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Document of The World Bank

FOR OFFICIAL USE ONLY

Report No. 61627-TN

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

PROGRAM DOCUMENT

FOR A PROPOSED LOAN

IN THE AMOUNT OF US$250 MILLION AND EUR 168.3 MILLION

TO THE

REPUBLIC OF TUNISIA

FOR A

GOVERNANCE AND OPPORTUNITY DEVELOPMENT POLICY LOAN

May 26, 2011

Social and Economic Development Department (MNSED) Maghreb Country Management Unit Middle East and North Africa Region

This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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TUNISIA - GOVERNMENT FISCAL YEAR January, 1 – December, 31

CURRENCY EQUIVALENTS (Exchange Rate Effective as of April 30, 2011)

US$ 1.00 TND 1.344 US$ 1.00 Euro 0.67297015 Euro 1.00 TND 1.4859

Weights and Measures Metric System

ABBREVIATION AND ACRONYMS

AFD French Agency for Development AfDB African Development Bank ALMPs Active Labor Market Programs ANETI Agence National pour l’Emploi et le Travail Independent ARABOSAI Arab Organization of Supreme Audit Institutions ATFP Agence Tunisienne de la Formation Professionnelle / Tunisia Agency for

Vocational Traning ATI Agence Tunisienne d'Internet / Tunisia Internet Authority AWI Arab World Initiative BCT Banque Central de Tunisie / Central Bank of Tunisia BTS Banque Tunisienne de Solidarité / Tunisian Solidarity Bank CAS/CPS Country Assistance Strategy / Country Partnership Strategy CBT Central Bank of Tunisia CFAA Country Financial Accountability Assessment CMF Conseil du Marché Financier / Financial Market Authority CNAM Caisse Nationale d’Assurance Maladie / National Medical Insurance Fund CNS Conseil National des Services / National Services Authority COSEM Comité de Suivi et d’Enquête des Marchés / Public Procurement Monitoring

Committee CPAR Country Procurement Assessment Review CPI Consumer Price Index CSM Commission Supérieure des Marchés / High Committee for Public Procurement CSOs Civil Society Organisations DGRA Department General for Administrative Reforms DGDP Directorate General of Financial Control DPL Development Policy Lending DPR Development Policy Review EIA Environmental Impact Assessment EU European Union FDI Foreign Direct Investment GDP Gross Domestic Product IBRD International Bank for Reconstruction and Development ICL Integration and Competitiveness Loan IDA International Development Association IFC International Finance Corporation IFRS International Financial Reporting Standards IMF International Monetary Fund INTOSAI International Organization of Supreme Audit Institutions

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ISPs Information Service Providers JICA Japanese Development Agency JSDF Japan Social Development Fund LDP Letter of Development Policy LFS Labor Force Survey M&E Monitoring and Evaluation MDGs Millennium Development Goals MENA Middle East and North Africa MICS Multiple Indicators Cluster Survey MMR Maternal Mortality Ratio MOF Ministry of Finance MoH Ministry of Health MPIC Ministry of Planning and International Cooperation MSME Micro, Small and Medium Enterprise MTBF Medium-Term Budget Framework MTEF Medium-Term Expenditure Framework MTFF Medium-Term Financial Framework NDP National Development Plan NGOs Non-Governmental Organization NPLs Non-Pool Loans OECD/DAC Organization for Economic Co-operation and Development/ Development

Assistance Committee PAFN Programme d’Appui aux Familles Nécessiteuse / Support Program for Poor

Families PEFA Public Expenditure and Financial Assessment PEPE Program for Schools with Education Priority PER Public Expenditure Review PFM Public Financial Management PM Prime Minister PSD Private Sector Development RAMPs Reserves and Assets Management Programs ROSC Report on the Observance of Standards and Codes SAI Supreme Audit Institution SDR Special Drawing Rights SICAR Societé d’Investissement à Capital Risque / Venture Capital Investment

Company SIVP Stage d’Initiation à la Vie Professionnelle / Internship for the Introduction to

Professional Life SME Small- and Medium-Scale Enterprise TND Tunisian Dinar UNDP United Nations Development Program UNICEF United Nations International Children's Emergency Fund

Vice President: Country Director:

Sector Director: Sector Manager:

Task Team Leaders:

Shamshad Akhtar Simon Gray Manuela V. Ferro Bernard Funck Antonio Nucifora and Daniela Marotta

REPUBLIC OF TUNISIA

GOVERNANCE AND OPPORTUNITY DPL

TABLE OF CONTENTS

LOAN AND PROGRAM SUMMARY ......................................................................................................... 1

I. INTRODUCTION ............................................................................................................................ 4

II. COUNTRY CONTEXT ................................................................................................................... 6

RECENT ECONOMIC DEVELOPMENTS ....................................................................... 9

MACROECONOMIC OUTLOOK ..................................................................................... 10

III. THE GOVERNMENT’S PROGRAM ........................................................................................... 16

GOVERNANCE .................................................................................................................. 19

EMPLOYMENT AND ADDRESSING REGIONAL DISPARITIES ................................ 22

FINANCIAL SECTOR ........................................................................................................ 24

SOCIAL SERVICES POLICIES ......................................................................................... 25

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM ..................................................... 27

LINK TO THE COUNTRY PARTNERSHIP STRATEGY ............................................... 27

COLLABORATION WITH THE IMF AND OTHER DONORS ...................................... 28

LESSONS LEARNED ......................................................................................................... 29

ANALYTICAL UNDERPINNINGS................................................................................... 29

V. THE PROPOSED GOVERNANCE AND OPPORTUNITY DPL OPERATION ..................... 32

POLICY AREAS ................................................................................................................. 34

VI. OPERATION IMPLEMENTATION ............................................................................................. 47

POVERTY AND SOCIAL IMPACTS ................................................................................ 47

ENVIRONMENTAL ASPECTS ......................................................................................... 48

IMPLEMENTATION, MONITORING AND EVALUATION .......................................... 49

FIDUCIARY ASPECTS ...................................................................................................... 49

DISBURSEMENT AND AUDITING ................................................................................. 50

RISKS AND RISK MITIGATION ...................................................................................... 51

ANNEXES

ANNEX 1: LETTER OF DEVELOPMENT POLICY .................................................................................... 55

ANNEX 2: POLICY AND INSTITUTIONAL REFORMS MATRIX ........................................................... 73

ANNEX 3: GOVERNMENT POLICY REFORMS MATRIX (JOINTLY SUPPORTED BY WORLD BANK, AfDB, EU and AFD) ........................................................................................................................................ 77

ANNEX 4: FUND RELATIONS NOTE ......................................................................................................... 79

ANNEX 5: KEY FACTS ON THE STRUCTURE OF UNEMPLOYMENT IN TUNISIA ........................... 84

ANNEX 6: RECENT ECONOMIC DEVELOPMENT ................................................................................... 86

ANNEX 8: COUNTRY AT A GLANCE (includes country map) ................................................................... 90

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The Governance and Opportunity DPL has been jointly prepared by the World Bank, the African Development Bank, and the European Union, and the French Development Agency (and in collaboration with JICA and UNDP). The World Bank team consists of Antonio Nucifora and Daniela Marotta (MNSPR, Team Leaders), Heba Elgazzar (MNSHH), Fabian Seiderer (MNSPS), Laurent Gonnet (MNSFP), Diego angel-Urdinola (MNSSP), Guenter Heidenhof (MNSED), Roberta V. Gatti (MNSSP), Rene Antonio Leon Solano (MNSSP), Najy Benhassine (MNSFP), Yolanda Tayler (MNAPR), Walid Dhouibi (MNAPR), Laurence Folliot Lalliot (LEGAL), Laurent Olivier Corthay (CICRS), Donia Jemail (MNAEX), Carlo Maria Rossotto (TWICT), Alexandra Ortiz (MNSUR), Carine Clert (LACHD), Ahmedou Hamed (MNAPR), David Robalino (HDSPN), Olivier Dupriex (DECDG) and Ingrid Ivins (DECDG). Legal counsel was provided by Jean-Charles de Daruvar and Ghada Youness (LEGEM) and disbursement guidance was provided by Hedda Hassine (CTRFC). Financial management advice was provided by Soukeyna Kane (MNAFM) and Anas Abou El Mikias (MNAFM). The operation was prepared under the overall guidance of Bernard Funck (Sector Manager, MNSED), Manuela Ferro (Sector Director, MNSED), Eileen Murray (Country Manager, Tunisia) and Simon Gray (Country Director, MNC01). The operation benefited from comments from peer reviewers Theodore Ahlers (ECAVP), Linda Van Gelder (PRMPS), Philip E. Keefer (DECMG), and Jesko Hentschel (ECSH4), and inputs from Ndiame Diop (MNSED), Marouane El Abassi (MNSFP), Mariem Malouche (PRMTR), Olivier Cattaneo (DEC), Catherine Laurent (MNSPS), Eavan O’Halloran (MNC01), Joel Toujas-Bernate (IMF) and Giorgia Albertin (IMF). Administrative support was provided by Narjes Jerbi (MNCTN), Besma Saadi Refai (MNCTN), Mohsen Sayari (MNCTN), Muna Abeid Salim (MNSED), Loubna Ennadir (MNSED) and Muna Abeid Salim (MNSED). The team also benefitted from interactions with colleagues from the African Development Bank (Jacob Kolster, Natsuko Obayashi, Agnes Soucat, Gehane El Sokkary, Justin Murara, Vincent Castel, Muteta Nzau, and Fabrice Sergent), the European Union (Francoise Millecam, Regis Meritan, Francis Lemoine, Nabil Ben Nacef, Gilles Nancy) and the French Development Agency (Roger Goudiard, Cyrille Bellier, Olivier Ray, Yamina Mathlouthi) and is thankful to many Government of Tunisia officials who contributed their time and knowledge. Special thanks are due to H.E. Mr. Abdelhamid Triki, Minister of Planning and International Cooperation for guiding this work, and his collaborators for their productive cooperation.

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LOAN AND PROGRAM SUMMARY

TUNISIA

GOVERNANCE AND OPPORTUNITY DPL

Borrower Republic of Tunisia

Implementing Agency Ministry of Planning and International Cooperation

Financing Data

IBRD Loan; Amount: US$250 million and Euro 168.3 million. Variable Spread Loan (VSL), repayment schedule linked to commitment with a thirty year maturity and 5 years of grace period, with tailored repayment of principal.

Operation Type

Single-Tranche Development Policy Loan (DPL). The single- tranche is to be disbursed upon effectiveness.

Main Policy Areas

The DPL supports a set of core measures envisaged by the interim government in the areas of governance, financial sector, employment, and social policies. The measures focus on: (i) improving transparency and accountability in a visible way to respond to the aspirations of the population, and to signal to investors that Tunisia is creating a level playing field for private sector-led growth; and (ii) taking immediate actions to relieve the plight of the unemployed and the poorest and vulnerable families.

Key Results Indicators

Governance: Average time needed to award a public contract; Quantitative estimate of cost of compliance of selected administrative procedures, and the extent to which regulation is prone to discretion and arbitrariness; Number of .tn domain names (internet websites). Employment: Provision of basic training package, internships and additional employment services to AMAL program beneficiaries. Financial sector: Number of independent board members in private and state owned banks. Social sectors: Number of participatory monitoring assessments of public and social services; Number of regions with community health and social teams trained and operating.

Program Development Objective(s) and Contribution to CPS

The DPL is a core component of the World Bank's strategy to support the interim government in its task to consolidate social and economic change, and prepare the ground to complete the transition. The operation focuses on the four priority policy areas suggested by the interim government and supports a program of immediate measures that are emblematic of improved governance and opportunity and are within the mandate of the interim government. The Bank's CPS for Tunisia, which was discussed at Board in December 2009, was designed with the pre-revolution Government. While the core of this CPS remains valid to address the structural problems facing Tunisia, the Bank recognizes that many of the elements of the CPS are no longer relevant in the post-revolution context. A new CPS will likely be prepared only after a new elected government under a new constitution is in place.

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Risks and Risk Mitigation

(i) Risks related to renewed political instability from unmet or conflicting political aspirations: The political climate may become unstable again in the run-up to the elections. This would impede the government’s capacity to push through the reforms. In addition, it is possible that the upcoming elections could bring a more fractious political leadership, less able or willing to carry through reform agenda or sound macro policies. To mitigate this risk, the government is building consensus through consultation (including though the broadening of membership of the ‘High Authority’ for political reforms). A benevolent international framework, including financial and political support from the international community will also help mitigate these political risks. (ii) Risks related to the uncertainty of the economic outlook: Uncertainty about the economic outlook, related to the impact of the Libyan crisis, as well as in the regional economic outlook, and slow recovery for major trading partners, poses significant risk to political developments in Tunisia. Lower economic growth and additional pressure in the labor market could lead to renewed social tensions and reinforce a sense of lack of economic opportunities. A recurrence of instability might lead to a renewed loss of foreign investors’ confidence, which will in turn affect industrial production and exports, further depressing domestic consumption and slowing the economic recovery, and sending Tunisia into a negative spiral. To mitigate these risks the authorities have adopted a strong plan to scale up social interventions, support enterprises during this transition, and accelerate public investments. The resources from this operation are intended to help finance this plan and mitigate these risks. The measures supported by this operation also aim to both facilitate public and private investments (though simplification of procurement procedures, and removal of red-tape), and improve the provision of social services, and to help reestablish social stability by addressing the key demands for voice and accountability made by the population. (ii) Risks to the stability of the financial sector: In order to address weaknesses in the financial system, over the past few years the authorities have been pushing banks to (i) steadily increase the provisioning rates, (ii) to decrease the NPLs, and (iii) implement strong internal control regulation, while keeping active supervision of the banking sector. The negative shock on the tourism sector (both from the revolution and the Libyan crisis) and the sensitivity of the exporting sectors to growth variations in Europe both translate into higher credit risk in the banking sector. Notably, the banking system is exposed to the tourism sector (at 12.7 percent of total loans in 2009). These risk will be added to the already relatively weak asset quality of the banking sector in spite of limited market risks overall (relatively high NPLs at around 12 percent in 2010). The Bank fielded a mission in April 2011 to work with the authorities in assessing the stability of the financial sector, including full-fledged stress test by bank and a discussion of the crisis preparedness arrangement. (iv) Risks related to the design and implementation of the program: Firstly, key stakeholders may deem it inappropriate to address

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politically sensitive issues before a new government is elected. Secondly, some parts of the administration are still tied to the old regime and likely to cause resistance. Finally, risks also exist that the new post-elections government could reverse the reform agenda, in particular against pro-business policies. All the above risks can be mitigated by consensus building both within and outside of the current government. The Bank’s technical assistance and informal discussions with civil society and key stakeholders during the preparation of the DPL should mitigate these risks, even if the operation’s time frame remains a major constraint. For this reason, the program is focused on reforms that are not politically colored, but rather focus on the efficiency and transparency in the operation of the administration. Further, the program focuses on limited amendments based on consensus and which explicitly respond to aspirations for accountability and opportunity.

Operation ID P126094

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IBRD PROGRAM DOCUMENT FOR A

PROPOSED GOVERNANCE AND OPPORTUNITY DPL LOAN

TO THE REPUBLIC OF TUNISIA

I. INTRODUCTION

1. This draft Program Document proposes a Governance and Opportunity Development Policy Loan to Tunisia in the amount of US$500 million equivalent (consisting of an amount of US$250 million and an amount of Euro 168.3 million). In January 2011 Tunisia experienced an unprecedented and spontaneous wave of protests, fueled by persistent lack of social and political inclusion, anger over governance and corruption problems, and mounting frustration over unemployment and food inflation. These countrywide protests led to the toppling of the regime and the ousting of Tunisia’s second President, Zine El Abidine Ben Ali, on January 14, 2011, after 23 years in power. In line with the Constitution, the President of Parliament, Foued Mebazaa, has been appointed Interim President of the Republic. Following the dissolution of Parliament, the Interim President has been given powers to legislate by decree-law. The Interim Government, now headed by Prime Minister Mr. Béji Caid Essebs has been tasked with reestablishing the conditions to hold free and fair elections for a Constituent Assembly on July 24, 2011. This proposed DPL supports the interim government in its task to bring about the social and economic changes needed to firm up the transition. This operation is a key component of the World Bank’s support to the interim government and the transition period in Tunisia (as outlined in Section IV of this Program Document). The operation has been prepared jointly with the African Development Bank (AfDB), the European Union (EU), and the French Development Agency (AFD), and in collaboration with the Japanese Development Agency (JICA) and UNDP.

2. Over the past decade Tunisia has shown robust economic growth. Tunisia grew at 5 percent average annual growth in GDP over 1997-2007, placing the country among the leading performers in the MENA region (average 4.3 percent). This performance reflects the positive effects of macroeconomic stability coupled with a gradual but steady opening to trade and foreign investment. The dynamism in growth was driven by increased exports and FDI inflows, but also large public investments and private consumption. Tunisia’s macro-economic management has been consistently sound, the fiscal deficit contained, inflation moderate, and decreasing public debt, despite the difficult international context in recent years. Economic growth exhibited resilience to exogenous shocks owing to prudent but also pro-active macroeconomic management.

3. Yet economic growth has been inadequate to generate sufficient jobs to absorb new entrants to the labor market. The already large pool of unemployment continued to increase in recent years. Further, what development took place was heavily concentrated geographically. Unemployment was estimated by government at 13 percent in 2010, or approximately 500,000 people, and is characterized by a large and growing mass of low-skilled long-term unemployed concentrated in the interior provinces of the country (Annex 5). Unemployment rates are particularly high among young university graduates (15-29) reaching 44 percent and have been increasing rapidly in recent years (from 34 percent in 2005).

4. Governance problems have been a key factor preventing higher growth and employment. While macroeconomic policies were sound and a substantial package of incentives successfully attracted FDI, the economic environment under the ex-President Ben Ali was characterized by lack of transparency, cronyism and related anti-competitive practices which discouraged entrepreneurship and private sector investment, particularly in the ‘onshore’ domestic economy (as different from the more open, export oriented ‘offshore’ sector). As a result, domestic private investment remained low and increasingly focused on real estate, considered safer. A broader

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lack of transparency, social accountability and citizen participation in government’s affairs further exacerbated a sense of denied opportunities.

5. The January 2011 revolution has highlighted not only the lack of jobs and economic opportunities, but also deep rooted frustration of young Tunisians at their lack of voice in the management of public affairs.

6. In the immediate term, the country faces therefore two interrelated challenges: (i) improving transparency and accountability in a quick and visible way to respond to the aspirations of the population and to signal that Tunisia is creating a level playing field for private sector-led employment growth; while (ii) taking immediate measures to relieve the plight of the unemployed and the poorest and vulnerable families, and accelerate the development of lagging regions.

7. Addressing these challenges would relieve some of the key constraints that had held back inclusive, private-sector led growth and job creation. In order to reduce unemployment Tunisia needs to improve both the speed and the quality of its economic growth: it needs to carry out a structural transformation of the economy from a low-wage, low value-added economy to a knowledge-based and skill-intensive economy. For a small economy, meeting these challenges requires deeper global integration, i.e., finding niches in global market for Tunisian products, tapping on global knowledge, technologies and investment, and further reducing protection at home to enhance resource allocation and efficiency. Accelerating growth will also require reforms to increase efficiency and attract private investment, which can be fostered by bold economic governance reforms to improve the business environment and open up economic opportunities. Adopting reforms to improve the business environment by removing red tape, increasing transparency and market contestability, and reducing discretion and privileges, would send a strong signal to private investors that the rules of the game have changed and Tunisia is now open for business.

8. The reforms supported by this proposed loan focus therefore on assisting Tunisia tackle the two short-term challenges mentioned above, and thereby pave the way for the deeper necessary medium-term reforms. The interim government has indicated they would not have the mandate to commit to a medium-term package of reforms, but that they would like support to adopt a program of immediate measures in four key areas: governance, employment and addressing regional disparities, financial sector, and social services policies. They have emphasized that they want to give priority to measures which can signal “a clear break with the past”, notably to increase equity, transparency, voice and accountability.

9. The overall cross-sectoral theme of the proposed operation focuses on improving transparency, accountability, and public participation in policy making and service provision, and is at the core of private sector development. Indeed governance issues were arguably the single most binding constraint to greater private domestic investment in Tunisia. The thrust of the program supported by the DPL is to underscore that greater voice, transparency, participation, inclusion, all lead to increased investment and competition, and thereby ensure sustained economic growth.

10. The transitory nature of the current government and the “stroke of the pen” character of the measures raise possible risks in terms of the future ownership and sustainability of the program supported by the proposed operation. More broadly, risks exist that the new post-elections government could depart from pro-growth, prudent policies. These risks are mitigated by two main factors: first, the measures directly respond to the aspirations of Tunisians as expressed by the revolution and therefore have strong popular support which makes very difficult for subsequent governments to reverse them. Second, the program entails reforms that are not politically colored, but rather focus on the efficiency and transparency in the operation of the administration. For instance the business environment measure is not focused on deregulation, but rather on the anti-discretion, anti-arbitrariness and transparency agenda, which encompasses simplification. It will be hard for a new government to undo an initiative that aims at preventing the most visible ills of the old regime. The communication campaign accompanying the reforms program should be focused on this message, which is a unanimous expectation in post-revolution Tunisia.

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II. COUNTRY CONTEXT

11. On the face of it, Tunisia had made relatively sound progress at a national level on social and poverty indicators, though spatial disparities have persisted. The steady increase in per capita income over the past 20 years has been the main engine for poverty reduction and social progress (Box 1). Using a low US$1.25/day poverty line, poverty in Tunisia was estimated to have declined to 7 percent of the population as of 2005, amongst the lowest in the region.1

12. Nevertheless economic growth has been insufficient to generate enough jobs to absorb new entrants to the labor market, such that the already large unemployment continued to increase in recent years. Unemployment has been increasing from 12.1 percent in 2007 to 13.3 in 2009. In fact, since 2005, annual job creation (between 70,000 and 80,000) has fallen short of covering the additional labor supply (approx 100,000 annually), much less made inroads into the stock of

1 Official poverty numbers show a decline in poverty between 2000 and 2005 from 4.2 percent to 3.8 percent. However the official government poverty line of US$0.65/day is clearly inadequate. The World Bank extrapolated that using the a poverty line of 1.25 US$/day, which is still quite low given Tunisia’s level of income per capita, would result in a poverty rate of approximately 7 percent (estimated at 2005 Purchasing Power Parity using POVCAL software). A poverty line of around 2.50 US$/day would be more relevant for Tunisia in light of its level of per capita income. Unfortunately the survey data on which poverty estimates are based remains outside of public access and has not been subject to verification. As part of the reforms supported by this operation the microdata from surveys will shortly become available to the public.

Box 1. Tunisia’s Key Social Indicators

Tunisia is on track to reach the MDGs. Over 98 percent of both male and female 6 to 11 year old children were enrolled in school in 2009/10 and based on recent trends it is expected that all students should complete primary school by 2015. Secondary net enrolment rate are similarly high, with 74 percent of boys and 81 percent of girls aged 12 to 18 in school. However, student learning outcomes remain low, with 61 percent of Tunisian students passing at least the ‘low international benchmark’ for mathematics grade 8, compared to an international mean of 75 percent. Similarly, only 31 percent of Tunisian students in science grade 8 pass the low international benchmark, compared to an international mean of 49 percent. Health outcomes are relatively better than those found in other middle-income MENA countries. Progress has been made on infant and maternal mortality rates, malnutrition has dropped markedly, and HIV/AIDS prevalence is very low. However, mortality and health conditions in underserved regions lag considerably behind those in urban areas. Tunisians enjoy a relatively long life expectancy of 74 years. Although only 6 percent of children are stunted, they are over twice as likely to be stunted in rural areas as in urban areas (10 versus 4 percent, respectively). Between 2004 and 2008, Tunisia’s Maternal Mortality Ratio (MMR) was estimated to be nearly 69 per 100,000 live births according to United Nations data (as compared to national estimates of 40 per 100,000 live births), or between two to four times that of most other middle income countries. Tunisia’s infant mortality rate (IMR) of approximately 19 per 1,000 live births is near the global average and on the decline. It is estimated that approximately 80 percent of the population is enrolled in national health insurance and an additional 9 percent receive health cards covering free basic health services, but approximately 11 percent remain uninsured. Access to basic socio-economic services (water, sanitation, electricity) is near universal in urban areas, but access to water and sanitation lags behind in underserved regions. Tunisia has promoted gender issues and women’s role in society to a notable extent overall. With 64 percent of the population living in cities or towns, Tunisia is relatively urban with respect to other Middle East and North Africa (MENA) countries.

Sources: TIMSS 2007 (http://timss.bc.edu/timss2007/index.html); Ministry of Education (2010), Annuaire Statistique 2009/10: http://www.education.gov.tn/article_education/statistiques/stat_education2010_fr.pdf; World Bank (2009), Who Pays: Out of Pocket Health Spending and Equity Implications in the MENA, Discussion Paper N. 58014, The World Bank, Washington D.C.; Ministry of Public Health/UNICEF (2006), Multiple Indicator Cluster Survey (MICS3), Tunisia.; UNICEF (2009), State of the World’s Children Report, UNICEF, New York.

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unemployed (approx 500,000 people in 2009).2 The majority of the pool of unemployed in Tunisia is composed of young, low-skilled, male, urban workers. However, as efforts to expand tertiary education have not been matched by job opportunities, in recent years the increase in unemployment has mostly fallen on young and educated individuals, reflecting a growing structural imbalance between the demand for labor, tilted towards the unskilled, and an increasing supply of skilled labor (Annex 5). Demographic trends suggest that unless the pace of economic growth accelerates substantially, unemployment will continue to worsen significantly over the next decade. Already without accounting for the impact of the economic shocks unemployment was expected to reach 17 percent by 2014 (Annex 5)—the impact current economic shocks has exacerbated these trends, and the level of unemployment could reach 17 percent already in 2011.

13. Extensive restrictions to economic activity in the domestic market have prevented greater investment and stifled job creation. Only a dynamic and growing private sector can create high quality jobs at a rate that keeps pace with this growing and increasingly young population. Unfortunately, the environment for private sector in Tunisia has not allowed the sort of dynamism found in high-growth economies. 3 As mentioned above, the economy has been characterized by lack of competition, unfriendly business environment (notably in the ‘onshore’ sector) and restrictive labor regulations which increase the costs of firing labor and reduce the competitiveness of the private sector by increasing labor costs. Furthermore, the Tunisian labor force does not have the skills the private sector needs, and labor market institutions are ineffective in matching labor demand to supply.

