting would free resources for growth-enhancing investment.
To shield the purchasing power of the population against world market contingencies and input cost increases, the government directly influences prices of basic food and consumer items, either by setting an official price or by subsidising the products. For decades, the compensation system has served to subsidise staple food (notably bread, pasta, milk, sugar and vegetable oils) and other products and services, such as hydrocarbons, transport and drugs. The budget of the Caisse générale de compensation (CGS), which distributes subsidies to the producers of these goods, surged between 2011 and 2019, to reach 4.7% of GDP, reflecting growing energy imports, rising world price of staple food and the currency depreciation (Dhakouani, Znouda and Bouden, 2020[39]). Food subsidies may mitigate food deprivation for poor households. However, they tend to benefit more the rich as they consume more subsidised products and the impact is regressive (Boughzala et al., 2020[40]). Smuggling of subsidised goods is estimated to be half as large as official trade with Libya and larger than official trade with Algeria (Ayadi et al., 2014[41]).
In the 2021 Budget, subsidies are reduced to 2.8% of GDP, of which ⅔ for basic food. A new automatic price adjustment formula for the three main fuels was applied for the first time in April 2021, resulting in a 1.5% decline in pump prices. In the new formula, the value of imported hydrocarbons and refined oil replace the average barrel price as the reference for the monthly adjustment, that will be within a +/- 1.5% band. The modification, and the associated decision to make the opinion of the technical committee binding for the government, go in the right direction: it should make the process more transparent and less prone to political pressures. The formula should be implemented fully and symmetrically, also when oil prices are rising.
Transitioning to subsidising income, rather than producers and prices, would better align the system with overall distributional and poverty reduction objectives. In the aftermath of the pandemic, this reform would benefit from progress achieved in digitalisation of social policy operations. In particular, it may be possible to use additional tools such as the identifiant social (IS) and the chip-card. Indeed, since 2017 each individual receives an IS that helps to better manage the beneficiaries of all social protection programmes by digitising the registration process. By mid-2021, 91% of those insured at the CNSS and CNRPS (7.4 million people) and 853 280 people registered in the AMEN programme had received their IS.
The tax system is in need of reforms
Tax revenues have increased from 25% of GDP in 2000 to 32% in 2018, which is high compared to most EMEs (OCDE/ATAF/CUA, 2020[42]). The burden falls disproportionally on salaried workers and the tax wedge on labour income is substantial compared to workers’ productivity level (OECD, forthcoming[43]). Both evasion and avoidance of income tax are frequent, although there have been improvements with the creation of a new company register based on a single tax identity number. Value added tax (VAT) receipts equal 7% of GDP: despite the advantage of the paper-trail and self-enforcing properties of the VAT, collection is made difficult by the complexity of the tax code and poor enforcement (OECD, forthcoming[43]). In this context, the priorities are improving tax administration and phasing out the régime suspensif, which allows a VAT-taxable person to receive, tax-free, some of the goods and services necessary for its exploitation.
Corporate taxation represents a small portion of revenue collection, given the substantial share of the informal economy and the large number of businesses that are subject to the flat-rate scheme (“forfait”). The flat-rate scheme simplifies tax filing procedures for self-employed and smaller firms up to an income threshold of TND 100 000. However, under-declaration is rife due to insufficient tax controls, and some features of the scheme could be improved. In particular, reducing the eligibility period would increase the frequency of checks and the flat-rate scheme could make greater use of online services for administrative management.
In addition, there are numerous tax incentives for investment and job creation. Regressive tax deductions (e.g. for owner-occupied housing) also weigh on the ability to raise more revenue from the personal income tax and to make it more progressive. In 2021, Tunisia published for the first time a report on tax expenditures. This is a significant step forward, even if some room for improvement exists (calculation of lost tax revenues for all tax expenditures, details of information on their beneficiaries, carrying out impact assessments, etc.) (OECD, forthcoming[43]).
The 2021 Budget Law contains encouraging provisions, such as halving the maximum response time for the tax administration to react to a taxpayer objection to 90 days. Some changes in the five codes that regulate the Tunisian tax system are intended to alleviate the burden of the recession (Box 1.9). An increase in tobacco excises was decided in March 2021, resuming the stepwise increase started in 2017 in line with WHO recommendations. This measure may generate additional revenue of at least TND 200 million (or 0.2% of GDP). The 2022 budget foresees that firms may benefit from lower interest rates on investment credits and that criteria for qualifying as an exporting company be eased, with the export-to-turnover threshold lowered from 70% to 50%. LF-22 also provides for an increase of indirect taxes on a range of consumer goods, including higher customs taxes on selected imports.
Box 1.9. Main tax measures in the 2021 Budget Law
The main tax measures in the Budget law for 2021 are as follows:
Corporate sector
Reduction in the corporate income tax from 25% to 15%, and rate convergence between offshore and onshore firms.
Transfer price regulations are only applicable to companies with sales equal or higher than TND 200 million (previously TND 20 million) and doing business with other connected foreign companies.
Reduction in the withholding tax rate from (i) 15% to 10% in the case of income from rental, (ii) from 5% to 3% in the case of income from professional services and (iii) from 1.5% to 1% when the sum is equal or larger than TND 1 000.
Specific measures to alleviate companies hit by the coronavirus, subject to respecting the preferential terms (e.g. paying 2020 corporate income tax by May 2022).
Possibility to re-evaluate land and real estate.
Deduction for reinvestment in the capital of “totally-exporting companies”.
Incentives for research and development expenditures.
