Chapter 1

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try an opportunity to accelerate a series of reforms which Government approvals continued to play an important role. should contribute to the improved competitiveness and The 1987 law offered generous incentives on a sectoral dynamism of the Tunisian economy. An Institutional basis, and two sectors also benefited from preferential inter- Development Fund (IDF) grant study constructed a gen- est rates: tourism and agriculture. The incentives were large eral equilibrium model to estimate the expected impact of (exceeding 1 percent of GDP), they created distortions in the agreement on the Tunisian economy. the allocation of investment resources, and-in the case of The total long-term gain in value added is substantial, as agriculture and tourism-encouraged debt as opposed to resources are reallocated to more productive activities and equity financing. Figure 3.2 compares private investment as Tunisia receives EU assistance to upgrade standards and patterns in the early 1980s and 1990s. Except for transport services. The unquantifiable gains in terms of providing services, which grew from a low base in the early 1980s, the increased security and momentum to strengthen the imple- pattern has not changed significantly. The decline in manumentation of Tunisia's reform agenda are equally impor- facturing investment may be due to high positive real intertant. The EU's policy support and technical assistance est rates, incentives that encouraged the misallocation of should speed up the transfer of technology and enhance resources, and uncertainties stemming from the preparainvestment opportunities that will help Tunisian enterprises tion of reforms in investment regulations and incentives. compete more effectively in international markets. In December 1993 Parliament passed the Unified Preferential and guaranteed access to the EU market, at Investment Code which replaced sectoral investment incenleast for the next ten years,' should enable Tunisia to tives with common, horizontal incentives: promotion of increase its exports and attract foreign investment. For the exports; regional development; technological upgrading; EU, the cost of promoting a closer trade and investment protection of the environment; and enlargement of the relationship with Tunisia would be modest-the total value entrepreneurship base (les jeunes entrepreneurs). The of Tunisia's non-oil merchandise exports represents less 1993/94 law provides that no approvals are necessary for than 2 percent of the EU's annual outlays for agricultural investments seeking only the common incentives, it reduces subsidies alone. The expected benefits to the EU include incentive distortions (preferential credit for tourism has not only enhanced political and social stability in the region, been replaced by grants), and it strengthens the investment but also an opportunity to integrate EU manufacturers with liberalization commitment begun in 1987. However, prior a lower cost producer, and thereby improve the EU's com- government authorization is still required for numerous petitiveness. The FTA with the EU is a major step, but in domestic activities, particularly in the services sector: fishorder to succeed, the agreement needs to show rapid ing; tourism; handicrafts; transportation; telecommunicaprogress in removing all trade barriers, ensuring access to tions; education; vocational training; cultural activities; the EU market for all Tunisian goods and services, and in health and real estate development. Investments in other integrating the production and investment patterns of the FIGURE 3.2 two parties. limisia: Private Investment (Pern composition) Domestic investment liberalization 45 40 The ratio of private investment to GDP dropped sharply 35 between 1982-87, and then began increasing after 1987 30 (surpassing the level of public enterprise investment), but 25 even by 1992/93, it had still not reached its 1982 level (fig- 20 ure 2.1). In 1987 a manufacturing investment law was intro- IS duced that abolished capacity licensing and removed prior I * 5 government investment authorization for all projects not 0 L requesting investment incentives. This was an important Agricre Mancturing Tourisrn Housing Other servces step toward investment liberalization, but since most pri- * 1983O85 0en 1990 93 vate investors wanted fiscal and financial incentives, Soure: Mnistry oE Economnc Development INS and World Bank estimates. 32 TUNISiA'S GLoBAL INTEGRATION AND SUSTAINABLE DEVELOPMENrl STRATEGIC CHOICES FOR THE 21ST CENTURY
sectors (not specified under the new code) remain regu- previous system, but restrictions on investment in many lated (restaurants, financial services, mining, energy) so that support services remain in place. Under the new code, forabout 40 percent of total investment (those specified in the eign investors need the approval of the Investment code and these other sectors not specified) still requires Commission for many service activities when foreign parprior Government approval. ticipation exceeds 50 percent of the share capital. The "Guide du Promoteur," August 1994, provides a list of activ- Foreign investment liberalization ities requiring approval: transportation; telecommunications; tourism; educational and cultural establishments; The largest share of Tunisia's FDI comes from Italy (40 per- construction, maintenance, and public works; real estate cent), followed by France and the United States (roughly 15 development; computer services and information technolpercent each). Historically, Tunisian