14. In fact the economic environment in Tunisia had evolved on dual tracks: an ‘offshore’ export-oriented sector operates under a liberal regime (10 years tax holiday, duty-free imports, fast trade procedures, free repatriation of profits, etc.; which has attracted substantial FDI), coexists with an insulated and highly restrictive ‘onshore’ domestic economy which does not benefit from any tax incentives and instead continues to be characterized by pervasive barriers to competition, heavy State intervention and red tape.4

15. Hence, while Tunisia improved its ranking in Doing Business from 139th place (out of 175 countries) in 2006 to 55th (out of 183 countries) in 2010, feedback from the private sector highlight that there is a substantial gap between the reasonably good processes de jure and the very difficult de facto business environment, especially for domestic investors in the ‘onshore’ sector.5 The explanation behind this is that typical governance indicators and other measurements often did not adequately capture Tunisia’s governance problem that seems to revolve around issues such as discretion in the application of laws and regulations, inefficient procurement processes, rigged

2 World Bank (2010). Development Policy Review: Towards Innovation Driven Growth. Report No. 50847-TN. The World Bank, Washington D.C. 3 The public sector has remained so far the main source of new formal employment creation (about 38 thousand jobs with contract created between years 2005 and 2009), followed by the manufacturing and transport and communications sectors (about 20 thousand jobs with contract created between years 2005 and 2009). Public sector jobs offer generous benefits, hence encouraging educated individuals to queue for them, creating distortions in the market and contributing to long unemployment spells. 4 The pervasiveness and complexity of government’s controls on transactions in the domestic market seems to be the main constraint to integrating these two sectors. Interestingly, current legislation allows offshore firms to sell up to 30 percent of their production in the domestic market (and be subjected to domestic regulation on that proportion). However, the take up of this option is quasi-inexistent. Firms operating in the offshore sector value the limited intervention of the government that they enjoy and are reluctant to face pervasive and complex controls from the administration and intrusive prescriptions of the modalities of business conduct. Firms operating under the offshore regime are used to operating in a liberal environment, with no tax and minimal interferences with the administration and therefore are reluctant to sell in the domestic market even when prices are higher there (as in the case of many textile and mechanical component products). 5 Tunisia also ranks 32nd in the 2011 Global Competitiveness Index, and 38th in the 2010 World Economic Forum Global Trade ranking, and 38th in the 2010 Global Competitiveness report (from 32nd in 2009). It ranks 61st on the World Bank’s Logistics Performance Index (LPI) and ranks above or at par with the overall Middle East and North Africa average. Since the mid-1990s, the country has accelerated its openness to trade and today trade in goods is duty-free with the EU, the Greater Arab Free Trade Area partners and a large number of bilateral partners. However, all these rankings focus mainly on doing business in the export-oriented ‘offshore’ sector.

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privatization, declassification of public land asset and improper use of public banks.6 Notably, the heavy and pervasive intervention by the State in the economy and slow progress on strengthening the business environment in the ‘onshore’ sector has plagued much of the private sector in Tunisia to date, limiting competition and the extent of private domestic investment (around 15 percent on average) and thereby preventing greater jobs creation.7

16. Tunisia has been characterized by weak levels of transparency and accountability, performing poorly across most dimensions of governance and anti-corruption; however, some of the key governance failures were not adequately captured in the rankings. Global Integrity’s 2008 rating labels Tunisia’s performance as ‘very weak’ on executive accountability, mainly because of the concentration of power that was subject to only few checks and balances (see Figure 1). Freedom House’s 2010 report rates the country as “Not Free”—the lowest rank possible. Legally, citizens do have the right to vote and are eligible to run for office. However, in reality, elections were tightly managed affairs and no agency has independent authority to monitor their integrity. On Global Integrity’s ratings for election integrity, Tunisia has been labeled “Very Weak.” In terms of the budget processes, Tunisia also fared “Very Weak”, as the legislature provided limited input into the national budget. There was a separate legislative committee which provides oversight of public funds, though its independence and impartiality was questionable. Freedom House’s Freedom of the Press ratings label Tunisia as “Not Free” and Global Integrity ratings indicate that Tunisia was one of the most repressive regimes in the world in regards to media freedom. Among the stronger governance ratings for Tunisia are those pertaining to business licensing and regulation as well as taxes and customs (though the enforcement of tax laws have often been criticized as being discriminatory). In addition, while the Anti-Corruption Law was seen as of very good quality, the implementation of this law was considered very weak. Indeed while Tunisia scored well on some governance ranking, there were important shortcomings and failures not captured by these rankings, most notably related to poor progress made on voice and accountability, the highly

6 World Bank (2009), MENA: Private Sector from Privileges to Competition, The World Bank, Washington D.C. This report highlights issues of governance as one of the main constraints to private-sector growth, including in Tunisia. 7 Looking at factors holding back more rapid growth, one theme that has been raised by the private sector is that rather than facilitating and regulating economic activities, some of the administration has a “control and punish mentality”. This is often linked to the private interest of civil servants who can extract rents. It is critical to change the mentality from “control and punish” towards “facilitate and regulate”.

Figure 1. Global Integrity Indicators for Tunisia

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centralized decision making process which undermined the system of checks and balances (which largely existed on paper only), and more generally the substantial discretion in the application of the laws.

17. This lack of adequate participation, transparency and accountability was a key trigger of the revolution. One of the words most frequently heard from young people demonstrating in Tunisia was the word “dignity”. Social and economic exclusion goes beyond the narrower conception of material poverty, whether conceived in terms of income or the fulfillment of basic needs. It is first and foremost about exclusion from the political process. Achieving greater accountability of authorities to citizens and greater citizen participation and feedback in policy making will require greater transparency in government operations and higher standards for public officials.

18. The ongoing political transition can unlock the economic and institutional reforms necessary to put Tunisia on a faster development path. Participation and accountability are necessary preconditions. The political consensus and public engagement emerging today in Tunisia offer the first realistic opportunity for the people to voice their desires and aspirations, formulate the strategies to achieve them and carry out the kind of reforms needed to overhaul the development paradigm in their countries and unlock their full creative potential. Addressing the growth and employment challenge will require a comprehensive approach to enable a transformation of the structure of the economy to facilitate private investment into labor intensive and high value-added sectors.8 To accelerate growth and reduce unemployment the government needs to create an enabling environment for greater investment and productivity. Greater technology adoption and productivity, investment (national and foreign), and deeper economic integration will continue to be essential ingredients.

19. To begin with a few building blocks need to be laid to reestablish social peace and set the country on such a faster development trajectory. Firstly there is a need to establish some basic governance standards which had been missing, notably related to greater participation (a more open and inclusive government), transparency (a different way of managing and conducting government business), and accountability (particularly external accountability and the results-focus of government activities). Second, the social frustration expressed by the January 2011 revolution calls for immediate actions to address the lack of job opportunities, by taking immediate measures to support job creation in the medium and long-term; it also requires a new commitment to the issues of transparency and fairness in the reform process for growth and sustained job creation. Third, improving access to finance in Tunisia requires addressing the widespread governance failures in the financial sector, which have severely undermined banks’ performance and the banking system’s ability to play its catalyst role and contribute to growth and job creation. Finally, the revolution has highlighted the urgent need to address social disparities, notably by adopting a different approach to public services provision to increase transparency and inclusive policy making and to ensure an equitable and transparent application of policies, and access to services, particularly in underserved regions.

RECENT ECONOMIC DEVELOPMENTS

20. Tunisia entered the transition period with a good macroeconomic stance and solid economic fundamentals (see Annex 6). Reaping the benefits of the sound macroeconomic policies implemented in recent years, the country had started to recover from the global economic crisis.9 GDP growth had picked up to 3.7 percent in 2010 while inflation remained subdued, at 4.5 percent (Table 1). As a result of the incipient recovery, the fiscal position also improved markedly in 2010 (with a fiscal deficit down to 1.3 percent of GDP, from 3 percent of GDP in 2009) while the external current account widened (to 4.8 percent of GDP in 2010 from 2.8 in 2009). Gross official reserves decreased

8 World Bank (2010). Development Policy Review: Towards Innovation Driven Growth. Report No. 50847-TN. The World Bank, Washington D.C. 9 Diop N. (2010) Tunisia and the Global Economic Crisis: A Policy Note. Mimeo. The World Bank. Washington D.C.

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therefore from US$ 11.1 billion at end-2009 to US$ 9.6 billion as of end-December 2010, still a comfortable level of approximately 5 months of imports.

Table 1. Tunisia: Selected Macroeconomic Indicators, 2008-2013

2008 2009 2010 2011 2012 2013

Act. Act. Est. Proj. Proj. Proj.

National income and prices

Real GDP growth rate (%) 4.5 3.1 3.7 1.5 3.5 4.5Nominal GDP ( TND million ) 55297 58768 63685 67226 72014 78264Nominal GDP per capita (in U.S. dollars) 4346 4172 4226 4374 4522 4749GDP inflation (%, period average) 5.0 3.1 4.5 4.0 3.5 4.0

Central government (percent of GDP)

Total revenues and grants 24.1 23.1 23.1 23.4 23.5 24.4Total expenditure and net lending 24.8 25.8 24.4 28.2 27.4 27.0

Current expenditure 19.0 18.1 18.1 20.6 20.5 20.4Capital expenditure 6.1 7.7 6.4 7.6 6.9 6.5

Overall balance before grants -1.0 -3.0 -1.3 -4.8 -4.1 -2.7

Money and credit

Broad Money (M2)/GDP 58.4 61.8 61.8 61.8 61.8 61.8 Broad Money (M2, 12 months % change) 14.5 13.0 10.8 5.0Credit to the economy (percent change) 13.4 9.9 17.8 4.6Interest rate (money market rate, in percent, e.o.p) 5.2 4.3 4.2

Investment and savings

Gross domestic savings(excluding grants)/GDP 22.1 21.5 20.2 15.7 19.4 20.7Gross domestic investment/GDP 25.9 24.2 25.6 26.1 25.6 25.7

External sector

Current account balance/GDP (excluding grants) -3.8 -2.8 -4.8 -6.2 -4.0 -2.7Gross international reserves (USD billion) 9.0 11.1 9.6 7.7 7.7 8.4

In months of imports 4.0 6.3 5.0 3.5 3.5 3.7Exchange rate (TND per USD, period average) 1.232 1.350 1.430 1.445 1.482 1.519

Debt stock

Public debt (as percent of GDP) 43.3 43.4 40.4 43.6 43.8 43.5 Domestic Debt 16.9 17.6 15.9 18.1 20.0 21.2 External Debt 26.3 25.8 24.5 25.5 23.8 22.3

Sources: Tunisian Authorities, World Bank staff estimates; (Projections for 2012 and 2013 by World Bank staff).

MACROECONOMIC OUTLOOK

Challenges to the Economic Outlook in the Short and Medium Term

21. While the outlook for 2011 has deteriorated sharply, Tunisia's growth prospect may be buoyed by a succesful transition. The economic outlook for 2011 has been revised downwards as a result of the recent events and the ongoing war in Lybia.10 GDP growth for 2011 was originally expected at around 5 percent, but projections have now been revised downwards to 0-2 percent, depending in part on the effectiveness of the ongoing fiscal stimulation.11 As discussed above, macroeconomic fundamentals remained strong in 2010, and the good macroeconomic management of the past few years gives the authorities some room for an accommodative fiscal and monetary policy in response to deteriorating growth prospects for 2011.

10 The crisis in Libya is expected to have a substantial impact on the Tunisian economy. Over 6 percent of Tunisian exports of goods and services go to Libya; Libya accounts for more than 10 percent of total FDI to Tunisia; a very large number of Tunisian work in Libya (and send remittances) and are having to return home to unemployment – it has been estimated that as of end-April already approximately 40 000 Tunisian workers have crossed the border from Libya back to Tunisia. 11 This outlook is based on reasonable assumptions about the impact of the crisis: a 40 percent drop in tourism revenues; a 20 drop in FDI; a 10 percent drop in remittances; and the implementation of 70 percent of the authorities’ stimulus package (of 2.9 percent of GDP—see below)

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22. Substantial downward risks to the short-term economic outlook exist. At present it is difficult to make projections for the performance of the economy in 2011, notably due to uncertainty with regards to the impact in the tourism sector and the FDI. Additional information will become available in early June when the data on tourism bookings for the summer season are firmed up. Hence, it is possible that the scenario presented in this document could turn out to be optmistic. In addition, the war in Libya, the complexities of the political process, the uncertain regional economic outlook, and the slow recovery for major trading partners, all pose significant risks to economic developments in Tunisia. Further, there is a risk that the financing required to support the authorities’ fiscal stimulus package may not be entirely secured, or that there may be difficulties in the implementation of the plan. Should such risks materialize, lower economic growth and additional pressure in the labor market could lead to renewed social tensions and reinforce a sense of lack of economic opportunities. A recurrence of instability might lead to a renewed loss of foreign investors’ confidence, which in turn could affect industrial production and exports, further depressing domestic consumption and slowing the economic recovery, and sending Tunisia into a negative spiral. Also, banks’ solvency is likely to be further challenged in the coming months as a result of the economic slowdown. While financial sector indicators improved during the past few years, the banking sector remains relatively weak and subject to vulnerabilities.12 In order to mitigate these risks the authorities have assessed the stability of the banking sector, including full-fledged stress test by bank as well as their crisis preparedness arrangements.13

23. Nevertheless, while it is important to consider the potential downside risks to the short-term economic outlook, the baseline scenario presented in this document is prudent, and the medium-term outlook remains good. Further, while the macroeconomic situation is presently stable and the authorities have not requested IMF financing, should the macroeconomic situation degenerate substantially, the authorities stand ready to request additional support through an IMF program.14

Economic Outlook

24. The January revolution, followed by the Libyan crisis, has taken a toll on tourism and FDI and depressed the short-term economic outlook. GDP growth was previously expected to reach approximately 5 percent in 2011, but it is now projected to slow down to 0-2 percent. The baseline rate of 1.5 percent is based on assumptions of a 40 percent drop in tourism revenues and 20 percent reduction in FDI, a 10 percent drop in remittances, and accounts for the implementation of 70 percent of the stimulus package of 2.9 percent of GDP adopted by the interim government. The economic slowdown would further increase unemployment to approximately 15 to 17 percent and put additional strain on the financial sector.

25. The medium-term economic outlook remains however positive. The pace of growth is expected to increase to approximately 3.5 percent in 2012 and 4.5 percent in 2013 as a result of the combined effect of the recovery in exports, tourism and FDI, the continuation of major public investments, and the package of reforms adopted by the interim government which is expected to lead to growing investment. Notably, domestic private investment is expected to expand in 2012 and beyond, as a result of the structural reforms supported by this DPL program, including improved transparency and accountability in the public administration, reduced business transaction costs, and

12 With 21 banks and net total assets of 82 percent of GDP, the banking system remains small and fragmented. Three of the largest banks are public and represent 37 percent of deposits. Banks’ spread between deposit and credit rates is narrow (2.4 percent), reflecting a competition for the largest projects and the low performance of bank assets, including the lack of full credit risk pricing. In 2010, credit growth was strong (20 percent), the loans-to-deposits ratio rose to 115 percent, and liquidity became very tight, with CBT’s funding reaching 48 percent of bank capital in March 2011. The CBT reported better indicators for the system in 2010 (capital adequacy stable at 12 percent, and NPLs down to 12 percent). However, NPLs’ provisioning remains low at 59 percent, banks have little free capital available (net fixed assets and participations of the larger banks are 84 percent of net equity), and asset quality issues raise questions about the reported indicators. 13 The Bank fielded a mission in April 2011 to work with the Central Bank of Tunisia on financial sector stability, in collaboration with the IMF. 14 An IMF technical mission already visited Tunisia in March, and is supportive of the authorities’ policy stance.

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better access to finance. The growth target for 2012 is based on the assumption of a normal year for agriculture (+2 percent annual growth); an average increase in manufacturing output (+3 percent growth); a partial recovery in exports; a partial recovery in tourism (+25 percent, still below pre-2011 levels); and an increase in energy production (+10 percent; following the completion of structural works which forced a temporary closure of the main refinery during 2010); and a return of investors’ confidence is expected to result in a gradual increase in FDI back to 2010 levels (at 3 percent of GDP, which was low due to the global financial crisis). For 2013 we assume a return to normal business activity, which combined with an increase in external demand is expected to contribute to a further recovery in exports and tourism to pre-revolution levels, and a further slight increase in FDI.

Fiscal Policy

26. The fiscal deficit in 2011 is now expected to reach 4.8 percent of GDP from 2.5 percent originally planned in the 2011 budget. The 2011 budget was designed to maintain a mildly expansionary fiscal stance to ensure that the economic recovery would be supported by a continued public investment stimulus in line with the levels of 2009 and 2010. Following the revolution, the interim government has prepared a supplementary budget (to be approved in May 2011)15 to account for the expected fiscal impact of the revolution and the need for additional measures to alleviate social unrest and boost economic growth. Notably, the revised fiscal deficit is now expected at 4.8 percent in 2011 from 2.5 percent originally planned in the original 2011 budget due to a combination of substantially higher expenditures (by 4.8 percent of GDP above initial projections) and lower tax revenues (which are now projected to be 0.7 percent of GDP below initial forecasts), and additional non-tax revenues (amounting to 2.1 percent of GDP, including payment of dividends from the Central Bank) (Table 2). In addition, the original 2011 budget built-in additional flexibility to allow for fiscal policy adjustments should the economic recovery require a further boost by including an unallocated expenditure cushion of 1.2 percent of GDP that could be used if needed, and this allocation will now help contain the increase in the deficit (to 4.8 percent of GDP).

27. The structural component of the increase in fiscal expenditures is limited to approximately 0.7 percent. The increase in expenditures is approximately 4.8 percent of GDP (which includes the 1.2 percent which was already included in the approved budget as a contingency). A large share of increase is due to the recent increase in international food and fuel prices which will raise the cost of subsidies by approximately 1.9 percent of GDP. The balance of 2.9 percent of GDP relates to the social and economic stimulus package of measures introduced by the interim government, notably including an increase of 0.7 percent in current expenditures (of 0.4 percent in the wage bill, 0.3 percent in social assistance programs and other social/economic programs), and 2.1 percent in higher public investment expenditures.

28. The authorities anticipate the widening of the fiscal deficit in 2011 to be temporary. The fiscal deficit is expected to decrease in 2012 (to 4.1 percent) and 2013 (to 2.7 percent) from expenditures control and increased tax revenues (Table 1, and Table A1 in Annex 6). Fiscal space will however remain limited given the rigidity of salaries and wages that represent more than 11 percent of GDP.16

Monetary Policy and Inflation

29. The BCT reacted promptly to the events in January 2011 to ensure the stability of the banking sector and to support the economic recovery. The increase in precautionary cash holdings due to the revolution at the beginning of the current year required a significant intervention from the Central Bank which injected TND1.8 billion (US$1.3 billion) on the monetary market during the first

15 Every budget, regular and supplemental is published in the official journal upon approval, and it is also made available on the Ministry of Finance web portal (for instance the 2011 budget is available at the following link: http://www.portail.finances.gov.tn/jort/Loi%20de%20finances%202011.pdf and in fact all budgets since 2003 are on line). The transition administration has committed to publication of its upcoming supplementary budget upon approval. 16 Public wages remain a major source of fiscal pressure as the wage bill represents approximately 50 percent of current expenditures.

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two months of 2011. Against this background and to provide the financing necessary for helping businesses resume their activities the BCT decided to decrease the reserve requirement ratio by 7.5 percentage points in two steps in early 2011 (to 5 percent as of April 1, 2011). The authorities are expected to loosen temporarily the monetary policy in 2011 to support the economic recovery, and also stand ready to provide liquidity if required. In line with the recent easing in monetary policy, the average money market interest rate decreased to 4.6 percent in March 2011, from 4.9 percent in December 2010.

30. Average inflation (CPI) is expected to slow down to 4 percent in 2011 and 3.5 percent in 2012, which is somewhat less rapid than previously anticipated, due to the increase in international food and fuel prices, the wage pressures triggered by the revolution, and a relatively looser monetary policy.

Table 2. Expected Fiscal Impact of the January 2011 Events and Authorities’ Fiscal Stimulus Plan

USD Million

% of GDP

Budgeted Fiscal Deficit for 2011 1,189 2.5%

Revisions with respect to Budget Law

Additional planned expenditures 2,230 4.8%

Current expenses 1,230 2.6%

Financing for subsidies 880 1.9%

Wages increases 200 0.4%

Unallocated expenses from budget law 150 0.3%

Capital expenses 1,000 2.1%

Direct investment and transfers 600 1.3%

Unallocated expenses from budget law 400 0.9%

Reduction in fiscal revenues 350 0.7%

Additional fiscal resources 1,500 3.2%

Unallocated resources from budget law 550 1.2%

Revenues phospates (non fiscal revenues) 450 1.0%

Central Bank dividends 500 1.1%

Revised Fiscal Deficit for 2011 2,269 4.8%

Source: Tunisian authorities and World Bank staff estimates.

Balance of Payments

31. Tunisia’s external position is also expected to worsen temporarily in 2011. The current account deficit is now expected to widen to 6.2 percent of GDP in 2011 (from 4.1 projected before the revolution), as the current account balance deteriorates compared to 2010 due to the 40 percent drop in tourism receipts, and deterioration in the trade balance (exports of goods are expected to increase by 9 percent against 11 percent for imports), and a 10 percent reduction in remittances (mostly due to the conflict in Libya). The capital and financial account is expected to deteriorate in 2011, as a result of projected drop in FDI by 20 percent in 2011. The deterioration in the current and capital accounts will only in part be financed by official external inflows (including this DPL), and foreign reserves are expected to decrease by approximately US$1.9 billion (to reach US$7.7 billion, or approximately 3.5 months of imports, as of end-2011).17

32. Still, while the balance of payments will put some strain on the economy in 2011, Tunisia should remain in a fairly solid external position, with a comfortable level of reserves. The current

17 Gross official reserves decreased slightly during the upheaval from US$9.6 billion as of end-December 2010 to a still comfortable 8.6 billion as of end-March 2011. A further drop in reserves occurred in April 2011, when a Euro-bond repayment of €450 million was carried out as scheduled.

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account and capital accounts are expected to recover starting in 2012 (see assumptions on exports, tourism and FDI in paragraph 25 above). Notably the return to normal business activity combined with an increase in external demand in 2012 is expected to contribute to a recovery in exports, particularly tourism. In parallel, a return of investors’ confidence is expected to result in increased investment leading to a decrease of the current account deficit to 4.0 percent in 2012 and 2.7 percent of GDP in 2013, and to be accompanied by a recovery in international reserves starting in 2013 (Table 4).

External Financing Needs

33. External financing needs will increase substantially in 2011 but are expected to decrease over the next few years. Reliance on official finance is also expected to decline, as Tunisia returns to capital markets. External financing needs for 2011 were already fairly large due to the scheduled repayment of two large debt maturities,18 and have increased further to approximately US$5.5 billion (compared to a pre-revolution projection of US$4.2 billion), due mainly to a wider current account deficit (as a result of the revolution and the war in Libya). Since the cost to access capital markets has substantially increased in 2011 the authorities have decided to rely mainly on external official financing and to draw down their international reserves (by approximately US$1.9 billion).19

Table 3. External Financing Needs in 2011 (in US$ millions)

Pre-revolution 2011 projections

Updated 2011 projections

Current account deficit 1,693 2,982

External medium and long term debt amortization 2,477 2,527

Total requirements 4,170 5,509

Grants 97 101 FDI and portfolio investments

11,726 834

Public borrowing (MLT disbursement) 1,985 2,805

Official creditors 1,338 2,196

Of which program support:

IBRD 350 500

ADB 250 500

EU 30 65

AFD 135 275

Private creditors 608 108

Other capital inflows including short term lending (260) 370

Total resources 3,548 3,609

Change in forex reserves (622) (1,900)

Total financing 4,170 5,509 Note: 1. Includes net ouflows from disinvestment inTunisiana sharesSources: Tunisian Authorities, World Bank staff estimates

34. Over the medium term the authorities expect to return to financial markets for an increasing share of their financing needs. Until the arrival of the global financial crisis Tunisia was borrowing significantly from international capital market for its financing needs, and the IFIs were only providing a small level of support (as is usually the case in MICs). Tunisia is now turning to IFIs to weather the economic shocks. In this context, IBRD financing will serve to leverage substantial

18 A large government-issued Euro-bond of €450 million which has been effected in April 2011 and a ¥15 billion Samurai-bond which is due in September 2011, jointly amounting to a total of approximately US$775 million. 19 The authorities working to leverage additional external resources to finance the external needs in 2011, in which case the drop in reserves could be smaller.

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2005 2006 2007 2008 2009 2010 2011 2012 2013

Current Account deficit 299 619 917 1712 1234 2118 2982 2069 1521

External medium and long term debt amortization1

1128 1580 1491 1053 1346 2383 2527 2302 2021

Total requirements 1427 2200 2408 2765 2580 4501 5509 4371 3543

Grants 135 185 169 118 165 110 101 111 113

FDI and portfolio investments2

725 3305 1545 2562 1525 1417 834 1370 1545

Public borrowing 1256 1453 1615 1079 1543 1777 2805 2538 2185Of which:

Official creditors 841 963 1103 831 1311 1667 2196 1789 1410

Private (incl bonds) 414 320 324 78 52 109 108 749 776

Other capital flows n.i.e. (includes short term lending) 152 97 156 646 1021 -260 370 378 369

Total resources 2267 5039 3486 4406 4253 3043 3609 4396 4212

Change in forex reserves -936 -2082 -689 -1667 -1673 1457 1900 -25 -670

Total financing 1331 2957 2797 2739 2580 4501 5509 4371 3543

Sources: Tunisian Authorities, World Bank staff estimates; (Projections for 2012 and 2013 by World Bank staff).

Notes: 1. The privatization of Tunisia Telecom in 2006 led to an exceptional capital inflow of approx USD2.3 billion.

2. A foreign disinvestment in the Tunisiana cellphone operator in 2011 led to an exceptional capital outflow of USD600 million.

additional official resources—official program financing in 2011 is expected to increase from US$850 million prior to the revolution to US$1350 million after the revolution under the new Governance and Opportunity DPL, with most of the increase from AfDB (+$250m), IBRD (+$150m), and AFD (+$140m) (Table 3).20 External financing requirements are expected to decrease to US$4.4 billion in 2012 and 3.5 billion in 2013, and the authorities expect to return to capital markets for part of their financing needs already in 2012 and 2013. Forex reserves are expected to remain stable in 2012 and increase by approximately US$ 0.7 billion in 2013 (Table 1 and Table 4).

Table 4. External Financing Needs 2005-2013 (in US$ millions)

Debt Sustainability

35. Tunisia’s public debt had been declining in the past few years, as a result of a policy of fiscal consolidation. Public debt has been declining steadily from over 60 percent of GDP in 2000 to 40 percent in 2010, of which almost 25 percent is foreign debt and the balance of 15 percent is domestic debt. The recent reduction in public debt has also brought down total external debt, which has decreased from above 60 percent of GDP in 2004 to 47 percent of GDP in 2010 (of which Medium and Long term debt was 37 percent of GDP in 2010). Despite remaining high compared to other emerging countries, the Debt Sustainability Analysis carried out in 2010 shows that Tunisia’s public debt remains sustainable under reasonable assumptions regarding future growth and real interest rates.21 While a more recent Debt Sustainability Analysis is not yet available the current increase in public debt appears to be a short term deviation from a medium term declining path and fiscal consolidation is expect to resume rapidly. This is reinforced by the expectation that growth and exports will resume and perhaps accelerate from 2012 onwards thanks to the structural reforms and improved economic governance.

36. Tunisia has scope to absorb the additional foreign debt without jeopardizing external sustainability; the composition of external debt also suggests fairly limited risks for debt sustainability. External debt is now expected to increase to 49 percent in 2011, before restarting its

20 Prior to the revolution the government was already expecting US$350 million in three DPLs from the Bank (in the pipeline for 2011) which had been included in the authorities’ 2011 macroeconomic framework. The AfDB and AFD expected to have their loans discussed at their respective Boards in late May 2011. The EU commission is expected to take a decision on the EU grant in July or August 2011. 21 IMF (2010) Tunisia Article IV, Annex 4 “External and Public Debt Sustainability Analysis”. This projection assumes a primary deficit of 0.9 percent of GDP over the period 2010–15, with the average nominal interest rate on public debt declining from 4.9 percent to 3.8 percent over the same period.