Household sector
Doubling of the threshold to benefit from the CEA (compte épargne en actions, a savings account to invest in shares) from TND 50 000 to TND 100 000 per year.
Increase of the threshold to benefit from the life insurance and the capitalisation insurance contracts from TND 10 000 to TND 100 000 per year.
Transformation of the 20% withholding tax on interest income into a definitive payment, not subject to restitution.
A coherent tax reform should contain different elements. There are currently five separate Codes, covering personal and corporate income taxes, VAT, registration and stamp duties, local taxes, and tax rights and procedures. A general tax code should be comprehensive, simple and clear to understand and apply. The institutional setting would benefit from establishing a state agency for collecting current and outstanding tax dues, staffed with competent specialists and highly digitalised. The scope of special regimes should be reduced, especially in the case of the VAT for which a rationalisation of exemptions is in order, while remaining tax differences between the onshore and offshore sectors should be removed, to allow all companies to operate in a level playing field. Widening the tax base, improving the implementation of the régime forfaitaire (flat rate) and controls, notably by more efficient use of tax inspectors, could in the medium run open the space for reducing tax rates. In more general terms, there would be benefits from introducing a reform roadmap and communicate clearly and in a timely fashion in order to reinforce the transparency of the tax system.
Other sources of government revenues could be mobilised. Privatisation, in the broader context of the reform of state-owned enterprises (see above), could help. In addition, investigations launched since 2011 have failed to confirm the initial estimate of the value of the assets stolen by the former president, his family and associates (USD 13 billion). Identified illicit assets held outside Tunisian territory totalled amounts that were very far from the initial estimate. On the other hand, almost all the financial properties controlled by the former president's clan in Tunisia were confiscated by decree. International procedures for the recovery of illicit assets, launched in particular in various European countries and in the Middle East, despite some notable successes, have suffered from the insufficient cooperation offered by some countries, the difficulty of identifying illicit assets originating from past crimes and the slowness of mutual legal assistance procedures.
The financial situation of the public pension system is poor
Population ageing, rising dependency ratios, generous gross replacement and low growth have weakened the pay-as-you-go system (Figure 1.26) (Ministère de l'économie, des finances et de l'appui à l'investissement, 2021[26]). The 2019 reform raised the retirement age in the public sector to 62 years, with the possibility of working until 65, and increased employee and employer contributions. It is understood that the same rules will apply to the private sector, but negotiations on this issue are not progressing. Further efforts are required to increase transparency about the fiscal deficit of the pension system, in particular by accounting for large arrears with the public health insurance system (IMF, 2021[7]).
The structural problems of the pension system, however, remain untackled and a wider reform will be necessary. Replacement rates are much more generous than in the average OECD country, particularly in the public sector system, where benefits are calculated based on the last salary (Figure 1.26). Pensions are indexed to wages, whereas in many OECD countries they are indexed to inflation. The accrual rate should be made linear (i.e. same rate for all years) and the amount of the pension should be calculated on the basis of average earning over the whole career (World Bank, 2020[31]). In the private sector regime, under-declaration of revenues and salaries is a serious issue for the collection of social security contributions which should be addressed by reinforcing controls and improving the digital infrastructure to detect fraud (CRES, 2017[44]; OECD, forthcoming[43]). Early retirement, where possible, is not penalised and is increasingly expensive given longer life expectancy. Moreover, multiple special regimes introduce distortive elements in terms of equity. Financing large contingent liabilities from pensions through general tax revenues is highly regressive in a country where coverage is far from universal and 46% of the workforce is informal. Brazil has recently reformed its pension system, reducing inequalities between the public and private sector regime and making contributions more progressive (OECD, 2020[45]).
Figure 1.26. The pension system is unsustainable and further reforms are needed
Source: Government of Tunisia; and OECD database on pensions.
A friendlier and fairer business climate could sustain investment
As other emerging market economies, Tunisia has long been plagued by crony capitalism, i.e. a form of economic governance in which policy decisions are subject to undue influence of a small number of interest groups. Politically connected firms, including those owned by former president Ben Ali and his family, dominated large swathes of the economy and were more likely to evade taxes than non-connected ones (Rijkers et al., 2016[46]). Despite expectations of tangible improvements in synch with the political transition, a small number of influential vested interests have a grip on the country’s politics and economy. They hold significant influence through ownership of media, business monopolies, the financing of political parties or by directly holding a parliamentary or government position. From their position, they can influence the public debate and better defend their interests.
Opportunities for gaining economic rents can be reduced by simplifying the regulatory environment, strengthening the rule-based system and improving policies in areas such as public procurement, subsidised credit, international trade, privatisations, and beneficial tax regimes and subsidies. The OECD Product Market Regulation (PMR) indices show the pervasiveness of state involvement in the economy and the numerous regulatory obstacles to firm entry and entrepreneurship (OECD, 2018[25]). Progress since the previous OECD Survey has been limited (Table 1.8). Analysis conducted for this Survey indicates that job creation is dominated by older firms signalling that business dynamics are weak and that younger firms face difficulties to grow and expand employment (Figure 1.27). Moreover, firm entry rates are much lower in Tunisia then in EME benchmark countries, and they have declined since 2011 (see Chapter 2).
Table 1.8. Past recommendations on the investment climate
Figure 1.27. Employment is concentrated in older firms
Share of employment by size class and age for Tunisian and OECD benchmark countries, 2018 or latest year
Note: This figure reports the share, in percentage, of employment in start-ups (firms aged between 0 and 2 years), young firms (2-5 years) and old firms (older than 6 years), separately for each size group: micro firms (between 2 and 9 persons engaged), small firms (between 10 and 49 persons engaged), and medium size firms (between 50 and 99 persons engaged, and between 100 and 249 persons engaged). The benchmark group includes Costa Rica, Hungary, Latvia and Turkey. The figure is based on data for manufacturing and non-financial market services, and covers the last available year in each country (2018 in Tunisia and 2015 for countries in the benchmark). Data may be preliminary and differ from official data.
