Chapter 1

the budget deficit rose. The domestic banking sector sharply trade deficit make Tunisia's external position vulnerable to
declined in importance as a source of deficit financing-its adverse developments in the region's economic and politishare
fell from about 28 percent in 1986 to 9 percent in 1991 cal stability. Faced with an adverse economic or political
before turning negative in 1992 and 1993. Therefore, non- shock, it would be rather difficult under current internabank
domestic financing became the main source of funds tional conditions to finance a larger current account
to cover the budget deficit. (Box 1.1 discusses the evolution deficit-because of both higher interest rates in developed
of public debt instruments since 1989.) countries and less optimism towards emerging markets
(partly as result of the Mexican crisis). However, Tunisian
Conclusions authorities have demonstrated, as in their handling of the
Gulf crisis repercussions on Tunisia in 1990 and 1991, their
The reform program initiated in 1986 has brought a signifi- determination to avoid serious balance of payments disecant
degree of macroeconomic stability and a much quilibria. Imposing trade restrictions (as in 1991) is effecimproved
level of efficiency in the use of resources in tive in the short run to deal with balance-of-payments imbal-
Tunisia. The inflation rate is approaching that of the EU ances; but in the long run, only policies that encourage
countries, the central-government primary balance has been competition, stimulate flexibility of wages and relative
in surplus since 1992, the ratio of tax revenues to GDP is prices, induce higher public and private savings (which are
higher than the respective average for the Latin American, all goals of the Tunisian structural reforms), and allow for a
Southeast Asian, and Middle Eastern regions. market-determined exchange rate (which is the motivation
Notwithstanding such important accomplishments, there behind the introduction of the interbank foreign-exchange
remain some areas in both the guiding principles and fine- market) result in a socially efficient, sustainable external
tuning of monetary, balance-of-payments, and fiscal policy position.
that merit further improvement. An examination of the behavior of national savings and
investment shows that the worsening of the current account
Monetary policy deficit from 1989 to 1993 was accompanied by a rise in both
savings and investulent, with the latter increasing at a faster
Further liberalization of interest rates is essential to obtain rate. To the extent that external savings are being used to
a market-driven yield curve. This can be accomplished by finance higher and better-quality domestic investment, the
eliminating all remaining preferential rates, encouraging sustainability of the current account deficit is preserved.
competition among commercial banks on the basis of both This confirms the conclusion in the above paragraph that
interest rates and portfolio quality, and promoting a sec- Tunisia's external position is secure to the extent that the
ondary market in Treasury securities through the removal of
restrictions in their clearance and settlement procedures.
structural reforms are implemented.
These changes will also allow the BCT to control monetary
expansion through system-wide open-market operations in
Fiscal policy
Treasury bills rather than by allocating funds on a bank-by- Generalizing the VAT and broadening the income-tax base
bank basis. System-wide monetary expansion, market-dri- will both reduce the reliance on foreign-trade taxes and
ven interest rates, and a thriving secondary market in gov- increase total tax revenues. These improvements and coneinment
securities are all necessary elements for the trolling the expansion of the government wage bill are necefficient
conduct of monetary policy, whose goals consist of essary not only to compensate for a likely future decline in
achieving price stability and minimizing GDP fluctuations petroleum sector revenues but most importantly to finance
around its full-employment level. increased expenditures in infrastructure, education, and
public health.
Balance of payments and exchange rate policy Although the deficit of the central government seems to
be well under control, there remains the question of the
Tunisia's rather sizable trade deficit and the large role of sustainability of the consolidated-government deficit, for
tourism receipts and workers' remittances in financing the which accurate information is unavailable. Some data on
12 TuNI'siAs GLOBAL INEGRATION AND SuniABLE DEVmLOPMEmp STRATEGIC CHOICES FOR THE 21sT CENTURY