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downward trajectory and reach levels below 40 percent of GDP by 2016. Tunisia’s average interest rate on new external debt is the lowest among ‘resource-poor’ middle income MENA since 2006 (in 2008, the average interest on new external debt was 2.5 percent for Tunisia). In fact 38 percent of Tunisia’s external debt is owed to multilateral donors and 20 percent of the debt is ‘concessional’22. The maturity structure is also favorable: 4 percent of the medium and long term external debt has a maturity between 1 and 5 years, 26 percent between 5 and 10 years, 44 percent between 10 and 15 years and 18 percent between 15 and 20 years. Medium and long term external debt is mostly contracted with a fixed interest rate (77 percent of external debt). Finally, the government has signed with the World Bank a framework agreement that allows it to use interest rate swaps, including on debt contracted from other creditors than the World Bank.

Overall Assessment of Macroeconomic Policy Stance

37. In conclusion, while not as strong as it was only a few months ago, the macroeconomic policy stance remains satisfactory and sustainable over the medium term. Over the past decade Tunisia has shown consistent economic growth, arising from sound economic policies and steady structural reforms. This good growth performance reflects the positive effects of macroeconomic stability coupled with a gradual but steady opening to trade and foreign investment. Overall, Tunisia’s macro-economic management has been consistently sound, the fiscal deficit contained, inflation moderate and the external debt under control, despite the difficult international context (characterized by the international economic and financial crisis) which has negatively affected the Tunisian exports. This allowed the authorities to be able to react promptly to the recent events and to have a sufficient fiscal space to limit and counteract the impact on the economy through a support package to assure a fast recovery. While substantial risks remain to the macroeconomic outlook, the Tunisian authorities’ macroeconomic policy stance appears both sound and sustainable. The authorities remain vigilant and stand ready to take further corrective action should it become necessary.

III. THE GOVERNMENT’S PROGRAM

38. The key mandate of the interim government is to enable a democratic transition and create the conditions to hold the election of a Constituent Assembly. In this context, the main task of the transitional government is the introduction of consensus political reforms to change the laws governing public life, including the Press Code, the Electoral Code, the Law on the fight against terrorism and the Parties Act in order to remove all anti-democratic laws and expand the guarantees of freedom and pluralism.23 The elections are scheduled to take place on July 24, 2011, to elect a 260 member Constituent Assembly.24 The Assembly will have three roles: (i) to appoint a new President and Prime Minister, who will then appoint a new government (which is expected to be in place by September or October, since August is Ramadan); (ii) to act as a legislature; and (iii) to draft a new constitution. The life of this Assembly will depend on how long the new constitution will take to put in place, which is estimated to be anywhere between 6-18 months. Once a new Constitution has been approved (possibly to be confirmed by a referendum) there will be a fresh set of presidential and parliamentary elections.

22 This refers to historical commitments. 23 The events of the past few months signal a breakdown of the social contract prevalent in Tunisia, and indeed in the MENA region. Political and economic power had been concentrated in the hands of a few. Governments offered energy and food subsidies, government jobs, and some public goods and services. In return, citizens tolerated a system of autocracy that gave them limited political voice and representation, and refrained from demanding real accountability and transparency. Events are showing that citizens no longer tolerate the prevailing social contract, and are demanding greater political voice, social and economic freedom and opportunities, and government accountability. 24 There are some technical issues to resolve and it seems possible that the election date may have to be delayed.

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39. In addition to the political measures that the authorities are implementing (see Box 2), the interim government has announced a Program of Social and Economic Measures to alleviate social pressures and introduce a stimulus to the economy. The second priority for the interim government is to boost economic growth and mitigate the negative impact of the revolution and the Libyan crisis on unemployment, in order to ensure a smooth transition. In order to mitigate the projected drop in economic growth (and related increase in unemployment), the government has announced in early April a program of measures to give an immediate tangible response to the economic and social situation “while not squandering the country’s future”. In signaling a break with past practices, the authorities have emphasized that the implementation of all the measures will be characterized by a strong effort in ensuring transparency and citizen participation. In addition to guaranteeing security which seen as prerequisite for the development of all activities of individual and firms, the program entails a total of 17 separate lines of intervention developed along four main axis:

Unemployment: (i) In light of the high social tensions and the unemployment crisis in 2011, the interim government feels the need to accelerate the recruitment of 20,000 new civil servants.25 The government has stated clearly that they see private sector job creation as the only sustainable medium-term solution to address the high unemployment. However, given the exceptional circumstances which Tunisia is experiencing, the authorities feel there is a need to contribute to immediately mitigate the current unemployment crisis including by some additional public sector positions. The expansion in the civil service includes approx 14,000 already planned hires that were approved in 2010 (but not yet hired), and 6,000 new positions (in total the civil service had 482,000 staff in 2010).26 This effort will be accompanied by a similar initiative by private sector to also create an additional 20,000 jobs. (ii) Program to support the unemployed covering a total of 200,000 youth, This includes a new program for graduate unemployed—the AMAL program—which provide a small monthly stipend of 200 dinars and medical insurance, and train/coach 50,000 graduates unemployed (beneficiaries will be selected on the basis of the length of unemployment, the social conditions of their family, and the level of economic development in their region) and also a program for low-skilled unemployed (with secondary education or less) which will provide a token monthly

25 These additional positions represent a fiscal cost to the budget estimated at 0.3 percent of GDP. 26 The government has indicated that most of the new hires are for the health and education ministries and will enable greater service provision in underserved regions, therefore contributing to address the spatial inequities in public services provision highlighted by the January events. Also, it is expected that this will largely allow regularization of existing large numbers of staff on short-term precarious contracts and therefore will not truly reflect an expansion in the already bulky civil services. The authorities have also stressed that full transparency in the hiring process will be a key distinguishing feature of this recruitment process (compared to the past). The government is working on a decree spelling out fast-track procedures and selection criteria for the hiring process—they envisage a competitive selection based on technical criteria whereby each Ministry will select a number of people who will then be trained and offered jobs—they plan to launch the process (invitation to apply) in May and complete the selection process by July.

Box 2. Brief notes on the political process and reforms in Tunisia Following the revolution three commissions were created as a check and balance mechanism for the interim Government. The first is the commission on human rights. The second is the commission on governance. The third and most important is the High Authority to Safeguard the Revolution’s Results, Political Reforms, and Democratic Transition (henceforth referred to as the ‘High Authority’), which is tasked with the main political reforms and related laws, notably to prepare the elections. It was contested until recently due to its lack of representation from the regions, and from key groups such as youth. In order to broaden the consensus and legitimacy on these sensitive reforms, this initially technical commission has been transformed into a 165 member council, with regional representation and also representing all major political forces, unions and associations in the Country. In April the High Authority reached agreement on the decree-law for the creation of an independent electoral commission to supervise the elections, and also on the electoral code for the elections of the Constituent Assembly, and these laws have since been approved by the Council of Ministers. The electoral code provides for a party-list, near proportional representation system, with overrepresentation from underserved provinces. The system also provides for men and women to be equally represented on party-list, hence more-or-less in the final outcome.

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allowance of 100 dinars and also targeted coaching training to improve their employability. (the details of the training/coaching component remain to be defined); (iii) Doubling of the amounts provided for public works programs in the regions.

Stimulus to economic activity: (i) Support to businesses that suffered loss of activity and/or damage during the revolution;27 (ii) Restructuring of the microcredit and SME financing mechanisms; (iii) Fiscal and financial incentives to firms and investors to boost economic growth especially in disadvantaged regions; (iv) Accelerating public infrastructure investment projects needed to boost private investment; (v) Support pilot projects in the telecommunications sector.

Regional Development: Provide an additional allocation to the provinces, with a focus on disadvantaged regions, to address the urgent needs which have been identified; dissolution of local councils and replacing them by special representations involving civil society and local competencies.

Social protection programs: (i) The ongoing direct cash transfers program to poor families, (PAFN; with a stipend of TND190 quarterly granted to needy families, the disabled and elderly people unable to work) has been expanded to an extra 50,000 households (from 135,000 households to 185,000 households; and now benefits 6 percent of families); (ii) Expansion of free medical insurance cards to poor people with limited income to non-affiliated social security system has been expanded to cover an additional 25,000 (to arrive at approximately 200,000 people; in addition, 557,600 people receive care at reduced rates; thus overall health care benefits reach approximately 25 percent of families); (iii) Provide microcredit or gifts to support home-improvements for 20,000 households; (iv) One-off lump sum transfer of TND 400 per person and TND 600 per family to the Tunisians coming back from Libya.

40. In light of the high social pressure and expectations following the January revolution, the measures envisaged by the government appear reasonable. While the expansion in the number of civil servants will bring a structural increase in the wage bill, this decision is understandable given the very difficult political and social situation the country is experiencing, and also mitigated by the fact that the new positions are focused mainly on boosting public services in remote regions, which will need to be addressed in any case. Other measures adopted by the government also appear to be sensible and addressing longer term needs. Notably expanding health coverage in remote areas is a priority; similarly providing unemployment support is necessary and the government is focusing on strengthening coaching and retraining programs, which have proved effective elsewhere (and is working with intensive technical assistance by the Bank in the design of the programs). The government is also working to reorient and improve efficiency of public expenditures: for instance in the health sector, instead of buying 15 new MRI scanners, they have redirected the money to expand services in remote regions. Also, as part of this DPL program the government is reforming the National Employment Fund (which represents 0.4 percent GDP) to use the money for the new unemployment programs, and introducing a new M&E system.

41. These measures will be pursued in the context of a sustainable macroeconomic framework. As discussed in previous sections, the transition period will result in an increase in budget deficit in 2011 (to 4.8 percent of GDP) and a reduction in forex reserves. However, these short

27 This includes: (a) the payment of 50 percent employer compulsory social security contributions for wages paid to employees affected by a reduction in working hours (of more than 8 hours reduction per week) due to reduced business of the company; (b) 100 percent of legal contributions to the compulsory social security contributions for workers in ‘technical unemployment’ (i.e. with hours of work reduced to zero), to encourage firms to retain them on the payroll; (c) delayed payment of taxes for 2010 to September 25, 2011 (without penalties), with possible extension for companies which have ceased activity to March 25, 2012; (d) amortization by the State of two percentage points on the rate of interest charged by commercial banks for rescheduled credits and for credits related to investments to repair damages suffered during the crisis; (e) extension to December 31, 2011, of the deadlines for the deduction of profits and revenues under the Investment Incentives Code (regional development).

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term adjustments do not jeopardize medium-term macroeconomic sustainability. The increase in public expenditures in 2011 is required to mitigate social tensions and boost economic growth in order to prevent a recurrence of social unrest in the run up to the elections (which could also jeopardize future macroeconomic stability). The interim government has been clear it does not intend to adopt measures which would leave the next government an unstable macroeconomic situation or to deviate from a sustainable long term management of macroeconomic affairs.

42. In addition, the interim government has also adopted a program of immediate economic governance and social reforms which address the aspirations of the population as expressed in the revolution. The interim government has indicated they won’t embark on a medium-term package of reforms, but that they want to address the expectations of the population by implementing a program of emblematic reforms (to be implemented before the elections). The authorities have decided to prioritize a few emblematic measures which can signal “a clear break with the past”, with a view to increase equity, transparency, voice and accountability. In addition they also want to adopt measures to address the demand for greater socio-economic inclusion, notably in disadvantaged provinces, and to improve access to economic opportunities. The program focuses on four key areas which lay the building blocks to reestablish social peace and set the country on a faster development trajectory:

Establish basic governance standards: notably related to greater participation, transparency, and accountability, notably to boost civil society participation, strengthen the operation of the rural councils, improve public access to information and statistics, simplify and increase transparency in public procurement, and start purging the administrative and regulatory environment faced by citizens and firms from cronyism and arbitrariness.

Employment and addressing regional disparities: address the lack of job opportunities, by prioritizing a few complementary measures that can be introduced in the short-term to stimulate private labor demand while supporting the unemployed, particularly in outreach in underserved regions, emphasizing transparency and fairness in access to support programs.

Strengthen the financial sector: address the widespread governance failures which have severely undermined banks’ performance and undermined the financial system ability to play its catalyst role and contribute to growth and job creation, including microfinance and other institutions to develop and support the creation of small and\or innovative firms.

Address social disparities: by adopting a different approach to public services provision to increase transparency and inclusive policy making, notably by adopting social accountability mechanisms, and to ensure an equitable and transparent application of policies, and access to services, particularly though greater outreach in underserved regions.

43. The reform program of the interim government is focused on ensuring a peaceful transition and maintaining macroeconomic stability, to enable the next government to successfully address the full aspirations of the Tunisian population. The program prepared by the interim government reflects a balance between the demand for greater voice and improved transparency and accountability of the government, and also measures to directly deal with the social aspects of the transition, notably the high level of long term unemployment and better access to services in remote regions. This will provide a strong platform for the transition to restart the Tunisian economy. As this DPL supports this program of emblematic reforms, a detailed description is provided below for each of the four pillars.

GOVERNANCE

44. The transition government wants to give a comprehensive signal about a credible governance reform agenda (as opposed to a few selected governance reform activities) prioritized around three themes: (i) Participation measures that are geared towards a more open and inclusive government which is probably the biggest challenge for the current administration; (ii) Transparency

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measures which send a clear signal about a different way of managing and conducting government business; (iii) Accountability measures which are geared towards improving particularly external accountability and the results-focus of government activities. Below are the main measures which the government is implementing:

Reinforcing freedom of association: Facilitate the development of a strong and free civil society and enable citizens’ participation in and independent analysis of government’s activities. Freedom of association was severely hampered by a restrictive legal framework and discretionary and arbitrary decisions under the previous administration. The result has been that civil society has not developed and plays only a minor role in the economic and social development process in Tunisia. Hence the interim government intends to prepare an amendment to the law on associations to rapidly remove all the major legal obstacles. In addition to the governance rationale for this measure, opening up to civil society and independent analysis of public policy is highly conducive to creating a vibrant and innovative economy.

Granting the public access to information and statistics: Open up access to information and statistics to the public to improve the accountability of government, as well as to improve the formulation and implementation of economic and social policies and of private investment decisions. Access to information, including economic and social statistics, was particularly constrained and controlled under the previous regime as the regime built its image and ‘legitimacy’ on the country’s image of good economic and social performance. This approach was backed up by a fairly comprehensive legal framework which supported secrecy in most areas of public activity. The limited accountability and resulting information asymmetry weighed negatively on the formulation and implementation of economic and social policies as well as on private investment. In order to address this failure, the interim government plans to adopt a law-decree concerning a pro-active public disclosure policy by the government, together with the publication of economic data, statistics and reports. The law-decree will commit the government to the main principles behind the right to information and will put in place practical rules for opening up government on a short-term basis, until such time as a democratically elected government might wish to adopt a fully-fledged law in this area.

Broaden Internet access and strengthen the ICT sector in Tunisia. Access to the internet was severely restricted in Tunisia prior to the January 2011 revolution. According to the government, all content restrictions and controls have now been removed. This was an important step, to increase freedom of information in Tunisia. The removal of all internet restrictions will also strengthen the local ICT industry, and allow for better use of ICT to increase social accountability of government programs. In addition to this step, the government is also in the process of taking important steps to further liberalize and strengthen the telecommunication infrastructure. Moreover, the government has decided to liberalize the Internet domain name ".tn", previously administered by ATI according to strict regulations that were constraining the private sector in their choice of the ".tn" domain name. The government plans to introduce a new “Domain Name Charter”, under which all a priori controls on the registering of websites are eliminated. Previously, the registration of a domain name was a cumbersome procedure, and included the a priori control on the basis of two lists of domain names (the “Forbidden Names” list and the “Reserved Names” list). Now the a priori control is eliminated and substituted with a posteriori control. In addition, the range of subjects that can be a registrar of domain names has been extended. Presently, only domestic ISPs can commercialize the ".tn" domain name, but this opportunity will now be offered to all hosting companies complying with a certain number of technical criteria. There are also plans to commercialize the ".tn" at the international level, consistent with common international practice. The government also plans to subsidize hosting by NGOs for one year. As a result of this initiative, the government expects an increase in the number of internet hosts from 8,000

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to 80,000 by end-2011. In addition, the government has plans to use ICT to increase the social accountability of government service delivery. The government intends to initiate a national program to change all government websites to make them technically compatible with Web 2.0 (social network) tools. This will enable citizen feedback loops using social media. In addition, the government intends to create technical teams in each ministry in order to handle complaints and citizen feedback provided by social media. This important reform will also be undertaken by outsourcing web management functions to competent local SMEs in the ICT sector, generating noteworthy business opportunities for the private sector. These reforms are placed within a broader policy framework, formulated by the interim government, which is centered on the following priorities: (a) Accelerate the deployment of Ultra-Fast Broadband (UFB), expand third generation (3G) wireless networks and develop technology parks; (b) Strengthen the competences of ICT sector firms, through dedicated training and capacity building activities; (c) Strengthen the access to and use of ICT, through the development of access centers, and the stimulation of ICT services demand from the central government; (d) Support to the creation and development of local digital content, in order to increase the number of ICT-enabled jobs among youth; (e) Strengthen innovation and facilitate technology transfer in ICT and (f) Strengthen the regulatory institutions and increase competition in the telecommunications sector.

Reinforcing, simplifying and increasing transparency in public procurement: The Tunisian procurement system is considered as too bureaucratic and unnecessarily procedural, lacking transparency and accountability, and is characterized by an excessive prior review. There seems to be a consensus within the government that the procurement framework is compromising the effectiveness and efficiency of public expenditures. In addition, the procurement system has failed to prevent political interference and high level corruption. Hence the interim government intends to revise the existing decree on public procurement procedures to reduce the procurement processing time while ensuring transparency and regularity of the procedures. In parallel, the government intends to launch a review of the procurement system using the OECD/DAC methodology, to inform a future more comprehensive reform of the system which will modernize the institutional structure and the proceedings related to public procurement.

Removing red-tape and reducing room for discretion in the application of rules for firms and citizens: For over a decade, Tunisia has implemented a significant number of reforms to simplify administrative burdens. Yet, the impact and credibility of these reforms suffered from the unequal and discretionary application of rules, leading to cronyism and privileges both in the economic and administrative spheres. As a consequence, many economic activities remain over-regulated or subject to unnecessary technical specifications that are prone to abuse and discretion. The government therefore wants to try a new approach to administrative reform and initiate a systemic, participatory, measurable and visible process of revision of regulations and administrative procedures for businesses and citizens in order to simplify procedures and limit the discretion in applying the rules. Initially, a first round of reform may focus on a limited number of priority sectors, possibly including: customs and the tax authority at the Ministry of Finance, as well as the Ministry of Trade and Tourism.

Strengthening external accountability and controls, starting with reinforcing the external audit function: While the competence and the quality of the Court of Accounts (Court des Comptes), which is Tunisia’s Supreme Audit Institution (SAI), is widely recognized, its independence is undermined by a weak legal framework which allows interference from the High Committee for financial and administrative controls reporting directly to the president, does not provide for the automatic publication of the SAI’s annual reports, and does not envisage a formal review process by Parliament. These weaknesses exposed it to political interference by the former regime and affected its credibility. The interim government is aware of these shortcomings and agrees to the urgent need to address

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these issues in line with international standards, in order to improve the overall accountability in the government. To start the process of reform the authorities intend to authorize the online publication of all annual reports of the Court of Accounts.28

EMPLOYMENT AND ADDRESSING REGIONAL DISPARITIES

45. Tackling the unemployment challenge requires a mix of short-term and long-term interventions to mitigate the immediate effects of high unemployment while setting the basis for sustained growth and job creation.29 The January revolution calls for a concerted, visible, and credible effort by the interim government to take immediate actions to start addressing the social frustration with the lack of job opportunities, particularly outside of the main industrialized areas. It also requires a new commitment to the issues of transparency and fairness in the reform process for growth and sustained job creation. A broad-based and inclusive consultative process—including with youth stakeholders—must underpin reforms.

46. Measures to tackle fundamental bottlenecks in the economy may take longer to design/implement and to achieve the desired outcomes. Notably challenging reforms are needed to: (i) remove obstacles to private sector led investment and growth that creates jobs; (ii) reduce distortions from excessively restrictive labor laws and high labor taxes; (iii) reform the education sector to give the labor force skills that match the market. The interim government, however, does not have the required political mandate to tackle these far reaching and deeply political reforms. Within the scope of its mandate it intends to launch a pilot to explore whether an alternative incentive package can help generate private sector employment, to inform future reforms by an elected government.

47. Short term measures should aim to increase confidence and investment, and send strong signals to investors that the rules of the game are changing. In this context, the government has already confirmed its commitment to sustainable fiscal policies and macroeconomic stability. It is also launching an effort to improve transparency and reduce room for discretion in the regulations governing the private sector (and improving transparency and efficiency in license approvals, e-monitoring/disclosure of processing times).30 These commitments should help to restore private sector confidence, minimize job losses, and increase investment over the medium-term. In addition, there is an urgent need for short-term employment creation programs. Building on international experience the government actions are focused on publicly-financed short-term job creation programs, notably labor-intensive public works which can support large numbers in the short-term, and public private partnerships to sustain inclusiveness, which could service programs for skilled youth. Government is also trying to expand and protect job opportunities in the private sector through support to self-employment and micro-entrepreneurship through training, mentoring, micro franchising, and microfinance.

Reform the National Employment Fund. The National Fund for Employment (Fund 21/21) is one of the main instruments that the previous government put in place to address unemployment and regional development. Placed at the discretion of the President, its resources are significant (in the order of 0.42 percent of GDP in 2010) and could have a strong impact if used efficiently. However, the fund operates in a very centralized manner and was widely used as a source of presidential patronage under the previous regime. Hence, the

28 In the medium term, the Court of Accounts of Tunisia, in consultation with counterparts of INTOSAI / ARABOSAI, will engage a deeper reform of the external control system, in particular to (i) redefine the terms of autonomy and independence of the Court and its members; (ii) revise the procedures for appointing members with greater transparency and increased competition; and (iii) improve the coverage, the annual program of audits and review of annual financial reports of the State and its various divisions. 29 The government has been clear to avoid fuelling expectations in the population that short-term measures will have a significant, quick effect on employment outcomes. 30 World Bank (2009) “MENA: Private Sector from Privileges to Competition”. This highlights issues of governance as one of the main constraints to private-sector growth.

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interim government is keen to transform the National Fund for Employment, into an effective instrument to assist the unemployed based on international best practice. To begin to reform the fund, the interim government wants to: (i) transfer the Fund 21/21 to the Ministry of Employment and Vocational Training, with a view to improve its management; (ii) launch a financial, institutional and performance audit of the Fund, which would inform its future restructuring; and, (iii) set up a monitoring and evaluation system for the programs financed by the fund.

Establish a new program to support the graduate unemployed: Among its first measures after taking office, Tunisia's interim government launched in February 2011 a new program to support the unemployed, especially graduate long-term unemployed, and facilitate their transition into permanent employment. The AMAL program (which means ‘hope’ in Arabic) aims to provide a comprehensive package of employment services, including the introduction of a coaching module (which has been virtually absent from existing programs), a stronger emphasis on vocational training, and promotion of entrepreneurship. The program seeks to revamp the apprenticeship program (Stage d’Initiation a la Vie Professionnelle, SIVP), by introducing additional design features such as a basic training package for all beneficiaries, promotion of entrepreneurship, training and retraining (hard and soft skills), and a coaching module that will provide program participants with personalized employment assistance according to their profile and the existing demands and opportunities in the labor market.

Strengthen programs to support the low-skilled unemployed: The government plans to enhance its support for low-skilled unemployed from disadvantaged areas by expanding public works programs and combining them with certification, training and job search counseling. To improve the employability long-term low-skilled unemployed and their prospects for re-integration into the labor market the participation in public works will be complemented with additional employment services such as certification and entrepreneurship coaching and will encourage non-governmental participation in the selection and implementation of projects.

Reaching out to provinces and local authorities: Establish procedures for emergency transfers to the governorates using a set of criteria to rectify the regional socio-economic disparity, accompanied by an institutional mechanism of public participation in the management and monitoring of local activities. The revolution was initially sparked by social discontent in the interior regions of the country who have suffered from the regional disparity in relation to the coastal region. While local authorities should normally play an important role in the implementation of such short-term mitigation measures, at present they are not operational due to the lack of political legitimacy of local councils (201 councils out of 264 are not operational) and also because of the lack of resources. Hence the government is establishing procedures for emergency transfers to the governorates, notably by adopting a special appropriation to fund their operating budgets and addressing the most urgent needs at the decentralized level.31 The government is also moving to clarify, in consultation with civil society, the procedures and criteria for the eligibility and appointment of special delegates who will replace municipal councils and rural councils. The criteria should allow for strong representation of women and youth. In addition to these short term emergency fixes, there is a need to put in place a framework for decentralization. This is a long-term endeavor which the interim government expects to set in motion during its mandate, also with technical assistance by the World Bank, but which will need to be pursued and finalized by the next elected government.

31 A formula for provincial allocations is under consideration jointly between the Ministry of Regional Development, the Ministry of Interior, and the Ministry of Finance, which aims to rectify the regional disparity in socio-economic indicators. It will also be important to establish a participatory and transparent, monitoring and evaluation system of expenditures and measures taken by local authorities (municipalities and governorates).

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Reform of the National Solidarity Fund (26/26). The Fund 26/26 was introduced in 1982 with the purpose to support the remote and underserved areas of Tunisia. However, the fund has been politicized and has not been managed in a transparent manner. The criteria for allocating resources have not been clearly defined and no impact assessment has ever been conducted. Following the revolution in January 2011, the fund's operation has been suspended, and the interim government intends to launch a financial and technical audit of the fund 26/26 to assess its operation, evaluate its impact, and inform a future decision on how to restructure it, if appropriate with eligibility criteria and transparent and effective operating rules, or whether to abolish it altogether.

FINANCIAL SECTOR

48. The capacity of Tunisia’s financial sector to contribute to growth and job creation has been undermined by weak governance and constraints to the development of adequate instruments and institutions. Poor banking sector intermediation capacity and performance has been closely linked to widespread governance failures in the banking sector.32 Bad corporate governance practices have undermined banks’ performance, and facilitated substantial lending to the first family and connected interest. As a result, burdened with structural low profitability and high NPLs ratios, the banking system is unlikely to play its catalyst role. Further, in the coming months the banking system’s liquidity could reach a critical point because of increasing arrears in loan service due to the economic downturn. Given banks’ present undercapitalization, there is a need to start reevaluating the various operational and financial responses to risk accumulation. Micro-finance has a very large job creation potential33 and could potentially expand rapidly but the sector urgently needs a legal and regulatory framework aiming at setting up a competitive environment and ensuring sound and sustainable development. The stock markets and alternative sources of external funding (namely venture capital, leasing and factoring) remain shallow. Various institutional and demand constraints limit Tunisian firms access to primary and alternative stock markets. In the short and medium term, the Central Bank of Tunisia and the government intend to focus their efforts on: (i) ensuring financial sector stability during the transition; (ii) improving banks’ governance; and (iii) improving access to finance. To contribute to these high level objectives, the Tunisian authorities have set out an ambitious work program over the next few months.