Source: OECD DynEmp database (https://www.oecd.org/sti/dynemp.htm).
Starting a business requires more procedures than the OECD average and operating a business activity suffers from heavy administrative burden (OECD, 2018[25]). Complex regulations including related to taxes oblige firms to incur additional expenses, a sort of tax that reduces competitiveness and induces small firms, which are disproportionally affected, to remain informal. In the case of digital infrastructure, for instance, erecting new masts entails multiple paper form filling, inconsistently applied rules and bureaucratic delays that consume up to two years (EBRD, 2020[47]).
There has been progress in the digitalisation of administrative procedures and delays have been shortened, but, prior authorisation is still required for many procedures related to market entry and investment. There are strong barriers to market entry and contestability, grounded in national legislation and sectoral regulation, in numerous services. Although the 2017 investment code contained a set of general principles to enhance both freedom to invest and investors’ protections, the 2018 application decree, the longest-ever in Tunisian legislation (222 pages), lists 243 authorisation and licensing regimes (World Bank, 2020[48]). Authorisation is required to invest in 49 sectors if foreign ownership exceeds 50%, while in other sectors, such as wholesale trade, a blanket prohibition to FDI applies. Possibly excessive reform zeal in the revamping of the institutional framework for investment promotion and facilitation has led to the creation of several bodies with mandates that are, in some areas, partly overlapping, creating additional administrative complexity (OECD, 2021[49]).
Introducing automatic authorisation procedures while maintaining transparent ex-post controls to ensure compliance with regulations could significantly reduce administrative burden. Silent-is-consent rules and the centralisation of administrative procedures for start-ups in one-stop shops or single windows have been applied in many countries with remarkable success in reducing administrative burden for firms and facilitating market entry, for example in Portugal (OECD, 2019[50]; OECD, 2020[45]). Requiring an ex-ante regulatory impact analysis in cases of new regulations with potential economic impacts, including on competition, would also be useful, especially if such assessments lead to binding recommendations. In addition, ex-post evaluation should be used systematically to assess whether regulations achieve their goals. Ideally, Tunisia should also consider the application of one-in, two-out rules, where further regulations can only be introduced by alleviating the cost of compliance with other regulations (OECD, 2020[45]). There are various other low-cost measures to improve the investment climate such as reducing the number of acts that require court bailiff transmittal, encouraging alternative dispute resolution, and de-penalising certain misdemeanours (World Bank, 2020[31]).
The 2018 Start-up Act introduces a series of changes to tax, immigration, and regulatory policies to eliminate barriers and to make access to entrepreneurship easier for the entire population, including those living in remote areas. It also includes tax exemptions for up to eight years, the possibility for public and private sector employees to take a one-year leave to set up a new business, a state-funded salary for up to three founders per company during the first year of operations, and the authorisation for prospective entrepreneurs to open a foreign currency account. However, simplifying the tax and subsidy system to reduce administrative burden for start-ups should be preferred over the introduction of new special incentives that may further complicate the system.
The 2015 competition law forbids anti-competitive or discriminatory practices and sets up controls on business concentrations. The law applies across the whole economy, although some sectors are subject to specific norms applied by sectoral regulation bodies (banking, insurance, micro-finance, and the media). The 2015 law covers price controls (on essential, subsidised goods and services provided under state monopolies). An on-going competition assessment by the OECD concludes that enforcement needs to improve in order to reduce market power of incumbents and facilitate market entry and growth of young and innovative firms.
The Competition Council is understaffed by international standards and has mainly concentrated on investigating market power abuses in a narrow set of markets where it currently has expertise (OECD, forthcoming[51]). Moreover, the Ministry of Commerce exerts considerable influence over the Council, whose budget is included in that of the Ministry, which also appoints the president and the other members and intermediates any cooperation between the Council and other government bodies, thus delaying information exchanges. Strengthening the independence of the Competition Council, improving its organisation and diversifying its resources, notably through a combination of different sources such as general revenues and fees collected for its activities could significantly improve the enforcement of the competition law framework (OECD, forthcoming[51]). In addition, currently the delays for appeals to the Council’s rulings are long and lead to a de facto immunity in many cases. The automatic suspension provision should therefore be eliminated when an appeal is filed and resources be devoted to provide training in economics to judges that deal with competition law (OECD, forthcoming[51]).
However, some progress has been made, as some sectors and products are being opened to more competition. For example, the price of three hot drinks (express, direct and cappuccino) was liberalised in 2012, but it was only in 2021 that such measure was extended to three additional items (café filtre, café crème and tea) and this only in shops that do not serve alcoholic drinks. Also in 2021 supermarkets gained the right to sell cigarettes (previously reserved to 14 000 tobacconists). The authorities expect liberalisation to curb smuggling that is estimated to account for up to half of total consumption. It is important to maintain momentum into reform processes and continue opening up markets where strict entry and price controls still prevail. Implementing the 220 specific recommendations made in 2019 to remove potential barriers and increase competition in various sectors, including retail trade, remains a priority (OECD, 2019[53]).