authorities' views on ogy; consulting and auditing companies; and other services. foreign direct investment (FDI) have fluctuated between Strong foreign investment in many of these areas, including concerns of foreign domination to a recognition that FDI software development, auditing and consulting (such as creates jobs, transfers technology and know-how, and pro- international marketing, technology, and quality upgrading vides a critical impetus to higher growth. In spite of the gen- firms), telecommunications, and transportation would be erous incentives provided to export firms, the current highly beneficial in terms of the quality of services provided account convertibility of the dinar, easy transfer of invested capital, and the stable economic environment, FDI flows to and as a means of exerting competition on local firms. non-energy activities have been very low in recent years (figure 3.3). Until recently, several activities have been mainly Offshore companies reserved for state ownership, effectively precluding private Another measure used to attract foreign investment since foreign investors: chemicals and petrochemicals; cement; 1972 is the offshore company law which gives incentives mining; electricity; telecommunications; transport (rail- (for example, duty free access to all inputs, tax free status) roads, airlines, and maritime); water/wastewater treatment to export-oriented (80 percent) companies. On balance, and distribution; and insurance. offshore companies have had a beneficial impact on the The Unified Investment Code makes FDI for all export Tunisian economy. The growth of manufactured exports activities (except agriculture) unrestricted. Foreign compa- over the past decade is due in large part to the offshore nies or individuals can now lease agricultural land, but they companies, which account for between one-third and half still cannot own agricultural land. These changes represent of Tunisia's merchandise exports. At the same time, the offa significant opening to foreign investors compared to the shore sector's integration with the domestic economy and its contribution to total FDI in Tunisia have been limited, FIGURE 3.3 since most foreign companies rent facilities (bonded ware- Tunisia: Foreign direct Investment houses), and have strong incentives to import their capital Millions of TD equipment and inputs from parent companies (box 3.2). 40 cThe Unified Investment Code attempts to place domes- 350 tic producers on a more equal footing with export compa- 300 nies, but important differences in treatment remain: access 250 to the local market for exporting companies; tax treatment; 200 and the inefficient duty refund procedures for local compaso nies. The Government could increase domestic tax rev- 100 enues by fully integrating the offshore companies into the 50 domestic tax base, which would also ensure their equal 990 1991 1992 1993 treatment with domestic companies that are partial exporters. The government's continued efforts to improve * Nonenergy Q Energy infrastructure services, rationalize tax laws and investment SDurcc Ministry of Irtemrnai Cooperation and API (Inrwtrial ornotion AVncy). incentives, and make the tariff regime more neutral between STRENGThENING MARKET FORCES 33
Page 1:
Public Disclosure Authorized Public
Page 4 and 5: Copyright i 1996 The International
Page 6 and 7: Education policies 20 Basic educati
Page 8 and 9: 2.4 Demand for telephone connection
Page 10 and 11: Acknowledgments The report is a pro
Page 12 and 13: STIL Soci&e Tunisienne d'Industrial
Page 15 and 16: Executive summary Elements of Tunis
Page 17 and 18: ments and controlling the expansion
Page 19 and 20: Progress in strengthening market fo
Page 21 and 22: investment banking, restructure som
Page 23 and 24: Chapter 1 Macroeconomic policy The
Page 25 and 26: Box .I Monetary policy Instruments,
Page 27 and 28: TALE 1.3 Main monetary Indicators 1
Page 29 and 30: national markets and ensure the sus
Page 31 and 32: domestic production, and inducing a
Page 33 and 34: was actually higher than that for t
Page 35: public banks and enterprises reveal
Page 38 and 39: (10 percent), and Malaysia (12 perc
Page 40 and 41: Infrastructure services: Provision
Page 42 and 43: on a pilot basis and is studying th
Page 44 and 45: or in the public sector. The Bank i
Page 46 and 47: onmental issues and their relation
Page 48 and 49: several industrial zones. Despite t
Page 50 and 51: vocational education more relevant
Page 52 and 53: also showed high effective rates of
Page 56 and 57: BOX 3.2 Free trade zones: Maximizin
Page 58 and 59: largest share of total employment (
Page 60 and 61: encouraging results and provides us
Page 62 and 63: ill market and to modernize the leg
Page 64 and 65: price/earnings ratio of about 25 in
Page 66 and 67: achieve their intended objectives i
Page 68 and 69: TABLE 4.2 crisis brought about an 7
Page 70 and 71: costly process of adjustment, the a
Page 72 and 73: ented economy The growth of exports
Page 74 and 75: as a whole, but the related transit
Page 76 and 77: Land degradation and water scarcity
Page 78 and 79: TABLE 5.1 Poky otfecdt Short term M
Page 80 and 81: TABLE 5.2 Complementary reforms (co
Page 82 and 83: IMF (International Monetasy Fund).
Page 84 and 85: Statistical Annex TABLE SA. I Exter
Page 86 and 87: TABLE SA.3 Public sector accounts,
Page 88 and 89: TABLE Sk6 GNP, output, and governme
Page 90 and 91: TABLE SA.8 Money, credit, prices, a
Page 92 and 93: TABLE SA IO Key economic variables,
Page 96: __s~~~~0 I _ 1 , h 5 .*-~. 5~~~ i -
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