The authorities are taking action to ensure and enhance financial stability during the transition. When the events started to unfold in January, the biggest challenge for the Central Bank was to ensure that the payment system kept working and that the banking system stays functioning, and they successfully avoided a run on banks. As the economic situation has been unfolding, the focus has shifted to ensuring that the health of the banking sector is adequate to withstand what is likely to be a difficult economic year, notably for the tourism sector. In order to monitor the health of the different banks, the authorities have started to conduct comprehensive assessment of banks’ portfolios and stress tests, with technical assistance from the Bank and the Fund. This assessment would help assess (i) the capacity of

32 In February 2011, the new governor of the Central Bank started the reform process by changing the Board of Directors of the Central Bank to ensure greater independence and competencies. 33 There are two distribution networks of micro-finance loans in Tunisia: Banque Tunisienne de Solidarité (BTS, a state owned bank), and ENDA (a non-governmental organization). Although both networks have expanded their activity very rapidly over the last three years and together cater roughly 400,000 active clients, the market is far from being saturated: a recent study carried out by the EU estimates that the number of potential micro-credit clients in Tunisia is approximately 1.5 million (over three times the number of current customers of BTS and ENDA). According to ENDA, 1 stable job is generated for every 8 micro-enterprises, over and above the micro-entrepreneur and occasional work for family members. Out of its 160,000 active borrowers, ENDA’s loans are generating 20,000 stable jobs. Based on the study’s projections, micro-credit may generate 187,000 new jobs within the next five years. This figure deserves to be further refined since we are assuming that the potential market is fully served by MFIs and that the ratio of 1 job created for 8 active clients is the same at BTS.

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the Tunisian banks to absorb the current shock, (ii) the potential immediate needs for a fresh injection of capital and, in fine, (iii) maintain public’s confidence. In addition, the authorities are working to strengthen the capacity of systemic risk analysis of the Financial Stability Department of the Central Bank of Tunisia; this reinforcement would result in broadening the skills of human resources available as well as the use of statistics to produce on a regular basis a greater variety of stress tests and stress scenario.

Strengthening the corporate governance of banks, private and public. On paper, the Tunisian banking sector has made significant progress in updating its legal and regulatory framework but implementation has been uneven and superficial and has only led to partial change in bank behavior. In particular, deficiencies are found at three levels: (i) the composition of boards of directors; (ii) the control structures; and, (iii) information to the public. It follows that the overall level of transparency of the banking sector is weak, which affects the confidence of stakeholders. In this context, the Governor of the Central Bank is planning to adopt a circular on good corporate governance for banks based on international best practice, and also to introduce criteria for the selection of key executives, directors and controlling shareholders in banks.

Revise the legal framework for microfinance. The government intends to establish a sound regulatory and institutional environment to ensure the successful and sustainable development of the industry. The government believes that micro-finance has the potential to contribute to the success of the transition and to become an engine of job creation in Tunisia. At present, however, there are only two micro-finance providers in Tunisia: ENDA, a non-governmental organization, and the Banque Tunisienne de Solidarité (BTS), a State owned bank which has been saddled with the same problems of patronage as other State owned banks.

The interim government intends to adopt new legislation to boost the venture capital industry. In collaboration with the profession (ATIC and management companies and SICAR), the interim government intends to adopt new legislation to boost the venture capital industry in Tunisia in all its segments (early stage, development, transfer, reversal), in order to broaden its scope of activity, reduce taxation, and extend the time horizon for the investments. The combination of these three key steps should help establish a true venture capital industry and attract the long-term savings needed for it to take off.

SOCIAL SERVICES POLICIES

49. The January revolution has highlighted the urgent need to address social disparities. Just as important to broaden social and economic inclusion, there is a need to adopt a different approach to public services provision to increase transparency and inclusive policy making—citizen participation, including from women, youth, minorities—and to ensure an equitable and transparent application of policies, and access to services. Hence there is a consensus on the importance of promoting the quality of public services particularly in underserved regions to the west and to develop local civil society and government planning, management and evaluation capacities. In the short-term the interim government intends to take action to expand social accountability and citizen participation and outreach in service delivery, which would be followed-up by longer-term strategic policy packages addressing structural policies in terms of financing and organization of social services.

Adopt mechanisms for greater participation by citizens in evaluating performance of public services. Civil society participation in public service planning, delivery and evaluation is low in Tunisia due to a relatively inhibiting environment. There has also generally been a weak consultation process and very little involvement of local communities and CSOs in policy and program formulation and implementation. The interim government recognizes the importance of strengthening citizen and CSO involvement in the democratic transition and enabling them to speak out in the community interest. Hence, the government wants to

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establish a mechanism for monitoring by independent committees representative of the citizens for evaluating performance of public services (health, education, welfare, administration).

Enhancing social services delivery in underserved regions. The high maternal mortality ratio (MMR) in the underserved, western regions of Tunisia has been associated with the dearth of obstetricians and a poor use of prenatal health services. The interim government has increased the total budget for 13 underserved governorates by 14 percent above original 2011 budget allocations to cover infrastructure needs. Outreach services have proven effective at increasing access, where well-managed.34 With this aim, the interim government plans to create a national outreach services policy to expand free access to care in underserved regions for health services provided outside of traditional fixed facilities, whether mobile health teams, educational services, or rotating practices for health care workers between fixed health facilities and outposts such as schools, community and municipal centers and homes.

Improving the medicines supply chain to increase the coverage of subsidized medications. Drug expenditures in Tunisia account for a third of operating expenses of institutions excluding-staff, or 15 percent of total expenditure, which is average by international standards. Yet medications for outpatient visits tend to be available on average only 60 percent of the time in public hospitals (as of 2008). The low availability is associated with both a relatively low level of public expenditure and a high degree of corruption. While hospital staff accounts for 5 percent of health facility users, they are estimated to account for 25 percent of medications usage, suggesting a misappropriation of health care resources by personnel. As a result, households tend to purchase medications in the private sector, which accounts for half of household expenditure on health care. The lack of public medicines represents a tangible reflection of the poor quality of public services, particularly in western, poorer regions. To enhance the availability of essential drugs in public health facilities, building on the positive results of a recent pilot, the interim government intends to institute a medications audit policy within performance-based budget contracts to monitor medications use for greater transparency and accountability.35 In the medium-long term, it will be necessary to strengthen governance and expand health insurance coverage to strategic purchasing policy, integrating public and private providers.

Adopt clearer and transparent eligibility criteria for welfare programs. In April 2011 the government decided to expand the coverage of welfare programs (free health coverage to poor people by an additional 25,000 households; and the direct cash transfer programs for needy families (PAFN) by an extra 50,000 household— see paragraph 39). While the Ministry of Health and the Ministry of Social Affairs already use categorical targeting to select beneficiaries for these programs, the government departments in charge of promotion and welfare believe that the eligibility criteria and targeting can be improved. In this context, the government plans to adopt a circular spelling out the criteria and ensuring its wide dissemination to the public to increase transparency in access to these programs and improve

34 In recent years, the Ministry of Health put in place financial incentives and mandatory practice schemes for providers in underserved regions. However, providers have so far remained reluctant to move to underserved regions. A meta-analysis of 73 studies from 10 countries, including countries where regional disparities have been observed such as the United Kingdom, the United States, Canada, Australia, Ecuador, Kenya and South Africa, showed that the effect of specialist outreach in collaboration with primary care, education or other services has been associated with improved health outcomes, more efficient service delivery, and less use of inpatient services (Gruen et al, 2004). 35 The Ministry of Health recently introduced a pilot audit policy for prescription drugs at Habib Thamer Hospital, which was associated with an improvement in medications availability. This approach is consistent with experiences from other countries which show that the appropriate use of medications is best achieved through both soft (guidelines and monitoring) and hard measures (financial incentives or sanctioning the misuse of medications) (Seiter, 2010). Corruption in the pharmaceutical sector has been addressed through measures to introduce transparency through better monitoring of prescribing practices in countries such as Mozambique and Cape Verde (Ferrinho et al, 2004), Costa Rica (2002), the United Kingdom, China and the United States (Seiter, 2010).

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their coverage. Similarly, the government intends to introduce a new monitoring-evaluation mechanism to measure their impact and ensure greater efficiency.

IV. BANK SUPPORT TO THE GOVERNMENT’S PROGRAM

LINK TO THE COUNTRY PARTNERSHIP STRATEGY

50. The Bank’s program in Tunisia set out in the Country Partnership Strategy FY10-13 will be formally revised following the election of a new government.36 The CPS envisages three strategic pillars: (i) employment, growth and competitiveness; (ii) sustainable development and climate change; and (iii) improving the quality of service delivery. While the core of the CPS remains valid to address the structural problems facing Tunisia, the Bank recognizes that many of the elements of the 2009 CPS, which was prepared with the pre-revolution government, are no longer relevant. At present, however, the situation is still too fluid for the Bank to lay out a new strategy, particularly given the short-term horizon of this interim government. A new CPS will likely be prepared only after a new elected government under a new constitution is in place.

51. In the short term the Bank is adopting a flexible approach suited to the social and economic challenges of Tunisia. The interim government has asked the Bank for support in four areas. The first was governance to show that the interim government was already doing things differently. The second was employment and addressing regional disparities, to address one of the root causes of widespread social discontent. The third was on the financial sector to ensure its stability and accessibility for economic actors. The fourth was for the social sectors, including health and an overall improvement of social services also with a regional focus. These four areas constitute the core and rationale of the Bank’s interim engagement approach.

52. During this transition period there are important needs and opportunities which the Bank plans to address through a five-fold set of interventions:

The first is the development of this proposed multi-sector DPL for an amount of US$ 250 million and Euro 168.3 million that supports the adoption of emblematic measures that address some of the demands expressed by the population in the revolution and show that the government has made fundamental changes compared to the previous orientations and approach. In addition, the measures in the DPL aim to lay the foundations to consolidate such changes during the interim period with a view to make them ‘irreversible’ for the future.

A second area is an investment loan under the Arab World Initiative (AWI) Micro and Small and Medium Enterprises (MSME) Lending Facility targeting MSME finance, which is under preparation in partnership with the African Development Bank. The targeted amount of this loan would be around US$50 million.

The third area of Bank response will be the fast tracking implementation of two recently approved community development projects (approximately US$125 million) to ensure that job creation activities and related programs are put in place in the country’s poorer regions.

The fourth area of Bank response will be the piloting of innovative programs in the areas of youth, employment, local development and employment and support to the Tunisian workers returning from Libya. A proposal was recently prepared for JSDF financing for employment generation activities through a community based local development program totaling US$3 million. In addition, a US$3.8 million grant proposal was submitted for review to the State and Peacebuilding Fund (SPF) to supports community building and the reintegration of

36 The CPS was approved by the Board of Executive Directors in December 2009. IBRD (2009). Country Partnership Strategy for the Republic of Tunisia for the Period FY10-13. Report No. 50223 –TUN.

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displaced persons from Libya in underserved regions.37 A JSDF program to put in place innovative youth programs is currently being implemented.

Finally, the Bank is providing substantial technical assistance mainly focusing on the measures being implemented under this proposed DPL operation, and a few other strategic tasks to prepare the ground for reforms by the next government (such as: preparing a decentralization strategy; design and implement a pilot of incentives package for employment generation; modeling the poverty and social impacts of shocks; assistance with setting up of a fund to manage the assets already recovered from the family of the ex-president; Reserves and Assets Management capacity development for the Central Bank (RAMP program); improving the legal and operational framework for the sound development of micro-finance and SME finance).

53. The Bank supports the strategy of the interim government to jump-start the economy using external official financing to ensure that it does not fall into recession, and its aim / objective to return to the capital markets for future financing needs as the situation improves. In parallel the interim government wants to mark a clear break with the past in terms of voice, transparency, accountability and inclusion. Bank support focuses on laying the ground for strengthening governance and promoting employment, particularly in regions previously neglected. The single-tranche US$ 250,000,000 and EUR 168,300,000 DPL will leverage about US$850 million in other donor resources, to help signal confidence in Tunisia and to get the country back on its feet. The government is clear that up-front support will impact IBRD exposure going forward. Nevertheless given timing constraints linked to the formation of the next government (to be nominated by the Constituent Assembly), and the urgent large funding requirements for the fiscal stimulus and debt servicing in their fiscal year (CY11), they have requested a single tranche DPL. Looking ahead to FY12 the Bank will continue support to Tunisia in restoring confidence and implementing medium-term measures for economic reform. The goal is to help government return to market for future financing needs, which are expected to decline substantially in 2012 and 2013 (see Table 4), along with selective investment lending opportunities. Further reforms are likely to include measures to bolster competitiveness, promotion of exports, strengthen further the transparent and effective delivery of public services and support the decentralization process and employment-creation agenda. Instruments could include an operation to support the government in its return to market, along with investment lending focusing on export development, vocational training and employment programs. In FY 13, the Bank will continue the path of supporting government develop a competitive and open economy, accenting emphasis on inclusive growth (lagging regions and vulnerable). Particular support will be paid to further integration with EU and MENA. By this time Bank support is expected to be entirely in investment lending focused on delivering knowledge in the strategic areas outlined above.

COLLABORATION WITH THE IMF AND OTHER DONORS

54. The Bank has excellent collaboration with the European Union (EU), the African Development Bank (AfDB), and the French Development Agency (AFD), all of which have a strong local presence in Tunisia. Relations with the IMF are also very close. The IMF has no local office in Tunis and Tunisia has no formal program with the Fund, though relations are good. The Fund undertakes one Article IV mission a year and has technically assisted the Central Bank on monetary policy issues. The government has not requested a Fund program at this stage. However the authorities invited the IMF for a technical mission to Tunisia in March 2011 to examine possible macroeconomic scenarios following the January revolution, and also to begin to assess the stability of the financial sector. In this context, the IMF supports the government choice of accommodative fiscal and monetary policies in 2011 which are needed to mitigate the social tensions in the run up to the elections and boost economic growth and employment. The Fund team also underlines the uncertainty regarding the short-term economic outlook, mainly related to the outcome of the tourism summer season and developments with the war in Libya. In particular, it was considered that: (i) the fiscal

37 About 40,000 Tunisians are estimated to have returned from Libya as a result of the current crisis.

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stance in 2011 strikes the right balance between supporting growth without undermining the longer term fiscal sustainability (and without squandering the significant gains achieved in bringing public debt down in recent years); and (ii) accommodating monetary and exchange rate policies are appropriate to support the economic recovery and ensure that adequate liquidity continues to be present in the banking system. The Bank has discussed with the IMF the content of the Governance and Opportunity DPL program since its inception.

55. The proposed DPL has been jointly prepared by the World Bank, the African Development Bank, the European Union, and the French Development Agency (AFD). The missions were conducted in coordination with JICA and UNDP, who are considering additional financial and/or technical assistance. The DPL builds on the successful experience of the Integration and Competitiveness (ICL) DPL, which was prepared jointly by the World Bank, the AfDB and the EU in 2009, and its formulation allowed these institutions to deepen the policy dialogue with the government on key economic issues.

LESSONS LEARNED

56. Lessons learned from implementing development policy loans in Tunisia and elsewhere show that country ownership of the proposed policies and actions is essential for success. This program therefore supports closely the program of the interim government, and is closely aligned to the expectations of the population, as expressed by the January 2011 revolution.

57. Other lessons learned from implementing development policy loans in Tunisia and elsewhere also show:

The vital role of voice and social accountability mechanisms. In Tunisia, a yawning gap had emerged between de jure changes to policies and programs (some of them supported by previous DPLs) and de facto reality of their implementation. In the absence of feedback from society, it is in that gap that cronyism and corruption flourished (this is also a main theme of the 2009 World Bank report “From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa”). More than on formal changes per se, this proposed DPL focuses therefore on establishing the social accountability framework that will allow for better development policies on the ground in the future.

The limits of gradualism. Previous reform efforts have often focused on bringing gradual change where opportunities arose (e.g., in creating, then expanding the off-shore sector), on the assumption (untested in the absence of feedback mechanisms, see above) that society was only prepared for incremental moves. As it turned out, the January 2011 revolution demonstrated that the said society was actually hungering for quantum change.

The importance of safeguarding banking stability in the transition. Experience from many other countries undergoing transition (e.g., Philippines, Indonesia, former Soviet Union, Eastern Europe) suggests that much of the legacy of the past may end up coalescing around bank portfolios. Preventing the related threats from becoming systemic is essential to securing the transition.

58. The previous DPLs in Tunisia also highlighted the substantial benefits of preparing a joint budget support program with the other development partners, which resulted in greater commitment by the government to identify a strong program, more synergies between the budget support program and the technical assistance and analytical activities carried out by the various donor agencies, as well as reduced transaction costs for the government and better overall donor coordination.

ANALYTICAL UNDERPINNINGS

59. The proposed reforms program build on existing analytical studies and rapid assessment missions recently completed as well as on projects that were under preparation in Tunisia. A

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summary of relevant analytical studies and Technical Assistance reports is presented in Table 5. The main lessons from this work which are relevant for this operation are summarized below:

Governance: The sensitive topic of governance has been addressed by past analytical reports from a technical angle, in the context of improving the business environment, implementing trade reforms or strengthening public finance management. This seemed the most suitable approach given that the government refused to engage on more sensitive issues. For instance, the 2005 Country Procurement Assessment Report (CPAR) which presents a candid assessment of the weaknesses of the procurement system was neither acknowledged nor published. Most of the analysis contained in the CPAR is still valid in the context of this operation. The technical analytical work which informed the recently implemented reforms improving economic and trade integration, as well as the business environment, also presented the case on the positive impact of improved economic governance. However, these efforts and results remained largely constrained by several factors beyond pure economic reasoning. These constraints have been analyzed in other studies and reports, which constitute a solid analytical background for this operation. For instance, the World Bank 2009 report “From Privilege to Competition: Unlocking Private-Led Growth in the Middle East and North Africa” analyses the factors leading to the lackluster response of the private sector to institutional reforms undertaken by governments in the region, including Tunisia. The main challenge identified lies in the capacity of governments to implement policies that give clear signals to investors and strengthens their credibility as they work to level the playing field for all investors. Strengthening and sustaining growth will depend on the capacity to reduce the unequal and discretionary ways of implementing policies. More recently, the 2010 Development Policy Review (DPR) for Tunisia provides a detailed discussion of the relevance of improving the quality of services to firms and citizens, introducing a framework for Monitoring and Evaluation in order to improve accountability and boost competitiveness. It also contains an in depth analysis of the role of the state which has not been acknowledged by the government but is a solid analytical background to this operation. The messages of past analysis are all consistent with the recommendations of a recent governance mission (Governance Assessment Mission Report, February 2011), which stressed the importance of strengthening government accountability and transparency as the paramount objective in the short and medium term. The main findings and recommendations of this mission, which have been presented in an internal Policy Note, have informed the design of the measures proposed in this DPL. Finally, the 2010 Public Expenditure and Financial Accountability (PEFA) identified transparency and accountability shortcomings, notably in the field of financial information and reporting, public procurement, the tax authority, internal and external financial controls. The authorities translated it into Arabic but have not yet published it. They now indicated they would and committed to implement its main recommendations.

Employment: There is ample analytical work carried out on employment in Tunisia. The analytical underpinning for the Tunisia Employment DPL I in 2010 (which include two policy notes- the 2007 “Skills Development, Social Insurance and the Labor Market” and the 2009 Labor Demand, Skills Supply and Employment” and follow-up technical work) and the Tunisia Employment DPL II (whose preparation has been suspended) has contributed significantly to inform the program, notably in identifying the medium term policy objectives of the reform program. A discussion on the medium term needed reforms of the labor market was also included as part of the Development Policy Review 2010 and constitutes a solid background for the medium term policy objectives of this operation. More recently, an internal Policy Note on Labor Markets in Tunisia (Mimeo, February 2011) provides an update of the recent trends and challenges and presents options for a package of short terms measures that could be implemented to mitigate high unemployment over the next few years, with particular focus on the low-skilled and long term unemployed. This note has directly informed the current operation. To fill the knowledge gap in specific topics, the World Bank is also currently providing (in collaboration with other donors) technical assistance (TA) to the

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government to support the design and implementation of the short term reforms. This includes sharing international experience and present international best practices that could inform the specification of the basic package of services for the unemployed.

Financial Sector: In the past, there has been a limited dialogue on the state and functioning of the financial sector in Tunisia. Some studies have addressed individual topics in the most recent years and provided suggestions and recommendations based on analytical work. For instance, in 2009 the World Bank Policy Note “SME Access to Finance in Tunisia” analyzed the narrow role of the banking and non banking sector in providing finance to private firms. The report recommended the introduction of specific measures for other financing instruments, including measures aimed at strengthening the venture-capital investment companies (Société d’Investissement à Capital Risque, SICAR). Complementary to this study, an internal policy note on the financial sector in Tunisia highlights how the limited role of the banks is mostly due to problems related to the governance of the commercial banks, and the State governance of public banks. Two missions were fielded in March 2011 to examine these issues in more details and the findings of these missions have informed the proposed financial sector component of this operation.

Social Sectors: The social sectors program was informed by the preparation of the Health Services Strengthening DPL (preparation suspended) and its solid analytical background, which includes a 2006 Health Sector Study, a 2007/09 Hospital Performance Evaluation and a 2009/10 Health Equity Study. The 2006 Health Sector Study focused on an evaluation of health resources and financing, which demonstrated that wide variations in user satisfaction, perception of quality of care, and operating costs in different areas of the country. The study also revealed a lack of standardized, comprehensive quality of care standards for important conditions such as maternal health. These findings have informed the design of one of the social sector measures of the current operation. The Health Equity Study demonstrated that there remain substantive gaps in health care utilization, which could be addressed through improved availability of personnel and better practices in the public sector, or by strengthening accountability for service delivery. A recent Policy Note on Social Sectors in Tunisia (mimeo, February 2011) examines policy implications for addressing the quality and inclusion of community social services in Tunisia, focusing on access and quality of health care services, as well as key aspects of rural community development. The key short-term policy recommendation of the note, to improve access to quality healthcare for the citizens by strengthening accountability, rebuilding trust between the state and the citizens, and promoting citizens’ voice and participation, has been directly reflected in the current operation.

Table 5. Studies and Reports, TA activities, and Investment Projects, related to the proposed DPL operation

DPL Pillar / reform area

Studies and Reports, TA activities, and Investment Projects Leading Institution

Macroeconomic Framework

Tunisia Development Policy Review (2010) Policy Note on Tunisia and the Global Economic Crisis (2010) Tunisia Global Integration Study (2008). IMF 2010 Article IV Consultations with Tunisia

World Bank World Bank World Bank IMF

Governance Country Procurement Assessment Report (2005) Tunisia Development Policy Review (2010) Doing Business 2010 Tunisia PEFA 2010 Governance Assessment Mission Report (Mimeo, February 2011) Tunisia ICT Sector Development Project 2004-2010

World Bank World Bank World Bank World Bank World Bank World Bank

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PSD Flagship Report on Competitiveness (2009) World Bank

Financial Sector Policy Note on SMEs Access to Finance in Tunisia (2009) Policy Note on Financial Sector (Mimeo, February 2011) Mission report on governance of commercial banks (Feb. 2011) Mission report on State governance of State owned banks (Feb. 2011)

World Bank World Bank World Bank World Bank

Employment and Regional Disparities

Tunisia Development Policy Review (2010) PSD Flagship Report on Competitiveness (2009) Tunisia Employment DPL I Tunisia Employment DPL II (preparation suspended) MILES I: Skills Development, Social Insurance and the Labor Market (Policy Note, FY07) MILES II: Labor Demand, Skills Supply and Employment (Policy Note, FY09/10) Policy Note on Labor Markets in Tunisia (Mimeo, February 2011) Policy Note on Regional Development and Municipalities in Tunisia (Mimeo, February 2011)

World Bank World Bank World Bank World Bank World Bank World Bank World Bank World Bank

Social Sectors Tunisia Global Integration Study (2008). Tunisia Health Services Strengthening DPL (preparation suspended) Policy Note on Social Sectors in Tunisia (Mimeo, February 2011) Tunisia Health Equity Study (2010) Tunisia Health Care Productivity Study (2011) Tunisia Hospital Performance Evaluation (2008)

World Bank World Bank World Bank World Bank World Bank World Bank

V. THE PROPOSED GOVERNANCE AND OPPORTUNITY DPL OPERATION

60. The proposed Governance and Opportunity DPL is a single-tranche operation supporting the transition in Tunisia. In February 2011, the interim government requested the Bank to prepare a multi-sector Development Policy Loan, jointly with a multi-donor team (with the EU and AfDB, and others who may want to provide policy-based support). The government indicated they wanted to undertake a program of immediate measures which would demonstrate the change in direction called for by the revolution, and set Tunisia on a new medium-term trajectory of reforms. In that sense, many of the measures supported by this DPL open up the way to a much longer and complex reform path which had hitherto not been touched by the previous government. The interim authorities have emphasized that they want to give priority to measures which can signal “a clear break with the past”, notably to increase equity, transparency, voice and accountability.

61. The objective of this operation is to help the interim authorities secure the transition. In this context the operation supports a program of immediate measures that are emblematic of improved governance and opportunity and are within the mandate of the interim government to undertake. As discussed earlier, the program of measures is focused on four key areas: governance, employment and regional development, financial sector, and social policies.

62. As mentioned above, the Governance and Opportunity program has been prepared by the government with joint support by the World Bank, the African Development Bank (AfDB) the European Union (EU), and the French Development Agency (AFD), with the participation JICA and UNDP. The program is summarized in the Government Policy Reforms Matrix (see Annex 3). All preparatory missions have been jointly conducted even if some flexibility was needed to respond to different internal processes. The Bank played the leading role across the institutions’ in coordinating the work, communicating with the government, and in evaluating a macroeconomic framework for this program.

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63. The government has discussed the reform program with relevant stakeholders. As mentioned in Section III, the interim government created three new commissions. Notably, in order to broaden the consensus and legitimacy on sensitive political reforms, the ‘High Authority’ has been transformed into a ‘checks and balance’ instrument and now consists of a 165 member council, with regional representation and also representing all major political forces, unions and associations in the country. The interim government has also consulted broadly on the proposed reforms program discussed in Section II, which is supported by this DPL. As part of the preparation of this operation, the authorities and the development partners held several meetings with civil society, private sector and academics, mainly to listen and brainstorm about country priorities.38 Subsequently, in May 2011 the government organized a large consultations workshop, with participation of more than 120 participants (from civil society, political parties, the High Authority, academics, private sector organizations, etc) to present and receive feedback on the reforms program. The event received ample media coverage. Several ministers attended the workshop and participated in the discussion. Most participants were supportive of the reforms program, although several emphasized that this ''emergency program'' does not decisively tackle the structural economic challenges, notably job creation and the development of disadvantaged regions. They also advocated the need to promote civil society associations not just by improving the law of associations, but also by granting them financial and technical support. Also there were calls to give civil society associations a greater role in the management of small infrastructure projects and regional development projects at the local level. Participants also emphasized the importance to change the legislation to improve access to statistics.

64. The total amount of financing to the government under the Governance and Opportunity DPL program is expected to be approximately US$1.35 billion, of which loans for an amount of US$ 250 million and Euro 168.3 million from the World Bank and a further US$850 million from other development partners (amounts discussed include US$500 million from the AfDB, Euro 45 million from the EU39, and Euro 185 million from AFD). The funding will be provided through separate financing agreements for each institution on the basis of the same Joint Policy Reforms Matrix.

38 The team was careful not to overstep its role in consulting directly on the government’s program, and to let the government lead its own consultations process. In its discussions with the authorities, the team made it clear that the government needs to carry out its process of consultations. 39 An additional Euro 45 million are to be disbursed in 2012.

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POLICY AREAS

65. The Governance and Opportunity DPL policy matrix and results framework present the specific areas supported by the DPL operation. The Policy Matrix is presented in Annex 2. The proposed DPL operation is focused on a subset of the measures included in the Joint Policy Reform Matrix supported by the donor partners (presented in Annex 3).

66. The prior actions have been selected based on their criticality for achieving the objectives set forth by the interim government. The measures supported by the DPL are based on four main guiding criteria: (i) being implementable in the short-run (i.e. during the administration of the interim government, which is expected to cease shortly after the elections scheduled for July 24, 2011); (ii) enhancing voice, accountability, citizen rights, and service delivery particularly in underserved regions and for underserved populations; (iii) preferably having a medium term/long-lasting impact, and /or setting the stage for needed reforms in the medium run; (iv) the assessment of the trigger can be done easily, e.g. verifying whether a law or some regulation has been approved. A balance has been struck between the critical importance of ownership, the required ambition of the reform program as well as realism and effectiveness of implementation within the timeframe of the program and the exceptional circumstances which Tunisia is experiencing.