Fostering the international integration of the domestic economy is key
Tunisia’s development since the 1980s has been closely connected with the success of trade policy liberalisation in spurring diversification and sophistication of the product structure of exports and participation in global value chains (Joumard, Dhaoui and Morgavi, 2018[52]). Trade intensity, measured by the share of exports and imports in GDP, is in line with OECD countries (Figure 1.28). Nonetheless, Tunisia does not fully exploit all its assets. Taking into account other features affecting the extent of economic globalisation – such as the geographical concentration of trade, the prevalence of non-tariff trade barriers and compliance costs, the mean tariff rates and the number of bilateral and multilateral free trade agreements (Gygli et al., 2019[53]) – Tunisia’s global ranking is rather low (95th in 2018). This is due to the rather cautious attitude of the country towards effective trade liberalisation and comprehensive trade negotiations.
Trade flows are mainly with the EU, with the main goods being machinery parts and components (Figure 1.29). This reflects the participation of Tunisia in global value chains through forward linkages (Joumard, Dhaoui and Morgavi, 2018[52]) and (Sammoud and Dhaoui, 2019[54])). On the other hand, slow progress in trade and investment liberalisation between Maghreb countries and poor transport and digital infrastructure hamper the development of regional exchanges and the reaping of the associated gains from specialisation. For Tunisian exporters, the political and economic crisis in Libya is particularly damaging, as sales to the neighbouring country fell from USD 832 million in 2009 (5.8% of total exports) to USD 539 million (3.6%).
Figure 1.28. Trade openness is roughly similar to the OECD average
Source: World Bank, WDI database.
Figure 1.29. Exports are predominantly to Europe
Source: COMTRADE; and UNCTAD.
The composition of Tunisian exports has changed substantially since the 1990s, due to the boom in sales of parts and components for the transport equipment sectors. In parallel, the relative importance of textiles and clothing has diminished. On the other hand, during the past decade, some important traded products have experienced negative developments. Oil production has fallen by -7.4% per annum since 2009 and gas has declined since 2018 (BP, 2021[55]), as the oldest fields were decommissioned, FDI remained modest and no major discoveries have been recorded in the current century. The number of prospect and exploration licenses have shrunk from 56 in 2010 to 23 in 2020, the energy trade deficit widened by 13.6 percentage points in the first semester 2021 vis-à-vis the same period one year earlier and the energy independence rate (i.e. the share of domestic consumption covered by available domestic primary energy resources) fell from 93% in 2010 to 36% in the first semester of 2021. Overall output of natural and liquefied gas is anticipated to decline through the current decade (Wood Mackenzie, 2021[56]), despite the recent opening of new fields, notably Nawara. Export volumes of phosphates and derivatives have fallen sharply since 2011 due to ongoing social unrest at production and transport sites. Tunisia’s global phosphate rock production ranking has gone from fifth in 2008 to tenth in 2020 (U.S. Geological Survey, 2021[57]). In the case of tourism, by 2018 arrivals had recovered from the losses caused by the terrorist attacks of 2015, although in 2019 average spending per visitor was below the pre-2015 levels (see chapter 2). Food imports have grown fast, aggravating the trade deficit (ONAGRI, 2021[58]).
The deteriorating quality of physical infrastructure and of trade facilitation weighs on Tunisia’s competitiveness (Figure 1.30). Export-oriented enterprises suffer in particular from the lack of adequate investments in ports, which represent 98% of overseas shipments. According to a recent survey, 70% of firms have lost orders due to delays at ports and more than half have been obliged to switch to more reliable, but also more expensive, air freight (AHK, 2021[59]). Despite legislation pertaining to the allocation of concessions in the sector, private sector involvement has been limited so far. While the Office de la Marine Marchande et des Ports (the responsible state-owned enterprise) is financially healthy, the other public enterprises responsible for infrastructure incur notable financial losses despite receiving considerable subsidies (World Bank, 2019a). An agreement has been signed with the Millennium Challenge Corporation to improve the management, enlarge and digitalise the port of Radès. The 2020 PPP law has clarified the regulatory framework, broadly in line with the findings of an OECD assessment of the previous law (OECD, 2015[62]) and streamlined the institutional set up by establishing a new body, the Instance générale de partenariat public-privé. Given the problems that have sometimes characterised PPPs in other countries, such as cost overruns and contract renegotiations, it will be important to carefully select infrastructure projects that are both viable and consistent with this financing modality.
In the aftermath of COVID-19, as digital trade has gained in prominence, another critical issue for exporters is access to, and quality of, digital infrastructure (Figure 1.30). Investment in this industry is made difficult by high tax charges (the standard rate of import taxes plus the special excise taxes applied to telecommunication equipment, as well as the selective corporation tax applied to telecom companies) and the regime’s unpredictability (EBRD, 2020[47]). The approved local loop unbundling and bit stream offer should be enforced and infrastructure-sharing should be promoted, in order to accelerate fixed broadband expansion. Firm-level analysis conducted for this report shows that firms that have access to the necessary digital infrastructure and have their own website have a 2.7% higher productivity than other Tunisian firms (see Chapter 2).
Figure 1.30. Infrastructure quality is low
Source: World Economic Forum, Global Competitiveness Indicator database and Opensignal 2020.
Offshore firms have played a very important role as an engine of job creation and exports growth. They account for more than three quarters of non-energy exports, although they account for only 4% of all firms. These firms are foreign-owned and enjoy a range of specific advantages, subject to exporting at least 70% of their production. They are exempted from strict foreign exchange regulations, tariffs, and many taxes, and have preferred access to trade infrastructure and custom procedures (Joumard, Dhaoui and Morgavi, 2018[52]). Linkages with the domestic economy are very weak. In turn, domestic or “onshore” firms face relatively high tariffs and excise taxes as well as non-tariff barriers for acquiring imported inputs and capital goods and are poorly integrated into global value chains.
