المؤسسات لرؤساء العربي المعهدArab Institute of Business Managers- Tunisia

(AIBM)

ECONOMIC REFORM AND LIBERALIZATIONIN TUNISIA

Dr. Jameleddine BOUMEDIEN Cairo 1-2 november 2010

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Tunisia is in the process of economic reform and liberalization after decades of heavy state direction and participation in the economy. Tunisia's economic growth historically has depended on oil, phosphates, agri-food products and tourism.

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Structural reforms• Tunisia’s economic adjustment efforts started when a

decline in oil exports earnings and excessive public investment causes a balance payments crisis. Since 1986, a vast program of economic reforms aiming to rehabilitate the market mechanism and the international openness of economy, with the objectives to develop private initiative and to achieve new levels of growth.

These reforms, which concern almost all areas, and in particular the regulatory framework, taxation, prices, foreign trade, investment, incentives system, the banking and financial system have made it possible to change the economic landscape of the country.

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To ensure that external balances remain sustainable:• It is encouraging export development (through the

mise à niveau Program) and foreign direct investment (including through privatization).

• The fiscal deficit has been reduced through a combination of expenditure restraint and revenue measures.

• The exchange rate has been managed flexibly, while maintaining overall real stability.

• Third, Tunisia is strategically managing its resort to international capital markets to consolidate its past record as a good credit risk able to borrow at the low of emerging market spreads.

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The government has totally or partially privatized around 219 state- owned enterprises since the privatization program was launched in 1987. Although the program is supported by the GATT, the government has had to move carefully to avoid mass firings.

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• As a result, inflation has been significantly reduced at around 3 percent. The external position (current account balance, foreign currency reserves and external debt) has also improved considerably.

• Promote exports which registered an average increase of 6.4% per annum in constant terms.

• This evolution allowed for the reduction of the current deficit which passed from 5.8% of GDP during 1990-1998 to 2.5% over the period 2003-2008 .

• a greater private-sector participation in the development effort, as shown through the increase of the share of private investment, which stood at about 59.8% in 2008, against 47.9% in 1986.

• More than 90% of prices become free.31/10/2010 6

Reform efforts have targeted two main objectives:

1) The legal framework2) The trade openness

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A transparent legal framework that provides incentives….but some

restriction

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• Tunisian legislation and regulations favor transparency at all levels:

• Procurement contracts and privatization are systematically done through bids

• Competition and price law applicable since 1991 try to ensure transparency rules in commercial transactions

• A standardized accounting system drawn from the one in force in OECD countries.

Regulation

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Freedom to invest

Nationals and foreigners are free to invest in Tunisia’s many sectors of activity. All foreign investors can hold up to 100 % of capital in a project in most sectors without any formal authorisation. However, some service activities that are not export oriented do need an authorisation for majority holdings held by a foreign party.

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Foreign portfolio investment

Non-resident foreigners can also freely purchase up to a maximum of 49.99 % and without restriction the shares listed or unlisted Tunisian companies. Any purchase above this ceiling is subject to the approval of the Investment Higher Board.

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Foreign exchange

• Foreign investors can freely exchange profits and capital. There are no constrains on transfer of Tunisian dinars for:

• the real net product derived from invested equity sale or clearance, by means of hard currency importation.

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Simplified procedures

• The procedures to start a company are done at a “One stop windows” that gathers all the concerned administrations at The Agency for the Promotion of Industry and the Innovation. APII.

The one-stop-shops (in Tunis, Sfax and Sousse) rapidly allow for companies incorporation. They are staffed with official representatives institutions

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Agreements• Tunisia joined a certain number of international conventions and

signed agreements with several countries :• Agreement with the Multilateral Investment Guarantee Agency

(MIGA).• Investment protection and double taxation relief agreements with

most OECD countries.• Convention concerning the creation of an Arab organisation to

guarantee investments• Inter-Arab Convention, Inter-Islamic Convention Inter-Maghreb

Convention

Tunisia is also:Member of the International Center for Settlement of Investment Disputes.

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Intellectual propertyIntellectual property is protected by the provisions of local law and international treaties related to it. Conventions signed by Tunisia

1-Signature of the Paris Convention on patent inventions protection.2-Signature of the UNCTAD agreement related to licenses and registered trade marks protection.3-Member of the World Intellectual Property Organization, WIPO.4-Member of the International Center for Settlement of Investment Disputes, ICSID.

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A competitive economy open to the world

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Market accessFrom January 1st 2008, Tunisia was the first country of the southern Mediterranean shore to join the Free Trade Area of the European Union. The associative free trade treaty gives access to the EU market

.Tunisian industrial products will be totally exempt from duties and levies, with no quotas.

• Agricultural products will enjoy preferential conditions.

Tunisian exports to the European Union market have undergone a remarkable evolution. Their part in the export total increased from 55% in 1985 to 77% in 2009. Nearly 80% of exports to the European Union are industrial products.