67. The Governance and Opportunity DPL policy matrix describes the logic of the program, by showing for each of the four components of the program the main axes through which the main

Box 3. Good Practice Principles for Development Policy Lending Ownership: The government program supported by this operation has been announced publically by the interim government on May 14, 2011, and is focused on demonstrating the change in direction in line with the demands of the revolution that set Tunisia on a new medium-term trajectory for reforms. They have emphasized that they want to give priority to measures which can signal “a clear break with the past”, notably to increase equity, transparency, voice and accountability. The policy actions supported by this operation are basically measures identified with the government to reach specific outcomes objectives of the interim government. They focus on key measures that the government believes are necessary and politically possible.

Harmonization: Agree upfront with the government and other financial partners on a coordinated and accountability framework. The program is jointly supported by the World Bank, the African Development Bank, the European Commission and the French Development Agency (and in collaboration with JICA and UNDP) and there has been very effective collaboration between these development partners throughout its preparation. The content of the program and its underpinnings have thus been naturally coordinated with Tunisian institutions. The policy matrix was carefully discussed and coordinated.

Customization: Customize the accountability framework and modalities of Bank support to country circumstances. The policy matrix reflects the government’s priorities and lessons learnt by the development partners in supporting similar programs of the government in the past. The Bank has been flexible in both the loan amount and government’s preferences in terms of the preparation schedule.

Criticality: Choose only actions that are critical for achieving results as conditions for disbursement. The government has asked the Bank to maintain the focus of this program on four areas: governance, employment and regional development, financial sector, and social policies, i.e., all crucial parts of the interim government’s response to attend to the demands of the revolution. Within that context the operation is focused on measures which demonstrate the change in direction in line with the demands of the revolution, notably to increase equity, transparency, voice and accountability, and set Tunisia on a new medium-term trajectory of reforms.

Transparency and Predictability: Conduct transparent progress reviews conducive to predictable and performance-based financial support. The selected prior actions can be effectively monitored, providing predictable and performance based financial support.

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objective is expected to be attained, the key actions and the specific measures to be implemented during the course of the program. As summarized in Box 4, the proposed DPL policy matrix includes nine prior actions that government has fulfilled prior to presentation to the Board of this operation. These prior actions are indicative of the richer reforms program which is being undertaken by the government (as reflected in the broader Joint Policy Reforms Matrix). As discussed above, the reform program underpinned by the matrix is directly linked to the implementation of the reform program of the interim government, notably with regards to governance, employment and addressing regional disparities, financial sector, and social sectors policies. The discussion of the detailed prior actions supported by this operation and the expected results is provided below.

PILLAR 1: GOVERNANCE

68. For a long time, Tunisia suffered from weak levels of government external transparency and accountability, performing poorly across all dimensions of governance and anti-corruption. The governance reform agenda in Tunisia therefore is very large. The DPL prioritizes a few pivotal measures which can be achieved during the mandate of the interim government and can set a new trajectory to continue to improve participation, transparency and accountability in the future.

Box 4. Prior Actions for the Governance and Opportunity DPL

Governance • Revise the legal framework to allow public access to information and give the public the right to access

information held by public bodies (and among others remove constraints to public access to economic and social statistics, including micro data).

• Modify the “Domain Names Charter” for the hosting of Internet websites, in order to simplify the procedures for the registration and hosting of Internet websites and eliminate the condition that the registrar is a Tunisian Internet Service Provider (ISP).

• Revise the legal framework for public procurement to improve the efficiency and transparency of procurement procedures and to shorten the decision process without compromising quality.

• Launch a systemic, participatory, measurable and visible reform to simplify administrative procedures and red-tape and reduce discretion and arbitrariness, notably relating to the key aspects of the business environment.

Employment and Regional Development:

• Establish a new regulatory framework for the National Employment Fund (approx 0.4% of GDP), starting with moving its management to the Ministry of Employment.

• Design and implement a comprehensive unemployment support program to (i) enhance the employability of high-skilled youth and promotes their insertion into permanent employment, and (ii) to assist low skilled unemployed through cash-for-training and/or enhanced public works.

Financial sector:

• Revise the regulatory framework on banks’ corporate governance practices, including the introduction of criteria for selection of senior management and members of the board.

Social sectors:

• Establish a mechanism of regular monitoring and evaluation by third parties of selected social programs and public services that would allow citizens to rate performance (e.g., using scorecards).

• Institute a national outreach services policy to expand free access to care in underserved governorates for health services provided outside of traditional fixed facilities.

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69. One of the key ongoing areas of work is to remove legal impediments to the creation of associations. The possibility to create associations was severely curtailed under the previous regime.40 This constrained the production of independent analysis and stifled an open debate on economic policies and priorities for the country. The revision of the legal framework for associations to open up to civil society and independent analysis of and feedback on public policy is a crucial element of a sustainable transition to an open society and is highly conducive to creating a vibrant and innovative economy. While the current transition process offers civil society a more favorable environment to thrive in, an amendment of the regulatory framework is necessary to consolidate this progress and establish safeguards for their autonomous existence. Hence, the transition government is strongly committed to remove the key restrictive and discretionary provisions of the current law of association (in tandem with the “High Authority”, which has the mandate to initiate the reform this law) governing the procedures for establishment and registration of associations and removing excessive government discretion in the matter (notably removing the de facto prior authorization from the Ministry of Interior; the prescribed classification, which was source of discretion and a means to limit certain types of associations; limits to membership fees; and burdensome administrative requirements).41

70. Once it is in force, the new law will allow the development of a vibrant civil society (including parent-teacher associations or consumer protection associations, think-tanks, chambers of commerce, professional associations, trade unions, etc.), which combined with greater access to information (see below) should help foster social accountability and fair competition, and gradually generate a lively debate on public policy and healthy scrutiny on policy issues and on the use of public funds. In the long term this is also expected to result into greater efficiency and effectiveness in the operation of government and a more favorable environment for private sector investment and economic growth. In parallel the government will also launch expert analysis and a broad consultative process to prepare the ground for further amendments of the law of association and a review of the broader regulatory framework of associative activities in line with international good practice (for instance including the Penal Code, the Law on anti-terrorism, and the Law on public gatherings, that have been used in the past to curb the activities of civil society). Such a more comprehensive review of the legal framework will need to be carried out on the basis of a wide consultation process extending after the elections.

71. While the legal framework for associations is being strengthened, the government has already taken the following measures to improve access to information by the public, simplify the procedures for the registration and hosting of Internet websites, simplify procedures and increase transparency in public procurement, and reducing red-tape and discretion by public officials in the enforcement of business environment regulations:

Prior Action #1: The Interim President of the Republic has signed the Decree-Law on the access to administrative documents of public bodies which defines the principles and rules governing the right to information by the public and the right to access information held by public bodies

40 Except in sports and cultural activities (which constitute 76 percent of the all associations), organizations were permitted selectively under procedures that granted much discretion to the Ministry of Interior. Their activities and membership were strictly controlled and relations with foreign counterparts discouraged. 41 At the behest of the High Authority, a draft decree-law amending the law on associations by removing the main discretionary clauses of the law and the restrictions to the creation and operation of association (through, inter alia, the replacement of the current authorization system with a declarative system, the removal of the existing association classifications, and the abolition of restrictions on association membership) has already been prepared by the sub-committee of the ‘High Authority’ in charge of such matters. As soon as the High Authority has discussed and approved it, the decree-law will be transmitted to the Council of Ministers for its approval. The Government is committed to take up the matter and promulgate the decree-law without any delay. They anticipate that this process will be concluded before the upcoming elections of the Constituent Assembly.

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by the public, and which among others removes key constraints to access to economic and social statistics by the public.

Rationale: Public access to information is an essential element of the accountability of government. Yet access to information and statistics in Tunisia has been characterized by high levels of secrecy and discretion.42 The limited external accountability and resulting information asymmetry weighed negatively on the formulation and implementation of economic and social policies as well as on private investment.

Policy: The key measure needed to create greater government openness is the adoption of comprehensive legislation on the right to information (or freedom of information), giving individuals the right to access information held by public authorities.43 A full right to information law may fall outside of the limited mandate and timeframe of the interim government and requires creating a new institutional structure which would be challenging in this transition period.

In the meantime, the interim government is eager to respond to the people’s expectations and to signal a change from past practices, by facilitating access to key economic and social statistics and reducing the administration’s discretion. Hence the interim government will duly publish a decree-law on the access to administrative documents of public bodies which establishes the main principles behind the right to information (presumption of openness, narrowly drawn exceptions, strong procedures for requests and obligations to disseminate key information on a proactive basis), and puts in place practical rules for opening up government on a short-term basis, until such time as a democratically elected government might wish to adopt a fully-fledged law in this area. The decree-law mandates the disclosure of enhanced information on public finances and public and social services.44 It also removes the most restrictive barriers to openness in the Statistics Decrees and ensures improved disclosure of economic and social statistics (including free access to anynomized survey data).

Expected results: In the short term, in order to translate this openness into tangible results, reduce information asymmetry and support public debate and analysis, the interim government has committed to anonymize and publish on the INS website the following surveys/ data: the two latest household surveys (1995 and 2005, the 2010 one is still underway); the two latest labor force surveys (2007 and 2009); the last census (2004); the detailed national accounts (400 products). Over the medium term, the revised decree will enable the dissemination of

42 For instance, the decree on statistics was interpreted to allow the dissemination of statistical information only in highly aggregated forms, which could then not be used for social planning and advocacy purposes. Access to micro-data was subjected to a very cumbersome and discriminatory authorization procedure, which was limited to public bodies or students, went up to the Minister of Planning and Cooperation and required the visa from the National Statistics Council. Even access to the National Statistical Institute’s data center, for the consultation of anonymized data, required such a prior-authorization. There was also limited dissemination of information in the field of public finances, notably with the absence of information on the medium term expenditure framework, on resources (budget and tax exemptions) allocated to policies and regions, on local government finances, on infra-annual budget execution reports and the Court of Account’s reports. 43 Such legislation establishes a presumption that all information held by public authorities, broadly defined, would be accessible. It also establishes minimum standards for the proactive publication of information in the public interest, including by providing a list of the categories of information that must be published. To give effect to the right of individuals to request and receive information, this type of legislation sets out clear procedures for the making and processing of such requests. It is recognized that some information held by public bodies should not be made public, such as personal information or sensitive security information. Access to information legislation describes in clear and narrow terms the information which must be protected (exceptions). Finally, better practice legislation also establishes an oversight body to which appeals from refusals by public bodies to provide information may be directed. 44 Every budget, regular and supplemental is published in the official journal upon approval; the approved budgets are also available on the Ministry of Finance web portal (For instance the 2011 budget is available at the following link: http://www.portail.finances.gov.tn/jort/Loi%20de%20finances%202011.pdf ). However, execution reports are delayed or not always published (online), and improvements are needed in terms of expenditure disaggregation (by level of state; geographical). Greater budget openness and transparency is part of the proposed decree law on public access to information: it is explicitly mentioned under the part on pro-active disclosure and Ministry of Finance has agreed in principle.

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disaggregated socio-economic statistics and survey micro data which would contribute to the reduction of information asymmetry and support public debate and analysis, and foster independent analysis of socio-economic developments in Tunisia and over the long-term lead to improvements in public policy. For instance the access to detailed national accounts should facilitate the assessment of the government’s economic policies and forecasts. The public availability of detailed data on private consumption and on unemployment, with its regional disparities, should facilitate better investment decisions and reduce the opportunities for discretion and corruption from the administration holding this data.

Prior Action #2: The President of the National Telecommunications Council (Instance Nationale des Telecommunications) has issued a resolution approved by the council modifying the “Domain Names Charter” for the hosting of Internet websites, to simplify the procedures for the registration and hosting of Internet websites.

Rationale: For many years, Tunisia has restricted Internet content, and limited the access to certain websites for the population. This was in stark contrast with other measures that Tunisia was taking to foster the ICT sector, such as to extend technical training, liberalize the telecommunications sector, and incentivize small companies and ICT start-ups. This incoherent content policy constrained the development of the local ICT industry, and limited the impact of private sector development policies in the ICT sector, also stifling job creation. Moreover, there were heavy restrictions on the creation of and access to digital content and the rules for people to create and register websites were also preventing the development of websites in the country. Specifically the regulations subject the registration of a website to a strict a priori control, based on the compliance with two lists of names (“Forbidden Names” list and “Reserved Names” list). In addition, only domestic ISPs were able to be registrars of Domain Names. The previous restrictive policy had an adverse impact on the development of websites in Tunisia. At present, only 8,000 websites are registered using the “.tn” domain name. This translates into 750 websites per 1 million inhabitants. Two years ago, Morocco already had 8,000 websites per 1 million inhabitants, and Turkey had 75,000 (100 times more than Tunisia). Morocco and Turkey have liberal regimes, consistent with good international practice. Hence the potential business development and job creation in the web management and ICT sector if these restrictions were lifted appears enormous. Also removing barriers to the registration of websites will foster a more dynamic and client-responsive business environment and thereby also positively affect overall levels of investment.

Policy: The interim government wants to remove these constraints and facilitate the development of the sector. First of all, shortly after the January 2011 revolution all Internet access controls have been removed. Secondly, the government has approved a new “Domain names Charter”, which establishes a more liberal environment, through elimination of the a priori control, and elimination of the requirement that only domestic ISPs can be registrars. In addition, an electronic registry will also facilitate the practical registration of a website. Article 22 of Arrête 2/12/2009 gives the National Telecommunications Council (Instance Nationale des Télécommunications, INT) the authority to revise the “Domain names Charter”, on the basis of the approval of the INT board and a Decision of the INT signed by its President. The policy reform has been enacted through a decision of the President of the Instance Nationale des Telecommunications, based on an open and consultative process, notably involving the private sector and civil society, such that the new Charter reflects the input from stakeholders.

Expected results: The elimination of the a priori control would encourage firms and civil society organizations and digital content creators to create websites and is expected to stimulate economic activity in this area. It is expected that the number of websites with the “.tn” domain name will increase from 8,000 to 80,000 by end of 2011. The impact on job creation, especially among young people having software or digital creation skills, may be

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noteworthy. This involves the employment of skilled ICT professionals, digital content and graphic creators, as well as specialists in the management and updating of the websites. This will have a strong and sustainable impact on job creation. Based on this projected demand for additional websites and related content, it can be estimated that at least 5,000 – 8,000 jobs can be generated in the short term and be sustained and increased on a long term basis. In addition, more competition can be expected, as different domestic, and in a second phase, international competitors will compete with domestic ISPs in the registration of domain names. This important reform will also develop demand for web management functions to competent local SMEs in the ICT sector, generating noteworthy business opportunities for the private sector. In addition, over the medium term increased use of internet websites by the private sector is expected to lead to a more dynamic and client-responsive business environment positively affecting investment levels and economic growth.

Prior Action #3: The Interim President of the Republic has signed the Decree amending Decree N° 2002-3158, dated December 17, 2002, regarding the regulations for public procurement, to reduce the procurement processing time while ensuring transparency and compliance with the regulations.

Rationale: The Tunisian procurement system is considered as too bureaucratic and unnecessarily procedural, lacking transparency and accountability, and is characterized by an excessive prior review. The contract award can take years, particularly within the framework of investment activities, and this was evidenced by the slow implementation of the government economic stimulus plan in response to the global financial crisis. In addition, the procurement system has failed to prevent political interference and high level corruption: in fact, decisions regarding contract awards were regularly submitted by the Higher Tender Commission (Commission Supérieure des Marchés, CSM) for the Presidency approval.

Policy: Hence the interim government will duly publish a decree revising the existing public procurement legislation with a view to increase efficiency and transparency. Improving efficiency in public procurement by for example (i) limiting the use of the two stage bidding procedure to complex procurement only while applying the single stage bidding to remaining contracts and (ii) simplifying the process of authorization and approval of tenders following emergency procedures by (a) including the procurement of works under the stimulus package for the economic recovery in the list of eligible emergencies, and (b) increasing the prior review thresholds of the CSM in order to empower the departmental and regional commissions to authorize a much larger number of contracts award. Improving the transparency in public procurement by actions such as (i) making the publication of the procurement opportunities and of the contract awards (competitive/limited bidding and direct contracting) mandatory in the website of the National Observatory, and (ii) establishing a credible and independent complaint mechanism. Such a complaint mechanism would include measures such as dedicated time frames and an obligation to transmit the complaint to the procuring entity while keeping the central commission (Comité de Suivi et d’Enquete des Marchés, COSEM) informed, (iii) introducing a 3 period for complaints between the publication of bid evaluation results and the signature of the contract, and (iv) publishing the COSEM annual report on the government website.

Beyond these important initial adjustments, the government wants to carry out, with technical assistance by the Bank (and other development partners), a comprehensive assessment of the country procurement system using the OECD/DAC methodology, and including through performance audits, in order to inform a future more comprehensive reform of the system which will modernize the institutional structure and the proceedings related to public procurement.

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Expected results: To improve the effectiveness, efficiency and transparency of public procurement procedures to shorten the decision process in markets without compromising quality: (a) improve efficiency in the full cycle of procurement by reducing delays for non-complex contracts to 3-month on average, (b) enhance the transparency of the system by publishing COSEM’s reports with statistics on how complaints are handled. Over the medium term this would lead to more effective and timely public expenditures and investment and thereby better quality of public services.

Prior Action #4: The Prime Minister has issued Circular No. 13 dated May 21, 2011: (i) institutionalizing a systematic and participatory reform process of services to businesses and citizens, based on streamlining of procedures, e-government, transparency, and reduction of arbitrary and discretionary behaviors; and (ii) committing to deliver concrete reforms within six months, in the priority areas of customs, taxes, and tourism.

Rationale: For over a decade, Tunisia has implemented a significant number of reforms to simplify administrative burdens,45 yet the impact and credibility of these reforms suffered from the unequal and discretionary application of rules, leading to cronyism and privileges both in the economic and administrative spheres. Frustration with these problems has been one of the reasons which spurred protests among the Tunisian people. In addition, the process by which such reforms were designed also limited their impact and credibility in the eyes of investors and citizens: weak participation by users, lack of a systemic and coordinated approach, as well as insufficient communication and transparency in measuring outcomes and the quality of service. Moreover, attention was often focused on simplifying procedures without systematically questioning the social objective behind existing regulations. As a consequence, many economic activities remain over-regulated or subject to abuse and discretion. In the wake of the revolution, reducing discretion, cronyism and arbitrariness in the administrative and regulatory environment faced by citizens and firms is a priority and expectations are very high. Doing so in a credible way and sending a strong signal that change in this area is structural and set to last requires a totally new approach to administrative reform, both in terms of pace, comprehensiveness and process.

Policy: The adoption of the Circular launches a systematic time-bound participatory review of administrative formalities and regulations against predefined assessment criteria of (i) regulatory necessity, (ii) legal coherence, (iii) process efficacy and efficiency, and (iv) extent of opportunity for discretion, ambiguity and arbitrariness in the administration of the rules. Each concerned agency will have to provide justification for each regulation or procedure it administers, within a timeframe monitored by the Prime Minister’s office. Inspired by similar experiences in the OECD (Sweden, the Netherlands, or Mexico) and in countries that have experienced substantial economic or political transitions (South Korea, Croatia, the Czech Republic or Ukraine), the design of the reform will build on existing initiatives in Tunisia (particularly at the Administrative Reform Department (DGRA) in the Prime Minister’s office) and will be adapted to the local administrative environment and current context.

Initially, a first round of reform will focus on achieving substantial results within six months of the adoption of the circular in the following sectors: customs and the tax authorities under the Ministry of Finance; and the Ministry of Trade and Tourism.

Expected results: In the short-term, the measure will lead to substantial reduction in compliance costs with business formalities in the areas of customs, taxation, and tourism. In the longer-term, the reform process launched through this decree will enhance transparency and limit discretion of administrative decisions and processes, as well as improve efficiency in

45 This includes the development of e-government initiatives, or the replacement of prior authorizations for business entry with declarative systems subject to predefined sectoral specifications.

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delivery key regulatory services/transactions. Furthermore, the reform will reduce costs and risks of doing business, as well as improve fairness in application of the rules to firms and citizens. By leveling the playing field and strengthening competition, this reform process is expected to open up new opportunities for investment and job creation.

PILLAR 2: EMPLOYMENT AND REGIONAL DISPARITIES

72. With an unemployment rate at 13.3 percent (2009) and even higher and increasing rate for university graduates (currently estimated at 20 percent), Tunisia faces a major challenge. Tunisia’s unemployment problem is structural, and therefore cannot be solved in the short run.46 Structural reforms are needed to create more and higher value-added jobs that can absorb the fast growing number of university graduates. Hence reforms are needed to: (i) remove obstacles to private sector-led job creation; (ii) reduce distortions from excessively restrictive labor laws and high labor taxes; (iii) reform the education sector to give the labor force skills that match market demand. In the short term, however, the current high unemployment and increasing levels of informality are likely to increase vulnerability and pose risks to social cohesion. Hence, this DPL prioritizes a few complementary measures that can be introduced in the short-term to stimulate labor demand, support the unemployed, and improve labor intermediation.

Prior Action #5: The Interim President of the Republic has issued Decree-Law N° 16/2011, dated March 26, 2011, amending Law N°101/1999 dated December 31, 1999, regarding the budget law for 2000, to transfer management of the National Employment Fund from the Presidency of the Republic to the Ministry of Employment and Vocational Training (published in the Official Gazette, No. 21, dated March 29, 2011).

Rationale: Until recently, the National Fund for Employment (Fund 21-21)—a presidential fund financed directly by the Treasury—worked in a very centralized manner and was regarded as highly politicized. Although it has served other purposes, the fund had been supposed to finance primarily: (i) regional programs for employment (23 percent of total allocations); (ii) entrepreneurship programs (25 percent of total allocations); and, (iii) active labor market programs (ALMPs), mainly on-the-job training programs accompanied of a monetary stipends (Programmes d’insertion dans l’emploi salarié) (about 52 percent of total allocations). The regional employment programs are actually seen as failures as they do not take into account the needs of the region and the economic environment. Its resources are significant (at 0.42 percent of GDP in 2010) and could have a significant on reducing unemployment if used effectively. The 21/21 Fund is the main source of funding for programs of the National Agency for Employment (ANETI), but again these programs remain generally poorly assessed (and the monitoring system of the programs is based on results and not on impacts).47

46 It’s important to avoid fuelling expectations in the population that short-term measures will have a significant, quick effect on employment outcomes. 47 Active labor market programs have long been at the core of Tunisian labor market policy. In order to tackle youth unemployment Tunisia has been investing heavily Active Labor Market Policies (ALMPs), and spends about US$70 million annually on ALMPs targeted to university graduates who are new entrants to the labor force, mainly consisting of paid internship programs. Formal ALMP provision was initiated in 1981 in response to employment challenges faced by vocational training graduates. Over the period 1981 to 2009 active labor market programs counted over 320,000 beneficiaries. ANETI undertook a reform of the ALMP portfolio in 2009 (supported by the Bank under the Employment DPL). The reform bundled over 20 ALMPs into six programs, thereby facilitating their management and financial control. All ALMPs contain a small monthly income-assistance, and have stricter eligibility rules for both job-seekers and employers. The number of new and ongoing program contracts has increased markedly over recent years, from 85,890 (2008) to 95,400 (2009) to 138,670 (2010). While ALMPs provided by ANETI constitute important mechanisms to provide first time job seekers with experience and financial support, they have hardly been successful at helping beneficiaries transition into

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Policy: The reform of this Fund 21-21 is meant to provide sufficient resources to finance better designed and rigorously monitored programs (including Amal, see below). In this context the Bank is supporting the government in transform the National Fund for Employment into an effective instrument to assist the unemployed based on international best practice. As a first step the government has transferred the management of Fund 21-21 directly to the Ministry of Employment and Vocational Training to improve its governance and ensure that the programs it funds are indeed focused on tackling unemployment. In parallel, the Bank is providing technical assistance to re-design of some of the programs, with an eye to regional needs, and to introduce the monitoring and evaluation of programs financed by the fund. The Ministry of Employment and Vocational Training is also planning to issues a Ministerial Decision (Arrête) to establish the legal basis to institutionalize a monitoring and evaluation framework for programs financed by the Fund 21/21.

Expected results: Tunisia has plenty of programs for training and employment, but they have not proved effective. The objective of this reform is to start a process of reform of Fund 21/21 to open the way to a more effective set of program to support the unemployed, reduce frictional unemployment, and improve the operation of labor markets in Tunisia.

Prior Action #6: The Interim President of the Republic has signed the Decree creating (i) a comprehensive active labor market program for high-skilled unemployed, (ii) a program to support short-term employment of low-skilled workers and improving the employability of graduates from vocational training program.

Rationale: Unemployment is proportionally more severe for young graduates, particularly females and in remote regions (see Annex 5). Recent analysis suggests that young graduates not only face higher rates of unemployment but also have a higher probability to remain unemployed for a long time (between 2 and 5 years). Further trends in unemployment suggest an exponential increase in graduate unemployment over the next few years. University graduates already make up the largest share of the new unemployment entries. Further, whereas the unemployment rates for individuals without education and with primary education are lower and falling, those for university graduates are increasing rapidly. The unemployment rates for university graduates has increased steadily from 8 percent in 1999, to 13 percent in 2005, and to 20 percent in 2009, surpassing those for individuals with lower levels of education. Furthermore, unemployment rates for this group are expected to worsen in the near future.

At the same time, the economic downturn is expected to have a significant negative impact on unemployment, especially for low skilled workers in the seasonal tourism sector, who lack access to formal safety nets. The long-term low-skilled unemployed represent about 70 percent of all unemployed. In addition, approximately 40 percent of low-skilled unemployed have been unemployed for at least 12 months. The temporal dimension of unemployment is an important feature of the labor market because the long-term unemployment reduces the propensity of individuals to find employment.

Policy: In this context, the interim government will duly publish the said decree to create a new program (Amal, which in Arabic means ‘Hope’) which aims to:

o Support high-skilled youth to enhance their employability and promote insertion into permanent employment. The program seeks to revamp the apprenticeship program

permanent employment, especially in disadvantaged regions where program’s placements rates are below 15 percent (e.g., in Sidi Bouzid and Gabes; for comparison OECD benchmark placement rates for on-the-job training programs are above 80 percent). Regional employment programs are also perceived as not successful as the programs do not accommodate to the region’s needs and economic context. Data collected by ANETI’s monitoring system is not being analyzed rigorously and the impact of ANETI programs on employment outcomes (beyond insertion rates) remains largely unknown.

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(Stage d’Initiation a la Vie Professionnelle, SIVP),48 in line with best international practice. The Amal program will provide a comprehensive package of employment services to high-skilled unemployed youth for a maximum of 12 months, and has four main components:49

coaching: a career focused mentoring program to help young people develop a concrete career plan towards salaried or self employment;

vocational training (hard and soft skills) with proper certification and based on/adapted to regional needs and with an orientation to skills in demand in service/value-added sectors; courses will be provided through the Tunisia Vocational Training Agency (Agence Tunisienne de la Formation Professionnelle, ATFP), private providers, Universities, and National Employment Agency (Agence National pour l’Emploi et le Travail Independent, ANETI);

retraining: an opportunity for youths to acquire a new set of skills aligned to the demands/needs of the labor market, thus increasing their chances of employment; and

on the job-training to provide beneficiaries with an opportunity to acquire work experience, while enabling employers to assess their performance at the workplace. AMAL will provide beneficiaries with a monthly allowance of TND200 (equivalent to about 80 percent of the minimum salary; SMIG), and is expected to reach a total of 200,000 young men and women in 2011 (more than 150,000 thousand potential beneficiaries have already signed up to benefit from the program since it was announced in March).

o Expand and revamp programs to provide a safety net to low skilled unemployed and contribute to the rehabilitation of socio-economic and administrative infrastructure damaged during the revolution. The programs will include additional / new elements such as non-governmental participation in project selection / implementation (which will strengthen community participation at the local level), and provision additional employment services that can enhance participants’ employability, such as certification and entrepreneurship coaching (building on the experience from Latin American countries, e.g. the Trabajar program in Argentina). The program will include a clear and transparent set of rules for eligibility (targeting criteria). .