Analysis conducted for this Survey shows that access to cheaper and higher quality inputs and capital goods would make onshore firms more productive and export-competitive (see chapter 2) (Cassimon and Grundke, forthcoming[60]). Facilitating custom procedures and improving trade infrastructure would further raise the export potential of domestic firms, but also benefit offshore firms (World Bank, 2020[48]). Although differences in the corporate income tax rates between the offshore and onshore sectors were eliminated in 2021, harmonising other tax rates and creating a level playing field would favour the international integration of the domestic economy.
Tariffs and non-tariff barriers for final goods, such as excise taxes, import quotas and non-automatic import licenses, are also high in international comparison and protect domestic firms from international competition (Figure 1.31). This reduces incentives for efficiency improvements and innovation for companies operating on the domestic market, leading to high prices and low product quality and variety in protected markets (Amiti and Khandelwal, 2013[61]; De Loecker et al., 2016[62]). It also hampers the reallocation of production factors to their most productive use reducing labour productivity and wages (Pavcnik, 2002[63]; Hsieh and Klenow, 2009[64]).
Analysis for this Survey shows that in sectors protected by high import barriers, resources are trapped in low-productivity firms (see Chapter 2) (Cassimon and Grundke, forthcoming[60]). Using the OECD METRO general equilibrium model to simulate a unilateral reduction of tariffs and NTMs by 50% shows that lowering import barriers would lead to significant increases in GDP, production, private consumption and exports as well as employment (Figure 1.32) (see Chapter 2) (Cassimon, Grundke and Kowalski, forthcoming[65]). The large increase in employment by 7% emphasises the importance of raising the international integration of the domestic economy in order to create more and better jobs and reduce unemployment (see Chapter 2).
Figure 1.31. Tariffs are high
Source: WITS.
Figure 1.32. Lowering trade barriers would boost employment, production and exports
OECD-METRO model simulation of a decrease in tariffs and non-tariff measures by 50%
Note: Simulations reflect high unemployment in Tunisia and assume that wages are fixed and rising labour demand is satisfied by existing labour supply including the pool of unemployed (Cassimon, Grundke and Kowalski, forthcoming[65]). Tariffs and non-tariff measures (NTMs) are cut by 50% on a unilateral basis.
Source: OECD calculations based on the OECD METRO model (Cassimon, Grundke and Kowalski, forthcoming[65]).
Moreover, improved access to imported consumer goods complemented by trade-induced productivity gains translate into falling prices for consumers. Estimates suggest that Tunisian consumers could see their purchasing power increase by 4% on average under the scenario of a 50% reduction in tariffs (Figure 1.33) (Cassimon and Grundke, forthcoming[60]). Moreover, these benefits are progressive as lower income households spend larger shares of their incomes on tradable goods such as food, home appliances, furniture and clothing. A detailed analysis of reducing trade protection, taking into account differences in the consumption basket across households, suggests that the lowest-income decile could gain as much as 4.6% in terms of additional purchasing power, compared to 2.5% for the top decile (Figure 1.33). This is in line with evidence found for other countries (Fajgelbaum and Khandelwal, 2016[66]). Besides price reductions, a stronger integration would give consumers access to a larger variety and higher quality of products and services (Broda and Weinstein, 2006[67]).
Figure 1.33. Lower trade barriers would benefit the poorest households the most
Increases in real purchasing power (relative to total expenditures) due to a reduction of tariffs by 50% for each household income decile
Note: The x-axis shows the ten income deciles of the household income distribution, starting with the poorest decile (1-10). Tariff rates at the detailed product level are taken from WITS. The data and the methodology are described in more detail in (Cassimon and Grundke, forthcoming[60]). The results are not based on relative price changes from OECD-METRO model simulations, but on a simple simulation where the reduction in existing tariff barriers translates directly into lower consumer prices.
Source: OECD calculations based on the Household Survey of Tunisia, 2015 (INS).
FDI inflows have been broadly trending downwards in recent years and have not regained the levels prevailing before the global financial crisis. The drop in FDI is alarming as foreign multinationals make an important contribution to sustainable development, productivity and job creation, also for women, in Tunisia (OECD, 2019[68]). On average, affiliates of foreign multinationals are more productive than domestic firms, pay higher wages, are more energy efficient and employ a higher percentage of women (Figure 1.34). A new investment strategy is being crafted, focusing on providing competitive conditions to global investors that are considering reshoring and near-shoring their production operations. Thereby, it will be important to improve conditions for all investors and avoid the further reinforcing of a dual economy model (see Chapter 2).
Tunisia recently signed several preferential trade agreements, but bolder steps, including unilateral trade reforms, would pay off for domestic consumers and producers. The 2019 UK-Tunisia Association Agreement, which became effective on 1 January 2021, is one of the first signed by the United Kingdom following the decision to leave the EU (FCO, 2019[69]). In March 2019, Tunisia also acceded to the Common Market for Eastern and Southern Africa (COMESA, a free-trade area with 20 member states). Tunisia and the European Union have been negotiating a Deep and Comprehensive Free Trade Area (DCFTA) since October 2015, to better integrate Tunisia's economy into the EU single market. The negotiations have been put on hold since 2019, after four rounds, due to some disagreements, especially on the DCFTA transparency chapter that covers access to information and documents such as laws, regulations, judicial decisions, administrative procedures and decisions that may affect trade and investment. If all remaining concerns on both sides are addressed, further integration with the EU market would lead to substantial benefits in terms of GDP, employment and wages (Rudloff, 2020[70]; European Commission, 2021[71]).