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Tunisia has signed a number of preferential agreements with Maghreb and Arab countries. Application of the regional agreement signed in 1998 to introduce an Arab free-trade zone has made good progress . Trade with Egypt, Morocco, Jordan and Libya is governed by bilateral agreements that set up a free-trade zone. Other free-trade agreements are being negotiated with other countries in the region.

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In brief:

Many reforms ...but a cautious approach

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What is the impact of these reforms?

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Competitiveness ranking

The latest report on global competitiveness 2010-2011 issued by the Davos World Economic Forum ranks Tunisia 32 th out of a total of 139 developped and emerging countries in terms of global competitiveness being hence ahead of several countries of the EU.

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A low-risk investment

Appraisals and ratings granted to Tunisia by specialized agencies get better and better. Since 1994, Tunisia has received top investment grades from financial institutions and rating agencies.

Ratings for Tunisia in 2009

American agencies Standard & Poor’s BBB

Moody’s Baa2

European agency IBCA BBB

Japanese agency R & I A-

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Corruption Perception Index

Rang Pays Score IPC 2009

14 Germany 8.0

17 United-kingdom 7.7

21 Belgium 7.1

24 France 6.9

32 Spain 6.1

63 Italy 4.3

65 Tunisia 4.2

71 Romania 3.8

71 Greece 3.8

79 China 3.6

84 India 3.4

89 Morocco 3.3

111 Egypt 2.8

Scale from 0-10 (10 high degree of transparency, 0 high level of corruption) Transparency international, 2009

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Tunisia has been one of the fastest growing economies in (MENA) since the 1990s. Today with a per capita GDP of about 8800 $ (PPP).Tunisians have more than three times the real income their parents had 30 years ago, and all indicators of their social and economic wellbeing have improved significantly.

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* By various indicators, Tunisia is a « moderately » indebted country. Total external debt was estimated at 21300 MD as of end 2008, equivalent to 42% of GDP and down from about 55% of GDP in the early 1990s.

* The debt service ratio payment of principal and interests as a share of exports of goods and services is about 8.5% at the end of 2008 versus an average of 25% in 1990s.

* In 2009, exports of goods and services accounted for 50% of GDP.

* For many years FDI (Foreign Direct Investment) has registered an important evolution representing up to 10% of productive investments, generating one third of exports and 1/6 of total employment.

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Almost all Tunisian children attend school compared to only 8o per cent for the MENA region

female labour participation is high in a regional context 27%.

life expectancy is higher than the average for both lower-middle-income and MENA countries 74 years.

In 2005, less than 4 per cent of the population lived in poverty, and inequality has dropped steadily

As a result of these social and economic achievements, the Tunisian middle class has expanded. This middle class has contributed to Tunisia’s stability.

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• During this period, the purchasing power of minimum wage workers was preserved thanks to the many revaluations of this wage category (18 times since 1990).

• At the same time, the average purchasing power increases about 2 points annually over the period1990-2008.

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In parallel, the indicators inherent to the utility services clearly improved:

1-the rate of drinking water supply in the rural zones reached 93.9% in 2008 versus 68.3% in 1996,

2-the rate of electrification in rural zones was for its part in 98% versus 75.7%,

3- the rate of connection to the sewer system reached, on its side, 79.7% versus 62.6% during the same period.

4-In the same way, telephone density is passing from 6.4 lines per 100 inhabitants in 1996 to 78.2 lines in 2008.

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As for extreme poverty, the portion of the population with less than a Dollar a day to spend went down from 1.5% in 1990 to 0.5% in 2008.

As for the population with less than two Dollars a day to live on, the percentage stabilized at about 6.7% in 2008 against 11.1% in 1990.

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Tunisia is going to attain, or even go beyond, the different Millennium Development Goals.

1. The rate of poverty was 4.2% in 2000, against 6.7% in 1990 and 12.6% in 1980 and is expected to be below 2% in 2015.

2. The objective of primary education for all children has been nearly attained. The reduction in the dropout rate will make it possible to resorb the 1.2% of pupils who do not complete their primary education.

3. The objective of eliminating gender disparities in primary and secondary education by 2005 and at all levels of education by 2015” has already been attained by Tunisia in 2000.

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Economic freedom

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Tunisia has pursued structural reforms to maintain a prudent macroeconomic framework, liberalize domestic prices and controls, and reduce the public sector’s role in economic activity. Regulation is more efficient. Property rights are largely respected even though the executive branch is the supreme arbiter. Tunisia has been able to keep its fiscal deficits relatively low.

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Despite these reforms, however, a number of institutional challenges remain to be addressed. Tunisia scores low in trade freedom and investment freedom. Excessively high tariffs, import restrictions, and licensing requirements limit trade freedom. Protectionist investment policies and cumbersome bureaucracy stifle a more stable inflow of foreign investment. The financial sector and judiciary are subject to political influence, and corruption remains significant…

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we have much work to do…

thank you for your attention

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