48 The “Stage d’Initiation a la Vie Professionnelle (SIVP)” is a program that provides beneficiaries with on-the-job training through a paid internship (TND 150 monthly for one year) and covers payment of social security contributions during the time of the internship and training costs for up to 200 hours. In practice, however, the vocational training component of the program has been virtually absent and the program’s placement rates are rather low at 23 percent in 2010. 49 Many countries, particularly in OECD and Latin America, have moved from traditional in-classroom and/or on-the-job training programs towards a more comprehensive employment programs which includes the provision of in-classroom and workplace training plus supplementary services such as counseling and mentoring, job search and placement assistance, and training is soft/life skills. Beyond training, additional employment services provide valuable support to young people, not only in their job search, but also through the sometimes awkward developmental stages that accompany the transition into adulthood. Coaching, for instance, provide youths with academic guidance, leadership skills, and interpersonal and problem-solving skills, all of which will contribute to their socio-economic insertion in society. International evidence indicates that comprehensive youth programs should include at least five core components: (1) Public-Private partnerships, whereby training programs are directly linked to an internship with a private employer previously identified by the training institution; (2) vocational training that provides new hard and soft skills; (3) provision of practical experience through internships; (4) flexibility in schedules to accommodate, for instance, the needs of women who take care of their children during regular business hours; and (4) careful monitoring and evaluation. Results of impact evaluations in Argentina, Chile, and Dominican Republic indicate that youth who participate in comprehensive youth programs display a 10% to 21% higher likelihood to find employment than otherwise similar youth and also report wages that are 10% to 21 % larger than among those who find employment but did not participate in the program (World Development Report, 2007).

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As different from past efforts, the program will include a rigorous monitoring and evaluation component in order to assess program success and cost-effectiveness, among others.

Expected results: The Amal program aims to:

o (i) improve the transition of high-skilled unemployed youth into permanent employment after program completion by providing them a comprehensive package of employment services, including the introduction of a coaching module (which has been virtually absent from existing programs), a stronger emphasis on vocational training, and promotion of entrepreneurship. Also, Amal aims to set the stage for a reform of existing Active Labor Markets Programs targeted to youth.

o (ii) provide a temporary safety net and to improve the employability and prospects for integration into working life of low-skilled job seekers. It also contributes to a reform in Active Labor Markets Programs in Tunisia, which have traditionally targeted exclusively educated unemployed individuals

PILLAR 3: FINANCIAL SECTOR

73. Tunisia’s banking system is burdened with structurally low profitability and high NPLs ratio, and, unless reformed, may not be able to play its catalyst role in economic development. It is well known that the poor performance of the banking system is partially rooted in insufficient corporate governance practices.

Prior Action #7: The Governor of Central Bank has issued Circular No 2011/06 dated May 20, 2011, setting forth good corporate governance rules for credit institutions based on international best practices and introducing criteria for the selection of senior management and members of the board, whose implementation will be verified inter alia through an annual regulatory survey on the internal control systems and corporate governance of the credit institutions, conducted by the Central Bank.

Rationale: For years, the banking sector has been suffering from weak corporate governance practices that undermined its performance. Shortly after the fall of the ex-President regime, Tunisian media started reporting various frauds and abuses organized by and to the benefit of ex-President family members and cronies (firms and individuals). Although the Central Bank of Tunisia (CBT) has taken critical steps to improve corporate governance practices, some grey areas continue to pose problems. Since 2006, banks are required to establish audit committees as well to set up credit executive committees in charge, notably, of examining the activity to be financed. Also, it is worth noting that the CBT has issued a circular on internal control and requires banks to be audited annually by two external auditors. The regulation is more lenient concerning the connected lending activity. Indeed, the regulation authorizes the banks to extend credits to directors, board members, and shareholders who hold more that 10 percent of the bank’s share capital subject to the limit of three times the bank’s equity and is silent on the specific conditions that must pertain to the underwriting and monitoring process of these loans. Also, the definition of related parties is insufficient. The CBT has also played an incestuous role in providing most state-owned banks with CBT’s staff to become CEOs without cooling off periods. As part of the efforts to increase transparency and risk management, Tunisian banks were also required to introduce internal client ratings but without any detailed guidance from the CBT.

Policy: The government has launched a process to improve the regulatory framework for corporate governance of Tunisian banks and its implementation in terms of: (i) the composition of boards of directors, in the sense that these boards have no independent directors and lack of diversity in terms of skills and knowledge, and indeed, many boards of

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directors of banks do not fully play their role as strategic and supervisory oversight; (ii) the control structures, particularly risk management, internal audit and compliance, as most of these functions seems to lack the resources and independence vis-à-vis the management, which tends to weaken the quality of their controls; and, (iii) the information to the public, since few banks are reporting using IFRS norms and disseminate relevant non-financial data. It follows that the overall level of transparency of the banking sector is weak, which affects the confidence of stakeholders. To monitor the implementation of this new regulation, the Central Bank will reinforce the prudential questionnaire on internal control which is sent annually to banks to cover both the application of the circular on internal control and also the new circular on corporate governance.

Expected results: The improvement in current practices in the area of bank corporate governance, notably in areas such as board functioning, internal control, compliance, risk management, connected lending, fit and proper requirements, and information disclosure to the market. These improvements will lead to better performance of the banking sector, and in the medium term have a positive impact on banking sector stability as well as its contribution to economic growth and development.

PILLAR 4: SOCIAL SERVICES POLICIES

74. To address social disparities in the short-term, there is a consensus on the importance of promoting the quality of public services particularly in underserved regions to the west and to develop local civil society and government planning, management and evaluation capacities. In the short term, this DPL supports actions that can be taken by the interim government to expand citizen participation and outreach, which could be followed-up by longer-term strategic policy packages addressing structural policies in terms of financing and organization.

Prior Action #8: The Prime Minister has issued Circular No. 12 dated May 21, 2011, establishing a participatory process for the systematic monitoring of the performance of public services by civil society, citizens and service providers, notably for the social sectors, aimed at improving the performance of services.

Rationale: Civil society participation in public service planning, delivery and evaluation is low in Tunisia due to a relatively inhibiting environment and there has been little consultation and involvement of citizens, local communities and CSOs in policy and program formulation and implementation.

Policy: The government is now seeking to strengthen citizen and civil society participation through transversal and sectoral policy responses.50 This circular aims to institute a cooperative and systematic interaction between citizens, civil society and government, with the aim of improving the responsiveness of public service delivery, as is standard practice in

50 Within the education sector, the government is focused on generalizing the experience of School Councils, which call for parents and teachers participation in the overall management of the school. Already positive experiences using this approach have been seen with the PEPE (Priority Areas) schools program. PEPE schools targeting poor populations were successful in raising learning outcomes of students attending these schools. In 2007 a study financed by UNICEF compared learning outcomes between PEPE and normal schools showed that 16% of the least performing PEPE schools in 2000 were performing among the top performing schools in the country; and 47% were obtaining results compared to the national average. Conversely, in key indicators associated with a lack of accountability the health sector, include: (i) long waiting times and distance traveled by citizens to access well-functioning and well-equipped public services, in part attributed to the perceived absenteeism of medical doctors, nearly 50 percent of whom practice in the private sector full or part time, notably obstetricians; (ii) lengthy, centralized procurement approval procedures and a lack of transparency in medications management in the public sector; and (iii) a relatively low availability of medications and medical supplies/equipment at health facilities.

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many countries. The circular has been signed by the Prime Minister and affects directly the Ministry of Health, Ministry of Education, Ministry of Social Affairs, and Ministry of Transport and Equipment, with the aim of improving the delivery of social and associated public administration services. The circular mandates the creation of an inter-ministerial and civil society working group and a civil society working group to develop implementation guidelines of the participatory monitoring process at the local level, such as through the creation of local community committees and ensuring access to information on social sector indicators on resources and outcomes (for example, regional-level social expenditures and outcome indicators on educational test scores; primary health care such as access to prenatal care and maternal mortality; and social assistance beneficiary registry) necessary for ensuring transparency and effective monitoring by civil society. In the medium-long term, the development of an independent civil society that is well-resourced and trained will support strengthening participatory monitoring for informing public policy

Expected results: The overall aim of the community participatory monitoring policy would be to strengthen citizen voice and accountability in the evaluation and planning of public service delivery (such as reduced waiting time, absenteeism and other performance measures). The aim is to institute a cooperative and systematic interaction between government, citizens and civil society, as is standard practice in many countries. In the medium term, the measure is expected to result in: (i) a number of regions that have publicly disseminated participatory monitoring of service delivery guidelines; (ii) the publication of service delivery information (expenditure and outcomes indicators) by region: health (primary health care and outcomes, including prenatal care and maternal mortality), education (PISA and TIMSS data) and social assistance data (beneficiary demographics); (iii) an increase in the number of regions that have published participatory monitoring reports synthesizing results of community surveys (users/providers) and proposing jointly-agreed policy actions. As such, this policy aims at reinforcing the use of participatory monitoring in setting performance standards, informing performance contracts, and reinforcing mechanisms such as community health and school councils in developing service improvement plans. Over the long term this measure is expected to lead to quality improvement of service delivery and associated health and social outcomes.

Prior Action #9: The Prime Minister has issued Circular No. 14 dated May 23, 2011, creating outreach services in underserved regions based on a participatory approach, comprising the provision of a basic package of health, education and social protection services.

Rationale: In spite of steady progress in expanding health insurance enrolment, nearly 11 percent of the population still lacks coverage (nearly 1 million persons), notably in the so-called “underserved” regions.51 Disparities in access to basic health and social services are found between urban coastal regions and interior regions, notably in terms of primary and secondary health care, early childhood development and social assistance. For example, the maternal mortality ratio (MMR) estimated in the underserved region of Kasserine (70/100,000 live births) are three times that of urban Sousse (20/100,000 live births), and nearly twice that of the national average (40/100,000 live births); this disparity has been associated with a dearth of obstetricians and a low use of prenatal services. The low use of services has been attributed to the “high cost” and “lack of availability” of services (Multiple Indicator Cluster Survey/MICS3, MoH/UNICEF, 2006).52 Currently, many of the 2,000 primary care facilities

51 As of 2008, nearly 55 percent of the population is enrolled in the Caisse Nationale d’Assurance Maladie; and an estimated 172,000 households are covered by health cards for free care, or 8 percent of the population. In February 2011 the interim government decided to increases coverage to reach nearly 200,000 families, or nearly 9 percent of the population. Further, another 25 percent of the population benefits from health care for partially subsidized care (or 550,400 households). 52 As of 2005, approximately 10 percent of household consumption expenditures went to health, largely covering health care visits, medications, and hygiene (INS Enquete de la consommation des ménages, 2005).

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(centres de soins de base; each serving a catchment area of 2,700 persons per clinic) are considered to be poorly-equipped and medically staffed less than 3 hours per day. It is estimated that only 55 percent of women in underserved regions receive at least 4 prenatal visits, partially due to a low density of medical personnel in these areas.

Policy: With this new measure, the government aims to create a national outreach services policy to expand free access to care in underserved governorates through services provided outside of traditional fixed facilities and in local community areas. The benefits package is designed to facilitate and promote access to primary health services, such as, prenatal care and institutional births through mobile and social workers rotating between fixed health facilities and outposts, such as schools, community/municipal centers and homes. The policy for outreach health services will include social workers in association with the Ministry of Social Affairs for improved monitoring of beneficiary social needs. In the medium-term, outreach services would be extended to operate with the private sector and covered by the national health insurance under a performance-based contract with specific incentives for preventative care such as prenatal services and facilitating institutional births (Caisse nationale d’assurance maladie/CNAM). In the long term, improving equity will depend on financing and organization reforms in the health sector (public and private) through improved resource allocation policies, decentralization, and instituting service delivery standards. The role of the national health insurance agency and the Ministry of Health will each also need to be oriented with a view towards greater coordination and strategic policy setting and performance-based financial management.

Expected results: In the short term, the outcomes envisaged are: (i) an increase in access to health services as indicated by the number of regions with community health and social teams trained and operating; and (ii) an increase in the number of regions that have published performance standards for community-based health workers. Over the long term the measure is intended to improve the quantity and quality of basic health service delivery, and thereby also improve health outcome indicators such as MMR in remote areas.

VI. OPERATION IMPLEMENTATION

POVERTY AND SOCIAL IMPACTS

75. The poverty and social impacts of the policies supported by the Governance and Opportunity DPL are expected to be positive. Many groups of stakeholders are likely to benefit from the policy measures supported by this program through several channels: in particular unemployed and poor or vulnerable families will benefit from both targeted unemployment programs and better access to services, particularly in the lagging regions. The prior action granting the public access to information is expected to have positive social impacts and no negative poverty impacts. Over the medium term these reforms are expected to foster a better informed public debate on the efficiency and effectiveness of public services, and thereby contributing to improve the quality of service delivery and accelerate poverty reduction. The measures on simplifying and increasing transparency in public procurement and strengthening banks corporate governance are not expected to have any negative poverty impact. Over the medium term they are expected to help Tunisia recover from the current economic crisis and therefore have an indirect positive economic impact on households. This is also the anticipated impact of the regulatory simplification which is expected to improve the business environment and increasing growth and employment in the medium

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term. Faster growth would lead to increased job creation, thereby supporting household incomes, with a positive impact on reducing poverty. It should be emphasized that the review exercise will focus on removing unnecessary regulations and reducing discretion in the application of existing rules, but will not remove the necessary health and environmental safeguards, as well as labor protection/standards. The highly participatory process will ensure this outcome. The new program to support the unemployed is expected to benefit low skilled unemployed through short-term programs which also aim to improve employability in the medium term and also to support high-skilled unemployed which will benefit from the opportunity to acquire new skills aligned with the demand/needs of the labor market, increasing their chances of employment. The reform of the National Employment Fund will have no immediate social and poverty impacts, but as the reform starts improving the effectiveness of the programs financed by the fund, this measure is also expected to have positive social and poverty impacts on the unemployed, and especially in remote regions (under the regional programs financed by the fund). The impact of the measures on social accountability in social services delivery and expanding outreach in social services are highly positive as they will provide access to social services where most needed, i.e. in the remote regions, and will also lead to improved quality of services. The beneficiaries will be mostly vulnerable groups (such as women in poor families which will benefit from access to primary health services, notably better prenatal care) and particularly in the so-called ’underserved’ regions which are also the regions with the highest poverty incidence and severity. In sum, the specific policies supported by this DPL are not expected to have negative distributional and social impacts; positive impacts are likely expected as a result of increased citizen voice in the management of public life and the delivery of public services, and improved access to employment and social services. Similarly, the poverty reduction impact of the policies supported by the DPL is expected to be positive, most notably the assistance to the unemployed and expanding frontline service delivery, both in the short and in the medium term.

ENVIRONMENTAL ASPECTS

76. The institutional and policy framework is generally strong and well defined in Tunisia. The Ministry of Environment and Sustainable Development is the key player in defining and implementing environmental policies and strategies. An annual report on the state of the environment is published yearly and action plans to address various environmental issues (incl. water, solid waste, biodiversity, natural resources, urban planning, etc.) are being implemented. The current five years development plan (2007-2011) allocates considerable investment for the protection of the environment. A policy note on the cost of waster degradation was prepared in 2007 and disseminated to all concerned sectors with clear recommendations for the optimization of the water resources, especially in the agriculture sector. Regarding water quality management, Tunisia continues its efforts for the establishment of a water quality monitoring network covering both surface and ground water. In parallel, the government initiated a new program to improve the environmental performance of wastewater treatment facilities. The national program on the reuse of treated wastewater, which is also among the priority of the new five year development plan, has been launched and several development and financial institutions are expected to join efforts with the government for the implementation of the project. The Bank is working to help the government to develop and implement appropriate policies in the areas of natural resources, environment and adaptation to climate change.

77. Tunisia has a well established environmental impact assessments (EIA) system. In 2007 it has been selected to pilot the use of country system (UCS) in the solid waste sector. As a result of the successful implementation of this pilot, it has been decided to extend the scope of the use of the country system at the national level. All activities that may result in a significant impact on the environment are subject to an Environmental Impact Assessment, which has to precede the issuing of licenses and investment activity.

78. The reforms supported in this DPL operation are not expected to have any positive or negative effects on the environment, forest and other natural resources. The DPL supports policy actions that create the enabling environment to support poverty reduction, and which by themselves do not have an environmental impact. The prior actions granting the public access to information and

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strengthening banks corporate governance will have no environmental impacts. Similarly, the program to support the unemployed, the reform of the National Employment Fund, and the measures introducing social accountability in social services delivery and expanding outreach in social services are also not expected to have any positive or negative effects on the environment, forest and other natural resources. The reform to simplify public procurement aims to accelerate public works, but will not dilute the environmental standards for public works, and therefore is expected to have no impacts. Similarly, the regulatory simplification will focus on removing unnecessary regulations and reducing discretion in the application of existing rules, but will not remove the necessary environmental safeguards and is therefore not expected to have negative environmental impacts. It is expected, however, that the regular private and public investment activities which may result from these last two policy actions, could have impacts on the environment. Nevertheless it is not expected that there will be need to introduce special measures since all activities to be carried out are subject to the Tunisian legal framework for the protection of the environment. Thus, neither specific environmental studies nor environmental impact management measures are anticipated.

IMPLEMENTATION, MONITORING, AND EVALUATION

79. Implementation and coordination responsibilities: The responsibility for implementing the program in government rests with the Ministry of Planning and International Cooperation which will coordinate all relevant activities with other Ministries. The government will take the lead in monitoring progress in implementation of this operation.

80. Supervision by the Bank: Regular supervision will allow the World Bank to continue providing policy advice and technical assistance to the institutions involved in the implementation of the program of reform. The Bank will continue to maintain continuous dialogue with the relevant government ministries and will conduct regular reviews in close collaboration with other partners. This will take the form of joint missions with the AfDB, AFD and the EU and shared analytical underpinnings.

81. Monitoring and Evaluation: The monitoring and evaluation of the program and its expected results will be based on the government regular M&E activities. The World Bank and other development partners will continue to provide support to the government to strengthen M&E, improve data quality and management and enhance capacity for using development outcomes to inform policy making.

FIDUCIARY ASPECTS

82. The Public Finance Management system, together with the government’s commitment and plans to reform, are adequate to support this operation. Public Finance Management in Tunisia is generally regarded as sound, transparent and well organized. The Tunisian system is based on the principle of segregation of responsibilities and separation of the roles between the payment authorizer (ordonnateur) and public accountant, and on the principles governing ex ante expenditure control and internal and external audits. The main weakness of the public financial management system was the lack of transparency and consultation in the process, notably in the preparation of the budget. This DPL is taking steps towards strengthening transparency and accountability in PFM through to measures that will facilitate the creation of associations and allow public access to data and information—and which will allow greater scrutiny and debate of government policies and the budget—as well through measures to strengthening transparency and accountability in the public procurement process. The 2010 PEFA concluded that the legal and administrative framework for public financial management (PFM) is sound and offers a solid level of assurance regarding the reliability of information and a strong control environment; however the report also identified transparency and accountability failures. The 2010 Public Expenditure and Financial Accountability assessment (PEFA; undertaken jointly by the European Commission, AfDB and the Bank) assessed the period of 2006-2008. The PEFA report confirmed that the PFM system supports

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the achievement of aggregate fiscal discipline, strategic allocation of resources and efficient service delivery. The report highlights that the main strengths of the Tunisian PFM system are: (i) credible and transparent budget;53 (ii) strong and effective financial control procedures; (iii) effective internal audit function; (iii) reliable fiscal reporting; (iv) strong cash and debt management due notably to a technical assistance from the Bank. On the other hand, the report also highlighted several shortcomings, notably in the field of financial information and reporting, public procurement, the tax authority, internal and external financial controls. The main challenges of the PFM system are: (i) delays in the production of the year-end government financial statements; (ii) the need to shift for internal controls and internal auditing from compliance to a system rating the performance; (iii) the insufficient scope of the external audit which cover an average of 13 percent of expenditures; (iv) the need to accelerate the implementation of performance budgeting. In recent years the administration has continued to strengthen the PFM systems and introduced measures to: (i) move to a performance based budgeting framework; (ii) develop an MTEF to assist in fiscal sustainability; (iii) modernize its accounting framework; and, (iv) improve revenue management.

83. The budget is generally executed in a straightforward way without any significant deviations, and fiscal reporting is deemed to be reliable. Reconciliations of banking and fiscal records are done satisfactorily on a monthly basis, facilitated by efficient computerization. Financial control is ensured by effective and reliable control systems—both internal and external, as well as ex-ante and ex-post. Financial controllers, who are part of the Directorate-General of Financial Control (DGDP), carry out the ex ante control of expenditure commitments and report to the Prime Minister’s Office. The Court of Accounts carries out good quality external audit and the international standards on autonomy, scope and quality are met. The proposed budget and financial management reform program currently focuses on the implementation of sector MTEFs (which will be, in principle, framed by an aggregate MTFF and an MTBF that will frame the inter-sectoral resource allocation) and performance monitoring. It covers a range of PFM issues and includes a proposed training program, the implementation of a new budget classification, the finalization of the chart of accounts and the preparation of a new organic budget law.

84. No safeguard assessment of the Central Bank has been conducted by the IMF (as there is no formal program with Tunisia); however, the Central Bank is audited on a yearly basis with the audit report being disclosed publicly. These audits and the auditor opinions did not reflect any weaknesses in the control environment and the auditor’s opinions were issued with no qualifications. The Management Letter of the CBT revealed some internal control issues, however the CBT has agreed to take appropriate remedial actions to address these.

DISBURSEMENT AND AUDITING

85. The proposed loan will follow the Bank’s disbursement procedures for development policy support and will be disbursed in a single-tranche. After the loan has been approved by the World Bank’s Board of Executive Directors and becomes effective, the proceeds of the loan will be disbursed in compliance with the stipulated release conditions as defined in the Development Loan Agreement and in a single installment. Specifically, the proceeds of the loan will be deposited by IBRD in an account designated by the Borrower and acceptable to the World Bank at the Central Bank of Tunisia at the request of the Borrower, upon submission of a signed withdrawal application. The Borrower should ensure that upon the deposit of the loan proceeds into said account, an equivalent amount in local currency is credited in the Treasury current account at the Central Bank.

53 According to the CFAA (2004) the documents that make up the budget law and its annexes are well prepared, easy to understand, and contain the relevant information. Most of the information requirements for budget documentation in the PEFA methodology have been met. The overview that introduces the budget law and the report on budget data provide good information. The economic and financial overview prepared by Ministry of Planning and International Cooperation (termed the economic budget) is well written and illustrated with numerous macroeconomic tables in support of the assumptions on which the budget is based. A move to performance or results-based budgeting is underway.

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86. The Borrower will report to the Bank on the amounts deposited in the foreign currency account and credited to the budget management system. If the proceeds of the loan are used for ineligible purposes as defined in the DPL Loan Agreement, IBRD will require the Borrower to promptly upon notice refund an amount equal to the amount of said payment to IBRD. Amounts refunded to the Bank upon such request shall be cancelled. The loan proceeds will be administered by the Ministry of Finance. The flow of funds (including foreign currency exchange) is subject to standard public financial processes. The government budget is comprehensive, unified and subject to centralized treasury account.

87. Although an audit of the use of the funds may not be required, IBRD reserves the right to ask for a transaction audit. This audit, when asked for, will cover the accuracy of the transactions of the dedicated account, including accuracy of exchange rate conversions; confirming that the dedicated account was used only for the purposes of the operation where no other amounts have been deposited into the account. Also the auditor will have to obtain confirmation from corresponding bank(s) involved in the funds flow regarding the transaction. The time period for submission of the audit report to the Bank is 6 months from the date a request for such audit is issued.

RISKS AND RISK MITIGATION

88. The risks to this operation relate to: (i) renewed political instability from unmet or conflicting political aspirations; (ii) renewed political instability that could result from unmet social and economic factors, or spillover from the Libyan crisis; (iii) risks to the stability of the financial sector; and (iv) risks related to the design and implementation of the program of reform measures. Details for each of these areas are provided below:

(i) Risks related to renewed political instability from unmet or conflicting political aspirations

89. While the political situation appears to have stabilized, and the interim government appears to hold legitimacy in the eyes of the population, nevertheless there is a risk that the political climate may become unstable again when real political issues become at stake, notably in the run-up to the elections. This would impede the government’s capacity to push through any kind of policy action. In addition, it is possible that the upcoming elections could bring a more fractious political leadership, less able or willing to carry through reform agenda or sound macro policies. In order to mitigate this risk, the government is aiming to build consensus through consultation (including though by broadening of membership of the High Committee for political reforms). In addition, a benevolent international framework, including financial and political support from the international community (a new EU partnership) will help mitigate these political risks.

(ii) Risks related to the uncertainty of the economic outlook

90. Uncertainty about the economic outlook, related to the impact of the Libyan crisis, as well as in the regional economic outlook, and slow recovery for major EU trading partners to Tunisia, all pose significant risk to political developments in Tunisia. Given the important economic ties Libya has with Tunisia, the protraction of the Libyan crisis could have an additional and sizeable impact on Tunisia in terms of reduced exports (Libya represents more than 6 percent of Tunisia’s total exports in goods), FDI and remittances (both 10 percent of Tunisia’s total inflows), as well as an additional negative impact on tourism. Also, the number of Tunisians returning home because escaping from Libya will cause additional strain to the budget resources as they will be in need of housing and social assistance.

91. Downwards risks in the global economic outlook, especially among major trading partners to Tunisia, also pose uncertainty about Tunisia’s own economic outlook. Econometric analysis shows that a resumption of the Tunisian economy by the year 2012 remains dependent on a substantial improvement in the economic performance of the EU and climatic conditions favorable to agriculture as well as on the effects of counter-cyclical public policy on growth.

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92. An additional risk is linked to the effectiveness of the fiscal stimulus on the economy. The economic projections presented here assume a strong impact of the fiscal stimulus on the economy, and its rapid and almost complete implementation (at least 70 percent) during the year 2011. This might not be possible if there is not enough financing to support the package, if the procedures are too lengthy, or if there are difficulties in the implementation of the plan itself. In these scenarios, the support package might not have the full effect on the economic recovery that has been envisaged by the government and could lead to economic growth lower than 1.5 percent, possibly closer to zero. Lower economic growth and additional pressure in the labor market could lead to renewed social tensions and a reinforced sense of lack of economic opportunities. Even the economic outturn was as planned, it may not yield outcomes that are commensurate with aspirations or rapid enough to meet them.