Figure 1.34. Foreign multinationals contribute to sustainable development
Note: Each indicator measures how foreign firms perform relative to domestic firms for a given outcome. It takes positive value if foreign firms have higher outcomes than domestic firms and negative value if foreign firms have lower outcomes, on average. See OECD (2019b) for details of the indicators. Data are for 2019, except Egypt and Tunisia (2020) and Chile (2010).
Source: OECD FDI Qualities Indicators based on World Bank Enterprise Surveys.
Financial development would contribute to accelerating investment
Financial development is critical in reducing poverty and achieving inclusive economic growth. When people can participate in the financial system, they are better able to start and expand businesses, invest in their children’s education, and absorb financial shocks. Firm-level analysis shows that firms with access to finance have a 1.9% higher productivity compared to other Tunisian firms (see chapter 2). While the banking sector is relatively well-developed, with assets representing about 90% of GDP, only 37% of the population had a bank account in 2017 (Figure 1.35). 17% fewer women have a bank account than their male counterparts, while the gap between higher-income and lower-income individuals is 26% (Global Findex database). At 2.2%, the ratio of gross insurance premium payments to GDP shows that insurance penetration is also very low (2017 FTUSA data).
Figure 1.35. The banking sector is rather large, but many people still do not have a bank account
Note: Benchmark countries include Chile, Colombia, Costa Rica, Czech Republic, Estonia, Hungary, Latvia, Lithuania, Mexico, Poland, Slovakia, Slovenia and Turkey.
Source: World Bank, Global Financial Development database.
Firms confront important obstacles to access banking credit and other financing modalities and could benefit from better protection of creditors’ rights and minority investors. With respect to insolvency, the 2016 reform has simplified processes, but swifter processing of corporate restructuring and debt restructuring would facilitate resource reallocation to more viable businesses and improve access to finance, an important element of a strong recovery (Adalet McGowan, Andrews and Millot, 2017[72]). Out-of-court insolvency schemes might safeguard eligible firms against potential abuse by creditors, the establishment of dedicated tribunal chambers would ensure that specialised judiciary is tasked with corporate cases and adjudication delays could be shortened.
The financial inclusion strategy launched in 2018 acknowledges the central role of both the private and the social enterprise sectors in national development and sets objectives in five separate areas, namely digital finance, micro-insurance, refinancing, the social and solidarity economy, and financial education. Microfinance has grown fast since 2011, when a sector-specific framework was adopted. Some obstacles were removed in 2017, such as very constraining regulations (e.g., on the maximum outstanding per client), and there has been progress in the institutional set-up, with the creation of the Financial Inclusion Observatory within the central bank, while the National Committee for Financial Inclusion within the Finance Ministry is not operational yet. Important global financial institutions have invested in the sector.
Nonetheless, there are still some issues that slow down the diffusion of microfinance, and henceforth progress in financial inclusion. MFIs cannot collect savings from their clients which limit their capacity to grow but also the access of their clients to a proper set of financial services. Banks financing microfinance institutions (the sector’s main source of financing) may not refinance themselves with the Central Bank. Therefore, they finance microfinance institutions on their own balance sheet which represent an additional risk for banks and limit their capacity to support the sector. Other tools such as a dedicated fund for microfinance (like in Morocco with the Jaida fund) or a guarantee fund for financings to MFIs, would support a better access to financing. Due consideration should also be given to the possible transfer of oversight responsibilities from the Autorité de Contrôle de la Microfinance (under the Ministry of Finance) to the Central Bank.
Since 2020, COVID-19 has accelerated the use of digital payments and around ten requests have been filed with the BCT between 2020 and 2021 to be authorised to offer such services. Allowing mobile network operators to offer financial products would introduce more competition and support the development of FinTech. Since April 2021, a payment institution has been authorised to transfer social assistance using wallets and a network of local agents covering the whole country. Four other payment providers have been pre-authorised.
Moving forward, it will be important to guarantee an even playing field between payment service providers and Tunisia Post, which is currently exempt from some regulatory requirements. The creation of a postal bank would provide clarity in this regard. Granting FinTech start-ups direct and full access to the electronic payments system would increase competition and reduce transactions costs. The BCT, cognizant that synergies with financial innovators are a fundamental lever to improve access to and use of financial services, has launched different mechanisms to closely collaborate with the start-up and FinTech eco-system. Examples include the regulatory Sandbox, BCT-LAB, and the FinTech specialised website (www.fintech.bct.gov.tn). Strengthening the credit registry would improve transparency, while enhancing financial literacy could better inform savers’ decisions and better prepare them for retirement.
Financial and business interactions between Tunisians living abroad and their families can also significantly contribute to financial inclusion. Sending money to Tunisia, however, is expensive, with fees (8.7% of the transaction value) almost thrice the 3% Sustainable Development Goal target 10.3 and well above the global average cost (6.5%) (Ratha et al., 2021[73]). Raising the efficiency of the Tunisian Foreign-Bank, the state-owned bank specialised in serving the diaspora, would contribute to lower remittances costs. Direct instruments such as special bank accounts in foreign currency for diaspora members and digitised investment files, which make it possible to reduce transaction costs, have been introduced to maximise the amount and impact of diaspora investments. Reinforcing competition among different actors and actions to ease the entry of new operators into the market should make it possible to lower intermediation costs.