93. A recurrence of instability might lead to a renewed loss of foreign investors’ confidence and a worsening of Tunisia’s country risk, as it appears in Tunisia’s credit spreads on international markets. The resulting decrease in capital inflows and investment will in turn affect industrial production and exports, further depressing domestic consumption and slowing the economic recovery, and sending Tunisia into a negative spiral. In order to mitigate these risks the authorities have adopted a strong plan to scale up social interventions, support enterprises during this transition, and accelerate public investments to boost economic growth, and will continue to pursue flexible budgetary and monetary policies to support economic recovery in an international environment which remains uncertain and volatile. The resources from this operation are intended to help finance this plan and mitigate these risks. The measures supported by this operation also aim to both facilitate the execution of public investments (though simplification of procurement procedures), and improve the provision of social services, as well as to reestablish social stability by addressing the key demands for better voice and accountability made by the population.

(iii) Risks to the stability of the financial sector

94. Credit risks in the banking sector: In order to address weaknesses in the financial system, over the past few years the authorities have been pushing banks to (i) steadily increase the provisioning rates, (ii) to decrease the NPLs and mandating special audits of NPL and portfolios and exposure to the former presidential family; and (iii) implement strong internal control regulation, while keeping active supervision of the banking sector. The negative shock on the tourism sector (both from the revolution and the Libyan crisis) and the sensitivity of exporting sectors to growth variations in Europe both translate into higher credit risk. Indeed, the banking system is substantially exposed to the tourism sector (at 12.7 percent of total loans in 2009). These risk will be added to the already relatively weak asset quality of the banking sector in spite of limited market risks overall. The level of Non-Performing Loans of the banking system has decreased in 2010 to around 12 percent thanks to some write-offs and the active cleanup, especially from banks that were privatized, but remains high overall. Also, it remains to be seen if the credit underwriting skills of Tunisian banks have improved significantly. In order to mitigate these risk and to strengthen intervention mechanisms, as part of the preparation for this DPL the Bank fielded a mission in April 2011 to work with the authorities in assessing the stability of the financial sector (including full-fledged stress test by bank), assess/strengthen crisis preparedness arrangement, and design solutions in terms of debt relief/restructuring in the unlikely event that these should be required.

(iv) Risks related to the design and implementation of the program

95. Several risks exist with respect to the adoption and implementation of the program. Firstly, key stakeholders may deem it inappropriate to address politically sensitive issues (e.g. such as the amendment of the law of associations) before a new government is elected. To mitigate this risk, the Bank has been recommending to the transition government to (i) focus on limited amendments based on consensus as a first step, notably those explicitly addressing the many abuses of the past regime (especially relating to all the governance and financial sector governance matters); (ii) clearly communicate that the reviews of more sensitive areas will be conducted in two steps, such that the

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more complicated and controversial amendments will be made by the future government once further analysis has been conducted and broad-based consultation process has taken place. Secondly, commitment to change may vary across segments of the bureaucracy, some parts of which may cause resistance (for instance related to procurement reforms, and/or the simplification of regulatory administrative procedures for the business environment). This risk can be mitigated by consensus building both within and outside of the current government. For instance the reform on regulatory simplification and transparency will be designed by the Administrative Reform Unit in the PM office, in close consultation with a core group of active and engaged ministries on this agenda (Finance, MDCI, Trade and Tourism, Social Affairs), and pro-active engagement will need to be sustained right after adoption of the relevant legislation; in addition the design of the initiative should ensure strong and sustained commitment: participative process, public engagement, multi-stakeholder systemic initiative which should emulate institutional competition to reach quantifiable and visible results. The mitigation measures, however, are limited by the lack of well established representatives of private sector organizations and civil society. Given the history of limited voice and freedom of expression in Tunisia, the established civil society and private sector organizations were closely controlled by the regime. Consultation will need to include representatives from the new competing business organizations and NGOs that have recently emerged. Third, the timeframe to revise and adopt the legal changes is very short, taking into account the necessary consultation. The Bank’s technical assistance and prior consultation should somewhat reduce this risk, even if the operations time frame remains a major constraint.

96. Risks exist that the new post-elections government could reverse the reform agenda, in particular against pro-business policies. Hence, the program entails reforms that are not politically colored, but rather focus on the efficiency and transparency in the operation of the administration. For instance the business environment measure is not focused on deregulation, but rather on the anti-discretion, anti-arbitrariness and transparency agenda, which encompasses simplification. It will be hard for a new government to undo an initiative that aims at preventing the most visible ills of the old regime. The communication campaign accompanying the reforms program should be focused on this message, which is a unanimous expectation in post-revolution Tunisia.

97. The limited access to data entails risks for the design of some of the policies envisaged under the program. For instance in order to design an effective package of incentives to promote investment/employment among new/existing firms in the service sector, it is necessary to analyze recent employment creation patterns in the service sector (by governorate and by activity) as well their revenues and costs composition. Ideally, subsidies should target regions and sectors that have displayed positive growth and should reduce (in a significant way) the main operation costs of these firms. Identifying suitable regions, activities, and relevant operation costs will require an in depth analysis of existing data on employment registration collected by the CNSS (Caisse Nationale de la Sécurité Sociale) and on net employment creation (levels and trends) collected by the Labor Force Survey produced by the INS (National Institute of Statistics). Access to such data has traditionally been limited in Tunisia due to existing institutional constraints to data use/sharing. In order to design the package through an evidence-based process, a technical team composed by the program designers as well as of data experts from the INS and the CNSS needs to be created rapidly in order to speed up necessary data collection and analysis. Lack of access to data may contribute to weak design of the proposed package of incentives.

98. The volatile socio-political situation entail public relations risks for the government and the donors supporting the program, since it is easy for government and donor actions to be politicized. For instance soon after the interim government announced the Amal program (to support high-skilled unemployed), the Tunisian youth perceived it as a continuation of the many unsuccessful programs that the government has implemented during the past years. At the same time, many young individuals who have shown interest in the program will not be able to enroll given the limited funds/spaces available. In order to address these concerns and risks, it is important for the government to carry out a communications/public-awareness campaign, to inform the public at large about the

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reasons for the measures and the merits of the design of the various initiatives, and also to manage expectations. For instance it will be important to manage expectations and clarify that short-term policies and the new program cannot fix the unemployment problem. The Bank will be assisting the government in the communications aspects of various reforms and the overall program.

99. The measures which entail community participation may be challenging to implement in as much as they are new to Tunisian population and they go against decades of repressive practices by the former regime. For instance, a moderate-high risk exists regarding the lack of trust among citizens and civil society actors vis-à-vis future results of a scorecard monitoring systems if there is inadequate citizen participation and little link to the performance of practitioners and goal-setting. However, if the government publishes required public service macro statistics (social assistance beneficiaries, test scores, health care budgets, MMR and performance indicators), scorecards for front-line practitioners and goal-setting would stand a higher chance of being used to improve the responsiveness of public service delivery to performance. Similarly, a moderate risk exists in terms of stakeholder support for extending health services to vulnerable populations. However, it will be important to stress the institutional, community participation and multi-disciplinary nature of the community outreach policy to ensure a differentiation from previous voluntary activities by the previous ruling party.

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ANNEX 1: LETTER OF DEVELOPMENT POLICY

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REPUBLIC OF TUNISIA MINISTRY OF PLANNING

AND INTERNATIONAL COOPERATION

The Minister

May 24, 2011

Mr. Robert B. Zoellick President of the World Bank group Washington D.C.

Letter of development policy

Mr. President, On January 14, 2011, Tunisia entered a crucial phase of its history marked by the Peaceful Revolution of its people, with an immeasurable impact on the region. A people reconciled with its history and aspiring to a democratic State, respecting human rights and fundamental freedoms. With this major change, Tunisia is determined to break with an old development model characterized by disjunction between, on the one hand, the political order, traditionally characterized by considerable centralization and lack of democracy and, on the other hand, the socio-economic order, in which the country is displaying definite skills and making appreciable progress despite persistent shortcomings in the distribution of national wealth, particularly at the regional level. New vistas are now opening up for building a new design for society aiming at inclusiveness and balance and based on freedom, good governance, transparency, justice and creation of a participatory citizenship. These are the only attributes that are capable of releasing energies, mobilizing potentials and creating synergies for the achievement of sound and sustainable growth, decent work and high income equitably apportioned between all economic agents and between the different regions, in accordance with the expectations and aspirations of the Tunisian people. To this end, the Interim Government is determined to create an environment conducive to peaceful political transition and satisfaction of the social demands which erupted following the popular uprising, together with revitalization of economic activity, intensification of job creation and improvement of living conditions in disadvantaged regions of the country. In the political sphere, wide-ranging measures have already been taken to restore confidence among all stakeholders, successfully organize free and credible elections and implant democratic values in Tunisian institutions. In this context, three independent neutral commissions have been established to draft political reforms, consider excesses and cases of corruption and establish the facts regarding abuses and breaches of the law. These commissions are composed of experts, jurists and representatives of political parties and of civil society and reflect a new political ethic in the country, henceforth marked by transparency, good governance and the rule of law.

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In addition, a general amnesty law has been enacted in order to recognize all the political movements formerly banned, to release all political prisoners and to consecrate the right and freedom of expression, association and movement. The determination to democratize political life was also strengthened by generally opening up media and politics and establishing complete freedom of the press and freedom to form political parties and associations. In the economic and social sphere, during this transitional period priority is being given to resumption of economic activity, restoration of a climate of confidence to boost national and foreign investment and creation of social safety nets to ensure a smooth transition. The instability that recently reigned in Tunisia created a real economic slump, as witness the marked decline in the level of production in several sectors of activity, the drop in tourist activity and foreign investment and the extent of the losses suffered by several businesses and the damage to public services following the rioting and the strikes and protests which occurred. This situation was aggravated by the rise in international prices of food and fuel and by the war in Libya, which resulted in a decline in trade with that country, a drop in remittances of funds and investments from Libya and the massive return of Tunisian workers from Libya. This difficult situation considerably modified the course initially set in the 2011 budget. Now the expected outcomes for 2011 as a whole are: A slowdown of growth, which in the absence of stimulus measures would amount to 1

percent, instead of 5.4 percent as initially forecast in the 2011 budget; Shrinkage of almost TND 2,034 million in the volume of global investments, including TND

1,000 million in foreign direct investments; A larger current account deficit, which will probably reach 6.2 percent of GDP, as a result of

the decline in revenue from tourism and transport and the slowdown in goods exports; In this sphere, it should be noted that foreign exchange reserves declined by TND 2 billion

compared with their level on December 31, 2010 and that other reimbursements of debt principal are due this year, including in particular a bond of 15 billion yen purchased on the Japanese market;

An increase of about TND 4,200 million in additional external financing needs, not counting the cost of damage caused during the recent events amounting to TND 3 billion;

Increased pressure on the State budget because of the decline in own revenue of about TND 570 million and the increase in public spending of TND 1,970 million (including TND 1,200 million for additional compensation expenses), which would result in a deficit of 3.2 percent of GDP in addition to the initially expected deficit of 2.5 percent of GDP;

A decline in job creation of over 61,500 posts due to the downturn in growth and investment, whereas the initial forecasts in the 2011 budget anticipate the creation of 81,000 jobs.

In view of these circumstances, the Government is implementing a program of support for economic activity that should step up job creation, encourage private investment and support for businesses that have suffered losses, promote regional development and enhance social activities to improve living conditions in the interior regions of the country. The main measures to be taken under this program focus on: Adoption of social programs for interior regions of the country and needy families (housing,

drinking water, basic health care, etc.);

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Enhancement of employment and training programs to deal with critical situations and improve the employability of young job seekers, accompanied by a strategic evaluation of employment programs through improved monitoring and evaluation arrangements;

Intensification of civil service recruitments, in view of the exceptional circumstances and particularly the social tensions and very high unemployment currently experienced by Tunisia. However, the Government considers that job creation by the private sector is the only solution sustainable in the medium term to absorb the high unemployment;

Execution of public investment projects in interior regions (industrial zones, road infrastructure, public amenities, etc.);

Compensation of businesses that have suffered losses and adoption of specific short-term measures to preserve existing jobs, in particular through assumption by the State of payroll taxes and of some financial expenses, postponement of corporate tax payments and creation of a specific mechanism of loan rescheduling guarantees and guarantees of loans to finance investments.

Numerous actions have already been authorized and implemented, including: Launch of the active employment program “Amal” for the insertion of higher education

graduates in professional life, giving them a special monthly allowance of TND 200 in return for a commitment to work in an association or to work on a part-time basis while looking for a permanent job. By the end of April, 142,000 applications had been approved;

Allocation of TND 10.6 million to help 141,000 needy families; Assistance to Tunisians repatriated from Libya by disbursement of almost TND 10 million on

May 10, 2011 to 22,000 beneficiaries; Budget allocations amounting to TND 251 million to various regions, giving priority to the

Sidi-Bouzid, Gafsa and Kasserine regions; Enactment of decree-laws in most sectors and creation of special commissions to study the

granting of compensation and benefits to businesses that have suffered losses. The commencement of collective bargaining for salary increases over one year is another milestone on the road to social normalization in Tunisia and opens a new page for social reconciliation, improvement of living standards, reduction of existing imbalances and strengthening of the middle class, which is an engine of economic development. This program should breathe new life into economic activity by increasing GDP growth by between 1 and 1.5 percentage points and promoting the creation of 40,000 new jobs this year, including for higher education graduates. However, this additional commitment will require additional external financing of about TND 4,200 million. Thus this program’s contribution to reducing the constraints and challenges facing Tunisia is dependent on mobilization of all available resources, on the combined efforts of persons of all tendencies and on the solidarity of the various partners, both national and in the international community; these conditions are all within the reach of Tunisia. Firstly, the State has quite a comfortable margin for maneuver in pursuing an expansionist policy, in view of the country’s solid economic and financial foundations and the resilience which it displayed in the face of exogenous shocks and vagaries, such as the deterioration of climate conditions, the steep increase in oil and commodity prices and the eruption of financial crises on a global scale.

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Secondly, the new social covenant embodied in the recently created “National Council for the attainment of the goals of the Revolution, political reform and democratic transition” will inevitably foster a climate of mutual trust, active consultation, constructive dialogue and effective participation of influential members of society in the decision-making process and strengthen the Government’s unshakeable determination to have a successful transitional period and prepare the next stage so as to allow Tunisia to join the ranks of democratic and emergent countries and win the confidence of the international community. Thirdly, Tunisia always counts on it partners to support the Tunisian people in their efforts to achieve democratic transition and their aspirations for a better economic and social future. The consistently fruitful cooperation with Tunisia’s partners should continue in the current situation, characterized by numerous financial constraints for which the Government hopes to achieve rapid and substantial support in the form of a rapid disbursement operation for an amount equivalent to USD 500 million. This pressing need for external resources is due, in these exceptional circumstances confronting Tunisia, to the crucial need, firstly, to create conditions conducive to democratic transition and particularly to the smooth conduct of elections to the Constituent Assembly and, secondly, to support the recovery program initiated by the Government, which has already started and which should pick up speed soon following enactment of the supplementary budget law. In addition to short-term supportive actions, a number of areas for study and of proposals for reform have been identified for possible incorporation in the medium term in the goal of strengthening the structural reform process already launched and solidifying the foundations of a political and economic structure that is sound, free and sufficiently open to best practices and new requirements at the global level. This is especially true of efforts to consolidate good governance, which require cross-cutting analyses and reforms in the medium term in essential areas such as justice reform, anti-corruption measures, decentralization and regionalization, government finance reform, and transparency and accountability at all levels of the administration and of public service providers. These essential reforms, which will be the responsibility of the next elected constituent assembly, will cement the transition process and the reforms introduced under this program. The program, designed in collaboration with the World Bank, the African Development Bank, the European Union and the Agence française de développement, will give more support to the institutional framework at the political, economic and social levels, by strengthening good governance and the regulatory framework governing the business climate, additional job creation and regional development as well as strengthening of social areas. On this basis, the program has four main pillars: governance, employment and regional development, the financial sector and the social sectors. I. Governance The aim of good governance is to make government actions more effective and responsive to society and the general welfare by improving transparency, ensuring healthy competition, and limiting discretionary practices and arbitrary and selective decisions. This approach supports the private sector by ensuring respect for property rights, protecting investors, fostering a better business environment, boosting economic growth, and consolidating the progress already made. The agreed reforms in this area focus on:

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1. Promulgation of a Decree-Law amending the Associations Act in order to consolidate the transition by removing the main discretionary clauses of the law and the restrictions to the creation and operation of associations by, in particular, the replacement of the system of the current de facto authorization system by the Ministry of Interior with a declarative system, the removal of the existing classification of associations, and deletion of the provisions restricting the freedom to accept or reject members. A draft decree-law has been prepared by the “High Commission for the Fulfillment of the Revolutionary Goals, Political Reform, and Democratic Transition” which is in charge of these matters. As soon as the High Instance has approved it, the Government commits to promulgate said decree-law without any delay. We anticipate that this process will be concluded before the upcoming elections of the Constituent Assembly. In the medium term, a more exhaustive review of the legal and regulatory framework of associations and related laws, such as the Penal Code and the security laws, will be carried out on the basis of a process of consultation with all the key players in society. 2. Promulgation of a Decree-Law institutionalizing citizens' access to the administrative documents of government agencies, in accordance with best international practices and norms in this area. The new regulatory framework will spell out the principles governing access to this type of information, the main categories of information to be issued by the Interim Government (including on the Internet), the objective criteria for exclusion (personal data, security, etc.), and a clear procedure for gaining access to information. The reform will focus, first, on the dissemination of key information in the economic and statistical fields, public finances, administrative bodies, and social services and programs. The information issued will gradually include detailed, qualitative data on the budget and public finance, sectoral statistics, and the economic, social, and monetary policies of the State. A comprehensive law on freedom of information will be drafted in the medium term. It will include important matters such as the implementation of an adequate institutional structure. 3. Authorization to publish the complete annual reports of the Court of Audit for the past five years. 4. Introduction of a guidebook describing the technical and methodological specifications for encouraging citizen participation in government decisions through mechanisms designed to take advantage of information and communications technologies. 5. Promulgation of a Decree amending the regulations governing public procurement, with a view to enhancing the effectiveness and transparency of bidding procedures so as to shorten the decision-making process without compromising quality. The main modifications will improve the efficiency of the entire procurement cycle by reducing delays and revising the terms of reference of the High Commission on Procurement, while ensuring the transparency, accountability, and regularity of procedures. Meanwhile, a thorough review will be conducted jointly by the donors and the Interim Government with a view to the forthcoming structural reform of the procurement system. 6. Issue of a Circular from the Prime Minister institutionalizing and initiating a systemic, participatory, measurable and visible revision of procedures and administrative authorizations in key sectors and services for enterprises and citizens in order to simplify these procedures and limit discretionary and arbitrary enforcement of rules.

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This reform process will continue to foster the streamlining of administrative formalities and procedures, with input from users, and on the basis of strategic objectives and clear criteria (legal coherence, need, cost-efficiency, and discretion), according to a predetermined timetable. The reform will concentrate on essential sectors, such as tourism and finance – including customs regulations and taxes -- in order to build confidence and boost investment and employment. It is important to remember at this point that Tunisia has been engaged for more than a decade in a program geared to modernizing government administration, an effort that has made some inroads in terms of eliminating many administrative authorization requirements and replacing them with specifications, computerized management, and simplified procedures. This new initiative will help consolidate and spread the results already obtained. 7. Modification of the Charter for Internet Domain Names, following open consultations with the private sector and civil society.

II. Financial sector The objectives of reform in the financial sector are to reinforce good governance, reestablish confidence in the banking sector and make it more stable, and develop microcredit and venture capital mechanisms, which will promote the consolidation of a modern, liberal, and efficient financial system and stimulate the recovery of investment, thereby ensuring strong, sustainable economic growth. The reform measures are centered on:

1. The preparation, in collaboration with financial professionals, of a regulatory framework to govern the organization and supervision of micro-finance. This framework will have a general component covering, among other things, the definition of service providers, consumer protection, and participation in a credit bureau, and a security component that will provide quantitative and qualitative rules. 2. Promulgation, in cooperation with professionals, of a Circular setting out the rules of good governance for credit establishments based on best international practices, together with a refined legal and regulatory framework, so as to introduce criteria for selecting managers and administrators. 3. Strengthening the capacities of the Central Bank of Tunisia to manage and analyze credit risks (bank stress tests) in order to ensure the stability of the banking sector. 4. Preparation, in collaboration with professionals, of an amendment to the Act on Private Equity in Tunisia, with a view to expanding and streamlining the catalog of investments, easing the tax burden, and extending the length of investments.

III. Employment and regional development The anticipated reforms in this area are intended to strengthen the mechanisms for creating paid employment or self-employment, enhance employability, and develop prospects for those entering the job market, in particular young graduates of higher education in the more disadvantaged interior regions of the country. Likewise, the Interim Government plans to take steps to improve the equitable distribution of wealth between the various regions of the country in accordance with the objectives of the Revolution. These steps will include:

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1. Adoption of a Decree-Law to transfer the management of the National Employment Fund (Fund 21/21) to the Ministry of Vocational Training and Employment; a financial audit; and development of a monitoring and evaluation system for employment programs financed by this Fund. 2. Promulgation of a Decree for the design and creation of a comprehensive job-seeking program for young graduates and support for temporary jobs for unskilled workers, together with improving the employability of graduates of vocational training courses (AMAL program). 3. Adoption, by Decree, of temporary job protection measures for at-risk jobs; these measures would help enterprises by providing, for example, targeted subsidies to cover short-term debt servicing, or tax incentives based on the number of jobs to be protected and the sustainability of the beneficiary enterprises. 4. Emergency transfer mechanisms for local governments to compensate for regional imbalances and help offset the loss of revenue and damages to public property suffered during the Revolution, so that suspended investment projects can be resumed and new ones launched. The Tunisian People’s Revolution, which was triggered by a social movement in the interior of the country, brought to light the regional disparities that exist. Like any revolution, it resulted in material damage which has affected, among other things, local governments. Their resources have been significantly reduced, and this in turn has limited their ability to carry out their functions. For the time being, one of the highest priorities must be to allocate funds for the operational budgets of local governments on the basis of objective socioeconomic criteria and to set up special priority delegations to replace municipal councils.

IV. Social sectors The purpose of the program is to strengthen the institutional framework for providing basic public services, social transfer mechanisms, and assistance programs for households in need and for the disadvantaged regions of Tunisia, using a participatory, targeted, and efficient approach. The primary measures to be taken in this area are:

1. Issue a Circular establishing a mechanism to enable citizens’ committees to monitor and evaluate the performance of public services, giving priority to the health, education, social protection, and administration sectors. 2. Issue a Circular establishing a program to provide a package of social services in the health, education, and social protection sectors, including a system of periodic evaluation in order to overcome geographical obstacles to access to public services in the disadvantaged regions (maternal and child care, preventive care, and regular follow-up visits by social workers to vulnerable families). 3. Issue a Circular for the establishment of a transparent, rational mechanism for the management of drugs in order to monitor their availability, in particular in the disadvantaged regions. 4. Issue a Circular establishing eligibility criteria and weighting methods for social assistance programs targeting needy families (such as the National Program of Aid to Needy

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Families (PAFN)), and new assistance programs for persons who have been repatriated from Libya, combining exit strategies with mechanisms to ensure transparency. 5. Launch a financial and technical audit of the National Solidarity Fund (Fund 26-26) and assessment of its impact.

In conclusion, the Tunisian Interim Government attaches particular importance to this support program during the current transitional phase, which will require additional efforts in terms of technical assistance, together with increased cooperation from Tunisia's partners, in order to sustain the process of democratization, maintain social stability, and promote economic development. It will be much easier to meet these objectives if the request for a rapid disbursement operation is accepted by the World Bank.

The Minister of Planning and International Cooperation Signed: Abdelhamid TRIKI

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ANNEX 2: POLICY AND INSTITUTIONAL REFORMS MATRIX

Development Objective

Policy and Institutional Reforms Expected Results

Medium Term Agenda

Indicator Baseline (2010) Target

FIRST PILLAR: GOVERNANCE

Support policy debate by allowing greater public access to government information (including statistical data).

Prior Action 1. The Interim President of the Republic has signed the Decree-Law on the access to administrative documents of public bodies, which defines the principles and rules governing the right to information by the public and the right to access information held by public bodies by the public, and which among others removes key constraints to access to economic and social statistics by the public.

Number of statistical surveys that are anynomized, published and open to public access

Number of detailed national account statistics published

Number of statistical data and surveys that are opened to public access:

LFS=0

Households Surveys=0

1. Anonymize and publish at least the following surveys:

(i)Labor Force Surveys= 2 (years 2007 and 2009)

(ii) Household Surveys: 2 (years 1999 and 2005)

2. Publish the following data:

(i) the detailed national accounts (400 products);

Adoption of a Freedom of Information law, which will enable the dissemination of disaggregated socio-economic statistics and survey micro data.

Establish a more liberal environment for the registration of Internet Domain Names, by reducing the administrative procedures and increasing the competition among registrars of Domain Names

Prior Action 2. The President of the National Telecommunications Council (Instance Nationale des Telecommunications) has issued a resolution approved by the Council modifying the “domain names charter” for the hosting of Internet websites, to simplify the procedures for the registration and hosting of Internet websites.

Number of “.tn” Domain Names 8,000 Ten-fold increase in the number of “.tn” domain names, to 80,000

Continue the liberalization of the Information and Communications Technologies Sector as an enabler of good governance and socio-economic development.

Improve the efficiency and transparency of procurement procedures and shorten the decision process.

Prior Action 3. The Interim President of the Republic has signed the Decree amending Decree N° 2002-3158, dated December 17, 2002, regarding the regulations for public procurement, to reduce the procurement processing time while ensuring transparency and compliance with the regulations.

(i) Average time needed to award a contract

(ii) Number of contracts subject to more than one stage process

(iii) share of contract awards UNISIA published on the website of the Observatoire National des Marchés Publics

(i) The average of the duration of contract award process =312 days

(ii) The percentage of contracts subject to more than one stage process = 100 %

(iii) share of contract awards (competitive/limited bidding and direct contracting) published on the web site of the Observatoire National des Marchés Publics= 0%

(i) Decrease by 50 % the average of the duration of contract award process (from transmission of the draft bidding document to the concerned committee to signing date of contract)

(ii) Reduce by 75 % the percentage of contracts not subject to one stage bidding process (one stage: simultaneous submission of technical and financial

Achieve more effective and timely public expenditures and investment and thereby better quality of public services.

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bids).(iii) share of contract awards (competitive/limited bidding and direct contracting) published on the web site of the Observatoire National des Marchés Publics= 100%

Improve administrative services to citizens and strengthen private sector development by improving its regulatory environment.

Prior Action 4. The Prime Minister has issued a Circular (i) institutionalizing a systematic and participatory reform process of services to businesses and citizens, based on streamlining of procedures, e-government, transparency, and reduction of arbitrary and discretionary behaviors; and (ii) committing to deliver concrete reforms within six months, in the priority areas of customs, taxes, and tourism.

(i) For each of the administrative procedures identified in the areas of customs, trade, tourism, taxes, social affairs and the employment administrations (at least one each): - Quantitative estimate of compliance time: number of steps and number of days for each step of interaction with the administration. - Quantitative proxy for the cost of compliance: direct costs (fees and payments) and opportunity costs (related to time it takes to complete the procedure) (ii) Proxy of the extent to which regulation is prone to discretion and arbitrariness.

Baseline will be determined uponlaunching the review for each selected procedure in customs, taxes, trade and tourism and social affairs.

(i) For each of the administrative procedures identified: - Reduction by 20% of compliance time with selected procedures in customs, taxes, tourism, trade and social affairs- Reduction by 20% of compliance costs with selected procedures in customs, taxes, tourism, trade and social affairs.

(ii) Procedures, decision criteria, decision processes are publicly available. Perception survey shows substantial reduction with discretion and arbitrariness in customs, taxes, trade, tourism and social affairs administration

Improved administrative services to citizens and firms, less discretion, increased transparency and accountability, and simplified procedures.