The #UpTunisia programme of FIPA (the FDI promotion agency), launched in April 2021, intends to facilitate diaspora investors in manufacturing, digital, health and agriculture. Issuing diaspora bonds, i.e. long-dated securities issued to a country’s diaspora that can only be redeemed upon maturity, would also be beneficial. These instruments leverage the desire that people who have long (or always) been away from their country of origin have to “do good”. Moreover, they are typically less skittish than outside investors and may agree to a “patriotic discount”. These bonds require reforms in exchange rate policies and governance (e.g. donor guarantees and investors’ protection through the involvement of professional fund managers). The BCT, which has recently opened a sandbox and successfully carried out an experiment with central bank digital currency in cooperation with the Banque de France, should pursue financial innovation in the search of alternative channels of cross-border diaspora transfers.
Raising business integrity is a long-standing challenge
Transparency International’s 2020 Corruption Perception Index (CPI) ranked Tunisia 69th out of 180 countries, better than its regional peers on most measures of perceived corruption. Despite improvements (Figure 1.36), among which it is important to underscore the ratification in 2020 of the Convention on Preventing and Combating Corruption, the cost of corruption is estimated at 4% of GDP (Conseil de l’Europe, 2017[74]). Citizens perceive corruption as the third main problem in the country after unemployment and the management of the economy, but a majority of citizens believes they can make a difference in the fight against corruption. However, opacity in the decision- and policy-making processes and excessive delays in managing corruption cases have weakened citizens’ trust in government institutions and risks entrenching popular disillusion with democracy. It is urgent to strengthen information collection and devote resources to accelerate procedures. It would also be expeditious to develop a methodology for legal verification of any legislative or regulatory act in view of detecting those provisions that during implementation may favour corruption and abuse, or make them more likely, and reducing the associated risks.
Figure 1.36. Anti-corruption efforts have been stepped up
Note: Panel B shows the point estimate and the margin of error. Panel D shows sector-based subcomponents of the “Control of Corruption” indicator by the Varieties of Democracy Project.
Source: Panel A: Transparency International; Panels B and C: World Bank, Worldwide Governance Indicators; and Panel D: Varieties of Democracy Project, V-Dem Dataset v11.
The anti-graft body (Instance nationale de la lutte contre la corruption, INLUCC), established in November 2011, has been moderately successful in raising awareness of the importance of making the fight against corruption a collective effort and in communicating with the general public (notably through a special radio station, Nazaha). Lacking prosecutorial powers, it has been far less effective in investigating suspected cases, a problem that was aggravated by the slow progress in reforming the judiciary (Conseil de l’Europe, 2017[74]). Two important complements are the Laws on Access to Information and on the denunciation of corruption and protection of whistle-blowers. The adoption of citizen charters – a simple yet powerful accountability tool at the interface between citizens and service providers – is now mandatory for all public authorities in direct contact with the public.
The appointment of the new board members would help INLUCC operate better. Independent anticorruption courts should be the next step to complete the anti-corruption framework as envisaged in the corruption prevention law. For the time being, the slow pace of justice remains an important obstacle to better deal with the phenomenon. Other open issues concern the regulation of conflicts of interest, revolving doors and whistle-blowing, the governance and management of SOEs, as well as a code of conduct for members of Parliament. The Law on Administrative Reconciliation, insofar as it provides amnesty for civil servants who could argue that they had no choice but to obey their superiors’ orders for fear of retribution, may be counter-productive to the anti-corruption effort.
In the fight against money laundering, progress has been moderate, not only with respect to the OECD but also relative to Morocco (Figure 1.37). While Tunisia is doing well on the confiscation score, it trails as far as investigation and prosecution and curtailing of terrorist financing are concerned. Nonetheless, it has been removed from the FATC (Financial Action Task Force) list of countries under surveillance and subsequently from the EU blacklist of third countries showing strategic deficiencies in their anti-money laundering and countering terrorist financing regimes.
Figure 1.37. Further progress can be made in the fight against money laundering
Note: Figure shows ratings from the FATF peer reviews of each member to assess levels of implementation of the FATF Recommendations. The ratings reflect the extent to which a country's measures are effective against 11 immediate outcomes. "Investigation and prosecution¹" refers to money laundering. "Investigation and prosecution²" refers to terrorist financing.
Source: OECD Secretariat’s own calculation based on the materials from the Global Forum on Transparency; and OECD, Financial Action Task Force (FATF).
In Tunisia, public procurement represent at least 14% of GDP, above the OECD average of 12%, and 40% of government spending (HAICOP, 2019[75]). TUNEPS, a comprehensive e-procurement system overseen by the High Commission for Public Procurement (HAICOP), has operated since 2013, with expected benefits such as increased transparency through traceability, greater spending efficiency and easier SME access to procurement opportunities. However, most small value procurement, accounting for 40% of the goods, services and consulting work and 20% of the construction work purchased by the Ministry of Facilities, remained outside TUNEPS. Since September 2019, e-procurement has been mandatory for all entities, including municipalities. There are remaining challenges in terms of collusion among bidders and insufficient competition. Priorities include monitoring non-competitive (below-threshold) public tenders and participation therein to avoid abuses and reinforce the resources and skills of the relevant government authorities. It will also be opportune to grant access to TUNEPS to foreign companies that are not established in Tunisia, making it possible for them to obtain the digital certificate that is requested to bid.
Reversing environmental degradation calls for lower carbon emissions
Economic growth, climate change, over-exploitation of natural resources and poor enforcement of environmental law have caused degradation to the country’s 69 natural ecosystems, 12 agro-ecosystems and protected areas extending over 6% of the national territory. In particular, Tunisia suffers from water scarcity: in the year to 1 June 2021, the reservoir level in the country’s 36 dams declined by 19% and by 29% in the largest one, Sidi Salem, that accounts for almost a quarter of stocked waters (ONAGRI, 2021[58]). The coastal zone, hosting the bulk of the population and of economic activities, including tourism and farming, is highly vulnerable to rising sea levels (Strauss, Kulp and Levermann, 2015[76]).
Future economic growth needs to be decoupled from CO2 emissions
Confronted with climate variability, such as rising temperatures and varied precipitation levels, as well as potential increased frequency of extreme weather events, Tunisia has enshrined the fight against climate change in the 2014 Constitution – the third country to do it worldwide. Article 45 stipulates the State’s obligation to guarantee the right to a healthy and balanced environment and to provide the necessary means to eradicate pollution (Figure 1.38).
Figure 1.38. The population is exposed to substantial pollution
Source: OECD, Environment Database.
Tunisia ratified the Paris Agreement in February 2017 and one year later a unit especially dedicated to climate action was established within the Ministry of Environment. Its Nationally Determined Contribution (NDC) aims to reduce emission intensity (CO2 consumption per GDP unit) by 41% by 2030 compared to the 2005 level. Greenhouse gas emissions have doubled since 1995 and improvements in energy efficiency have been slow (Figure 1.39). Therefore, in addition to the continued pursuit of energy efficiency, lowering emissions in electricity and heat production (responsible for 23% of the country's emissions in 2016) is crucial. The target is to reduce consumption by 30% in 2030 through comprehensive mitigation measures, such as strengthening incentives for energy efficiency and developing renewables, as well as prosecuting energy wastage and taxing private transport to favour collective transport.
Figure 1.39. Environment performance is slowly improving
Source: OECD, Environment Database; and Hannah Ritchie and Max Roser (2020) - "CO₂ and Greenhouse Gas Emissions". Published online at OurWorldInData.org. Retrieved from: 'https://ourworldindata.org/co2-and-other-greenhouse-gas-emissions'.
Meeting the goals of sustainable and green growth would have large spillovers effects on productivity and inclusion. Considering its achievement thus far, Tunisia could reach its ambitious national targets faster with a comprehensive package involving market-friendly regulations that promote investment in clean energy, carbon prices adjustment and support to needy households, at least in the early phase while behaviours adjust. In this respect, the economic policies to be applied to steer the recovery offer an opportunity to accelerate the green transformation.
Renewable energy can be further promoted in tandem with market liberalisation
The government’s target is to raise the share of renewable energy in electricity generation from 3% in 2016 to 30% by 2030. Law 2015-12 allows private companies and households utilizing co-generation and renewable energy technologies to produce electricity for their own consumption and sell up to 30% of excess electricity exclusively to STEG at a fixed price. The law’s implementing decrees and a Power Purchase Agreement template were published in early 2017 and later in the year the first IPPs in renewable energy were announced. The May 2019 bill to improve the business climate permits businesses to create separate special-purpose vehicles entirely dedicated to power generation. Private companies have been awarded 17 solar projects and four wind projects. Various financing initiatives, such as the Energy Transition Fund (FTE) and the PROSOL-ELEC programme, exist for renewable energy, energy efficiency and fuel substitution (RCREEE, 2019[77]). By 2019, however, renewables accounted for 6.6% of power generation, well below the target (MEMTE, 2020[78]).
While Tunisia has experienced some liberalisation, it should move faster to create an independent regulator, which international experience shows is indispensable to secure transparent and fair electricity procurement from generators. Moreover, necessary funding from the public and private sectors should be mobilised for FTE to effectively operate (IRENA, 2021[79]), the state monopoly in the transmission, distribution and retail of electricity should be at least accompanied by accounting separation and a feed-in tariff should be set ahead of the creation of a wholesale market.
Improving solid waste management is of the utmost urgency to fight air and sea pollution
Solid waste generation has increased alongside economic growth, making the introduction of appropriate policies and its effective application an urgent priority to realise a greener economy. Tunisia enacted a law relating to waste disposal control system in 1996 and established ANGeD (Agence Nationale de Gestion des Déchets). A ban on single-use plastic bags entered into force in March 2020. Nonetheless, improvements are needed. Most organic waste collected is mixed with other residues and then deposited in landfill without any treatment. The eight existing dumps are fully used and the Eco-let recycling system, once a MENA best practice, suffers from the declining number of collection points (from 63 in 2010 to 45 in 2018) and the lack of financing and public awareness (Chaabane, 2021[80]).
Solid waste mismanagement, combined with poor control of chemicals, is a major source of air and sea pollution. Most cities for which high-quality air pollution data was available had annual mean PM10 levels above the WHO guideline value of 20 μg/m3 (WHO, 2015[81]). Although waste-to-energy technologies have gained more attention in Tunisia, incinerators are few and none has energy recovery. Responsibility over solid waste management is shared among the different government levels, including local institutions, but the lack of precision and clarity regarding the definition of their respective mandates, as well as the scarcity of financial and technical resources at the local level, have reduced investments. Due to the lack of a national strategy, waste valorisation suffers from similar problems.
Moreover, the introduction of an extended producer responsibility (EPR) scheme would also be a useful policy tool. The extension of a producer’s responsibility for a product to the post-consumer stage of a product’s life cycle helps to reduce the overall amount of solid waste, through recycling of reusable materials. The EPR scheme is a means to shift some waste management costs from taxpayers to producers and consumers, although there is as of yet limited evidence that it triggers eco-design (OECD, 2021[82]).
Key policy insights recommendations
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