SECOND PILLAR: EMPLOYMENT AND REGIONAL DISPARITIES

Improve accountability and governance of employment programs financed by the National Employment Funds.

Prior Action 5. The Interim President of the Republic has issued Decree-Law N° 16/2011, dated March 26, 2011, amending Law N°101/1999 dated December 31, 1999, regarding the budget law for 2000, to transfer management of the National Employment Fund from the Presidency of the Republic to the Ministry of Employment and Vocational Training.

(i) Number of programs financed by the Fund assessed through an impact evaluation

(ii) number of employment programs financed by the Fund that have a baseline indicators for insertion rate and cost of insertion

ONEQ (i) Number of programs financed by the Fund assessed through an impact evaluation = 0 ANETI / ONEQ: (ii) Employment programs financed by the Fund that have baseline indicators for insertion rate and cost of insertion = 0

(i) Number of programs financed by the Fund that have rolled-out an impact evaluation = 2 ( AMAL and AMAL 2); (ii) Employment programs financed by the Fund have initiated data collection for production of baseline indicators for insertion rates and cost of insertion.

Increased use of evidence-based policymaking in matters related to employment programs.

Enhance employability and promote insertion into permanent employment for high-skilled youth.

Prior Action 6. The Interim President of the Republic has signed the Decree creating (i) a comprehensive active labor market program for high-skilled unemployed, and (ii) a program to support short-term employment of low-

Indicators related to AMAL 1: (i) provision of basic training package; (ii) beneficiaries of paid internships.

ANETI: (i) Number of AMAL 1 beneficiaries who receive the introductory two-day basic training package (phase 1) =0 ANETI: (ii) Number of

(i) 10,000 beneficiaries; (ii) 50,000

Reform/design ALMPs based on evidence from careful impact evaluations and pilots.

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(AMAL 1)

Provide a safety net program (public works plus) targeted to low-skilled long-term unemployed that (i) promotes local participation of NGOs and (ii) provides some basic employment services aiming to enhance the employability of participants. (AMAL 2)

skilled workers and improving the employability of graduates from vocational training program.

Indicators related to AMAL 2: (i) provision of additional employment services to beneficiaries; (ii) non-governmental participation,

AMAL1 beneficiaries who have been enrolled into a paid internship. MFPE: (iii) Number of AMAL2 public works beneficiaries who received training = 0 MFPE: (iv) Number of AMAL2 projects that have been implemented through partnerships with NGOs = 0

(iii) 1,000 beneficiaries (iv) 100 projects

Reform/design ALMPs to promote non-governmental participation and to address the needs of the most vulnerable segments of the population.

THIRD PILLAR: FINANCIAL SECTOR

Improve banks corporate governance practices and introduce criteria for selecting officers, directors and shareholders of banks.

Prior Action 7. The Governor of Central Bank has issued a Circular setting forth good corporate governance rules for credit institutions based on international best practices and introducing criteria for the selection of senior management and members of the board, whose implementation will be verified inter alia through an annual regulatory survey on the internal control systems and the corporate governance of the credit institutions, conducted by the Central Bank.

(i) Increased number of independent board members in private and state owned banks (ii) Improved independence of the internal audit function in banks (iii) Improved risk management function access to boards

(i) 2 banks have an independent board member. (ii) Head of internal audit is hired, fired, promoted and remunerated by the CEO (50%) or senior management (33%) (iii) Less than 20% of the banks have independent reporting lines from the risk function to the board.

(i) All banks have at least 2 independent board members. (ii) 100% banks’ head of audit are hired, fired, promoted and remunerated by the Audit Committees (iii)All banks implement independent reporting lines from the risk function to the board.

This measure is expected to lead to i) a rebalance of the entrepreneurial mindset of the boards toward risk/return considerations in order to ensure that the banks are managed in a safe and sound manner, ii) more transparency. This measure will contribute to improved performance of the banking sector, and increased impact of the sector contribution to economic growth and development.

FOURTH PILLAR: SOCIAL SECTORS

Allow citizens to rate performance by establishing a mechanism of regular monitoring and

Prior Action 8. The Prime Minister has issued a Circular establishing a participatory process for the systematic monitoring of the performance of public services by civil society, citizens and

Participatory Monitoring User and Provider assessments

(i) Number of regions where at least one local-level public facility has conducted a participatory monitoring user/provider assessment and

(i) Number of regions where at least one local-level public facility has conducted a participatory monitoring user/provider assessment and

Improve performance monitoring and accountability for strengthening the delivery of

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evaluation by third parties of selected social programs and public services

service providers, notably for the social sectors, aimed at improving the performance of such services.

publicly disseminated the findings and improvement strategies = 0; (ii) Number of regions for which the government has published social sector expenditure and outcomes indicators: health (primary health care and outcomes, including prenatal care and maternal mortality), education (PISA and TIMSS data) and social assistance data (beneficiary demographics) = 0 (iii) number of regions that have publicly disseminated participatory monitoring operational guidelines = 0

publicly disseminated the findings and improvement strategies increases by 25%. (6 regions of 24 regions) (ii) Number of regions for which the government has published social sector expenditure and outcomes indicators: health (primary health care and outcomes, including prenatal care and maternal mortality), education (PISA and TIMSS data) and social assistance data (beneficiary demographics) (24 of 24 regions); (iii) Number of regions that have publicly disseminated participatory monitoring of service delivery guidelines=100% (24 of 24 regions)

public services.

Introduce a national outreach services policy to expand free access to care in underserved governorates for health services provided outside of traditional fixed facilities

Prior Action 9. The Prime Minister has issued a Circular creating outreach services in underserved regions based on a participatory approach, comprising the provision of a basic package of health, education and social protection services.

(i) Number of regions that have published performance standards for community-based health and social workers.

(ii) Number of regions with community health and social teams trained and operating

(i) Number of regions that have published performance standards for community-based health workers =0

(ii) Number of regions with community health and social teams trained and operating =0

(i) Number of regions that have published performance standards for community-based health workers increases by 100% (24 of 24) ii) Number of regions with community health and social teams trained and operating increases by 25% (6 out of 24)

Improve the quantity and quality of basic health service delivery, and thereby also improve health outcome indicators (notably MMR) in remote areas.

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ANNEX 3: GOVERNMENT POLICY REFORMS MATRIX (JOINTLY SUPPORTED BY WORLD BANK, AfDB, EU and AFD)

GOVERNANCE:

1. Revise the Law on Associations to address the major discretionary clauses and remove restrictions to the establishment and operation of associations. 2. Adopt a decree on public access to information (including survey data) held by government. 3. Revise the Public Procurement Code to improve efficiency and transparency without compromising quality. 4. Launch a systematic, participatory, measurable and transparent review of procedures and administrative permits in key areas /services for businesses and citizens. 5. Authorize the publication of annual reports of the Court of Auditors. 6. Modify the naming policy for hosting websites and eliminate the requirement that the host is an Internet Service Provider (ISP) to grant the opportunity to set up internet sites to any individuals meeting basic criteria. 7. Adopt an Orientation Guide to provide technical and methodological guidance to Ministries in setting up citizen participation mechanisms through ICT (facebook, online surveys etc.).

FINANCIAL SECTOR:

8. Adopt a new law to regulate and supervise the micro-finance industry. 9. Adopt a circular of good corporate governance for banks to improve the legal and regulatory framework, including the introduction of criteria for the selection senior management and board members. 10. Strengthen the capacity for monitoring financial sector stability, including by carrying out detailed stress tests of banks. 11. Adopt legislation to boost the venture capital industry in Tunisia in all its segments.

EMPLOYMENT AND REGIONAL DEVELOPMENT:

12. Adopt a decree to transfer the management of the National Fund for Employment (Fund 21/21) to the Ministry of Employment Vocational Training and launch a financial and performance audit of Fund 21/21. 13. Adopt a decree to design and implement (i) a comprehensive program of active job search for high-skilled unemployed (Amal 1), and (ii) improve employability and prospects for integration into working life of low-skilled job-seekers (Amal 2). 14. Adopt a set of economic measures to protect jobs at risk by supporting companies, including by providing targeted support through grants to cover costs of short-term debt of businesses and tax breaks based the volume of jobs. 15. Establish procedures for emergency transfers to the governorates in order to rectify the disparity from regional socio-economic criteria and clarify the mode of appointment and criteria for eligibility of special delegates to replace municipal councils.

SOCIAL SECTORS:

16. Establish a citizens monitoring mechanism for evaluating performance of selected public services on a systematic basis (in health, education, and social protection). 17. Establish a program to provide a minimum package of public services (e.g. for prenatal care, childbirth assistance, and regular monitoring visits by social workers to vulnerable families) in underserved areas. 18. Establish a mechanism to monitor the supply chain and improve the availability of medicines to underserved areas. 19. Establishing eligibility and targeting criteria for social protection programs also integrating the

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modalities of monitoring participation and monitoring by citizens. 20. Launch a financial and technical audit of the National Solidarity Fund (Fund 26/26).

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ANNEX 4: FUND RELATIONS NOTE

Tunisia—Assessment Letter for the World Bank and the African Development Bank

Macroeconomic Performance and Policies54

April 27, 2011

Tunisia entered the recent political and social turmoil from a relatively solid macroeconomic position, although unemployment remained high. The Tunisian economy experienced a gradual growth recovery and inflation remained moderate during 2010. Real GDP grew at 3.7 percent in 2010, supported by a rebound in domestic and external demand. Owing to imports recovering at a faster pace than exports, Tunisia’s external position deteriorated, with the current account deficit widening to 4.8 percent of GDP. Reflecting the authorities’ fiscal consolidation efforts, the fiscal deficit was reduced to 1.3 percent of GDP in 2010 and public debt continued to decline to about 40 percent of GDP. Financial sector indicators improved during the past few years but the banking sector remained weak. Tunisia registered a relatively strong macroeconomic performance in the past few years and the strongest growth in real GDP per capita in the region. However, unemployment remained high (at 13 percent), especially among young graduates. In addition, economic gains were not widely and fairly shared, which prevented Tunisia to achieve its full potential and further improve the welfare of its entire population. While the short-term outlook will be challenging, the medium-term prospects for economic growth in Tunisia are potentially very favorable.

Economic activity was significantly disrupted during the political and social turmoil. Industrial production declined by 12 percent in January-February, and tourism receipts by 43 percent in January-March. External reserves declined from $9.5 billion at end-December 2010 to about $8.5 billion (4.1 months of imports) in April 2011, and the stock exchange stabilized at about 15 percent below its end-2010 level. Inflation continued to decelerate to 2.9 percent in March (y-o-y), reflecting weaker domestic demand and measures taken to reduce the prices of certain staple commodities. While the internal economic and social situation is stabilizing, the conflict in Libya has put bilateral trade and tourism on hold (Libya is the main trading partner outside the EU, representing 5 percent of Tunisian exports and 10 percent of tourism receipts) and about 35,000 Tunisians working in Libya have reportedly returned to Tunisia (about 1 percent of Tunisia’s labor force). The main rating agencies have downgraded Tunisia’s credit rating, which, however, remains in the investment-grade category.

The recent turmoil and remaining uncertainties, coupled with exogenous shocks, are expected to have significant negative repercussions on the Tunisian economy in 2011. Owing to the uncertainties related to the political transition until the upcoming elections, compounded by the direct and indirect impact of the ongoing conflict in Libya, tourism and FDI—and to a lesser extent exports and remittances—are expected to decline significantly. With banks facing liquidity constraints, domestic investment could also decrease. Under a

54 This assessment reflects the conclusions of a technical IMF mission which visited Tunis during March 16-25, 2011. The last Article IV consultation was concluded in August 2010.

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baseline scenario in which tourism receipts would decline by 40 percent and FDI inflows by 20 percent, real GDP growth would significantly slow down to less than ½ percent in 2011, reflecting the negative spillovers of the contraction in tourism activity on other sectors of the economy. The fiscal stimulus envisaged by the authorities, amounting to about 3.4 percent of GDP, would help to partially mitigate the impact of the exogenous shocks and could bring real growth up to about 1½ percent this year. Nevertheless, with lower growth and the return of Tunisian workers from Libya, unemployment could increase substantially this year. With lower domestic demand and subsidies for basic food and energy products, inflation would remain moderate at 4 percent. Owing to the drop in external receipts, coupled with high international food and fuel prices, the current account deficit would deteriorate significantly to just under 8 percent. Depending on the external financing that the authorities will receive, official reserves could decline further during the remainder of the year.

The short-term economic outlook for Tunisia is subject to uncertainties and downside risks. Key downside risks to the outlook include uncertainties surrounding the political transition and the duration of the crisis in Libya, which could weigh on tourism and FDI even more than anticipated, possibly resulting in negative growth. Furthermore, the Tunisian government could face capacity and financing constraints for implementing the envisaged fiscal stimulus package thus weakening the short-term growth outlook. On the upside, tourism could recover more quickly than anticipated, other sectors, such as agriculture and energy could contribute to higher growth, and higher external financing would bolster reserves and provide more fiscal space.

Against this challenging backdrop, IMF staff supports the planned fiscal expansion in the short-term, tailored to address social demands, enhance job creation and provide support to economic growth, while preserving medium-term fiscal sustainability. The interim-government has provided some relief measures for households and corporations directly affected by the turmoil during the revolution. Furthermore, social measures targeting poor families and unemployed graduates were introduced. The coverage of social transfers to poor families was broadened and an unemployment program for young graduates was put in place. Subsidies for basic food and energy products to all households are expected to almost double to offset the increases in international market commodity prices. Moreover, a large economic and social support plan (about 2 percent of GDP) targeting in particular underdeveloped areas and unemployed youth is envisaged. As a result, the fiscal deficit would widen to 4.8 percent of GDP, despite the mobilization of sizable nontax revenues. Nevertheless, following the significant reduction achieved in the past years, public debt would remain at a sustainable level of 43 percent. While trying to address pressing needs, it will be important to avoid measures that could result in a sizable increase in the structural budget deficit and weaken fiscal sustainability over the medium term. Furthermore, mechanisms should be put in place to ensure that new social measures are well-targeted.

Mobilizing additional external financing, beyond resources currently identified, will be key to cover budgetary financing needs and support the balance of payments. Under the baseline scenario, Tunisia’s budgetary financing needs, reflecting the size of the budget deficit and debt repayment commitments, are expected to reach $3.7 billion in 2011, about 8 percent of GDP. Given the deterioration in the current account and the decline in FDI the external financing gap is expected to be $4.4 billion, about 9.5 percent of GDP Based on current indications, the government could receive about $2 billion of external financing.

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Additional external resources will be critical for implementing the envisaged fiscal stimulus without crowding out banking sector’s financing to the economy This would also help maintain a level of official foreign exchange reserves (equivalent to about 3.7 months of imports), appropriate to provide a buffer against further exogenous shocks and help preserve credit growth.

IMF staff supports the authorities’ accommodative monetary policy to support adequate credit to the economy, while retaining the flexibility to respond quickly to higher inflation or pressure on the foreign exchange markets. In the aftermath of the crisis, the Central Bank of Tunisia (BCT) has promptly intervened to support the banking sector by providing increasing liquidity to the system, with the BCT’s funding reaching 48 percent of banks’ capital in March 2011, and lowering the reserve requirement ratio from 12.5 to 5 percent in two steps. Given the growth and balance of payments outlook, IMF staff would support a foreign exchange intervention policy that would be more guided by an objective for external reserves and allow greater exchange rate flexibility.

While financial sector indicators improved during the past few years, the banking sector remained weak and subject to vulnerabilities even before the expected economic downturn. With 21 banks and net total assets of 82 percent of GDP, the banking system is small and fragmented. The three largest and weakest banks are public and represent 37 percent of deposits. In 2010, credit growth was strong (20 percent), the loans-to-deposits ratio rose to 115 percent, and liquidity became tight. At end-2010, the banking system reported a capital adequacy ratio of 12 percent, and a ratio of nonperforming loans (NPLs) above 12 percent, with a relatively low provisioning of 50-60 percent. Preliminary estimates point to a need for recapitalization of banks at end-2010 of about 2 percent GDP to bring the provisioning of NPLs to an adequate level.

The Tunisian banking sector is exposed to the risk of rising NPLs and liquidity constraints due to possible losses from the economic downturn. The banks’ portfolio is likely to deteriorate in 2011 in the context of the economic downturn, especially for banks most exposed to sectors being affected such as tourism and businesses with strong links with Libya. IMF staff recommends that the Tunisian authorities strengthen their contingency plan for the financial sector focusing on two areas: (a) introducing a higher frequency monitoring of banks’ liquidity position; and (b) carrying out an in-depth diagnostic of the situation of the banking system (including audits, stress tests, and stepping up onsite supervision to track closely banks’ solvency). Moreover, the issue of how to preserve the stability of the financial sector in the context of the economic downturn will need to be further considered. At a later stage, a plan should be developed to restructure and recapitalize some banks in needs. Fiscal financing needs and public sector debt could be significantly larger than under the baseline scenario if the authorities decided to recapitalize some of the banks or assume the costs of the recently introduced debtor relief program.

While the BCT introduced a debt rescheduling program in mid-April, the program should be better ring-fenced. The BCT authorized banks to reschedule all loan servicing falling due in 2011 for companies affected by the turmoil and the economic downturn. It also lifted the obligation that banks classify these rescheduled loans so as to be able to extend its refinancing against such loans that could have been classified otherwise. IMF staff recommends to mitigate some risks attached to this measure by: (a) stipulating stringent

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eligibility criteria to avoid that borrowers who are currently servicing their debt decide to stop repaying their loans and benefit from the rescheduling program, as no penalty would be attached in case of payment arrears; (b) rigorously keeping track of the quality of loans and of actual repayments during this period; and (c) protecting the BCT balance sheet by keeping high standards for eligibility for refinancing operations.

While the short-term outlook will be challenging, the medium-term prospects for economic growth in Tunisia are potentially very favorable if it can capitalize on its strengths and remove obstacles to private sector investment. Assuming continued appropriate macroeconomic policies, improved governance and transparency in the economy could lead to a more efficient allocation of resources and to larger private investment. Together with a well-educated workforce, this would contribute to enhancing potential growth over the medium term and foster job-creation. Higher and more inclusive growth will be critical to addressing over time the challenge of high unemployment, especially among young graduates. The transition government, including with the reform measures supported by the Development Policy Loans to be extended by the World Bank and the African Development Bank, is aiming at laying the ground for Tunisia to achieve this greater potential in a socially equitable way. The support of the international community would contribute to the success of this strategy.

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2007 2008 2009 2010 2011 2012

Output and PricesReal GDP (market price) 6.3 4.5 3.1 3.7 1.3 5.6Consumer prices (end of period) 5.1 4.0 4.0 4.1 4.0 3.3Consumer prices (period average) 3.4 4.9 3.5 4.4 4.0 3.3

Investment and SavingGross capital formation 23.8 25.9 24.8 26.4 27.3 26.8

Of which: Nongovernment 1/ 18.4 20.1 18.2 19.8 19.3 19.3

Gross national savings 21.5 22.1 21.9 21.6 19.5 21.0 Of which: Nongovernment 1/ 18.8 17.1 17.9 16.2 15.8 16.7

Public Finances 2/Revenue (excluding grants and privatization) 21.8 23.8 22.8 22.8 24.3 22.7Expenditure and net lending 24.5 24.8 25.8 24.2 29.1 26.2Budget balance (excluding grants and privatization) -2.7 -1.0 -3.0 -1.3 -4.8 -3.5Budget balance (including grants) -2.6 -0.7 -2.7 -1.2 -4.5 -3.3Primary balance (including grants) -0.2 1.4 -0.7 0.6 -2.8 -1.9Total government debt 45.9 43.3 42.9 40.4 42.8 42.8

Monetary Sector Credit to the economy 9.7 14.0 10.3 19.0 3.6 9.3

Base money 15.3 26.6 12.9 4.9 2.1 4.2Broad money 12.5 14.4 13.0 11.1 6.8 8.0Velocity of broad money 1.7 1.6 1.5 1.5 1.5 1.5One-year treasury bill rate (period average,

in percent) 5.5 5.4 4.8 4.4 … …

External Sector Exports of goods (in US$, percentage change) 29.6 26.6 -24.8 14.0 9.2 8.3 Imports of goods (in US$, percentage change) 26.9 28.7 -22.5 16.8 11.4 9.4

Merchandise trade balance -7.4 -8.9 -8.2 -10.3 -11.7 -12.5Current account excluding official transfers -2.4 -3.8 -2.8 -4.8 -7.8 -5.8Current account including official transfers -1.9 -3.6 -2.5 -4.6 -7.6 -5.6Foreign direct investment 3.7 4.8 3.5 3.1 1.1 2.5Total external debt 49.3 48.8 48.1 48.7 49.9 48.3Gross reserves (in billions of U.S. dollars) 7.9 9.0 10.6 9.5 7.7 7.0

In months of next year imports of goods and services 5.0 4.4 6.7 5.1 3.7 3.1In percent of short-term external debt (on

remaining maturity basis) 139.4 158.1 162.3 138.9 107.1 95.2

Memorandum Items:Nominal GDP (in US$ billions) 38.9 44.9 43.5 44.3 46.6 49.0Unemployment rate (in percent) 3/ 12.4 12.6 13.3 13.0 14.7 14.4Net imports of petroleum products (in millions

of U.S. dollars) -106.8 676.8 112.6 337.7 332.0 170.6Local currency per U.S. dollar (period average) 1.3 1.2 1.4 1.4 … …Real effective exchange rate (annual average,

percentage change) -2.1 -1.0 -1.1 -1.1 …Stock market index 4/ 2,614.1 2,892.4 4,291.7 5,112.5 4,394.8 …

Sources: Tunisian authorities; and Fund staff estimates.

1/ Includes public enterprises. 2/ The fiscal year is the calendar year. 3/ Based on the ILO definition of the labor force. 4/ TUNINDEX (1000=12/31/1997). Latest data: 4/1/2011.

(Main export: textiles, electronic and mechanical goods, energy, tourism; 2009)

Tunisia: Selected Economic Indicators, 2007–12(Quota: SDR 286.5 million)

(Population: 10.5 million; 2010)(Per capita GDP: $4,200; 2010)(Poverty rate: 3.8 percent; 2005)

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ANNEX 5: KEY FACTS ON THE STRUCTURE OF UNEMPLOYMENT IN TUNISIA

The majority of the unemployed in Tunisia is composed by young, low-skilled, male, urban workers. According to data from the 2009 Labor Force Survey (LFS), the majority of all unemployed individuals reside in urban areas (65 percent), are male (62 percent), between ages 15 and 34 (85 percent), and have at most completed secondary education (71 percent). These characteristics reflect the demographics of the participation in the labor force.

Long-term unemployment is wide-spread. As much as 37 percent of the unemployed are out of work for over 12 consecutive months, and 15 percent for over 24 months. Reflecting the structure of unemployment, long-term unemployed are mainly young, low skilled, urban workers. The majority long-term unemployment resides in urban areas (64 to 66 percent), is between the ages 15 and 34 (75 to 82 percent), and has attained at most secondary education (65 to 69 percent). Long-term unemployment has been increasing rapidly in rural areas and among adults.

Unemployment rates are proportionally most severe for young graduates. Unemployment rates vary substantially by level of age, level of schooling, gender, and by provinces. The unemployment is highest for younger age groups, reaching close to 35 percent for the 15-19 age group, 29 percent for individuals aged between 20-24, and 25 percent for the 25-29 age group. Unemployment rates are particularly high among youth (15-29) who have attained tertiary education at approximately 44 percent and have been increasing drastically in recent years (from 34 percent in 2005). Unemployment in 2009 was much higher for women (at 19 percent) than for men (at 12 percent). There is also a large gender gap in labor force participation (92 percent for men and 48 percent for women). Interestingly the gender gap reflects solely the very low participation of women non-graduates (i.e. there is almost no gender gap amongst graduates). As a result of the large participation of female university graduates, unemployment rate for graduates (at 20 percent) is much higher than for non-graduates (at 13 percent). There is also large variance in unemployment by province, ranging from around 10 percent in more developed provinces (Zaghouan, Tunis, Sfax, Monastir) to over 20 percent in interior rural provinces at the border with Algeria (Jendouba, Gafsa, and Tataouine).

Whereas the unemployment rate for individuals without education or with primary education only have been falling lately, that of university graduates has been increasing fast. The unemployment rates for university graduates has increased steadily from 8 percent in 1999, to 13 percent in 2005, and to 20 percent in 2009, surpassing those for individuals with lower levels of education. Furthermore, unemployment rates for this group are expected to worsen in the near future. Assuming that the main economic and demographic trends observed between years 2005 and 2010 remain stable (i.e., a moderate rate of economic growth oscillating around 5 percent per year, an increase in labor supply of graduates of approx 12 percent per year, and an increase in labor demand for graduates of approx 8 percent per year), unemployment rates will continue to deteriorate rapidly in the years to come and could reach 17 percent by 2014, and as much as 34 percent among university graduates. This corresponds to a deficit of jobs for university graduates of approximately 27,000 jobs per year during 2010 and 2014 (out of a total deficit of jobs of approx 34,000 per year). In addition to graduates, unemployment rates have also been increasing rapidly among women, up from 15 percent in 2005 to 19 percent in 2009. Among men, unemployment rates have actually decreased slightly over the same period. In terms of geographical distribution, between 2005 and 2009 unemployment has remained stable in urban areas at 13 percent, and has increased in rural areas from 13 to 15 percent. The increase has affected predominantly rural regions with already high levels of unemployment in 2005 (mostly regions bordering with Algeria).

Young graduates not only face higher rates of unemployment but also have a higher probability to remain unemployed for a long time (between 2 and 5 years). The average duration of unemployment is much longer for university graduates than other job seekers: 28 months for university graduates against 19 for non-graduates (LFS 2005). The share of all university graduates who have being seeking employment for more than 12 and 24 consecutive months is high at 39

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percent and 17 percent in 2009 respectively (but has been decreasing slightly since 2005). This is compounded by the fact that non-graduates (especially men) tend to be more entrepreneurial that graduates: 19 percent of non-graduates are self-employed versus only 5 percent for graduates, meaning that most graduates prefer queuing for a salaried employment instead of creating a business. While a proportion of university graduates now apply for lower skilled job positions (downgrading), those that can afford it seem to disdain manual work and prefer queuing for a secure, well-paid job vacancy.

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ANNEX 6: RECENT ECONOMIC DEVELOPMENT

Growth and Investment

Tunisia had started in 2010 to recover from the global crisis. GDP growth was 3.7 percent in 2010, up from 3.1 in 2009, which is still well below the 4.5 percent in 2008 and the average of the previous decade. Reaping the benefits of the sound macroeconomic policies implemented in recent years, the Tunisian authorities were able to loosen fiscal and monetary policies respond to the crisis and mitigate the impact of the worsening international environment (which has been particularly acute among Tunisia’s main trading partners in the European Union). Growth in 2010 was primarily driven by the upturn in demand for manufacturing sector exports, especially mechanical and electrical goods, phosphate and chemicals, and to lesser extent in textiles, but was mitigated by the weak performance of the agricultural sector. Overall, exports of goods and services grew by 13 percent in 2010 (in real terms), recovering from a drop of 8 percent in 2009. In addition to the resumption of international trade, the growth recovery also benefited from the increase in domestic private investment, and the growth in private and public consumption (by 4.3 and 4.4 percent, respectively).

Private investment was contributing to the rebound. Private investment suffered as a result of the global economic slowdown, but this was partly compensated by an increase in public investment programs. Private investment decreased in 2009 by almost 2 percent of GDP (18.2 percent from 20.1 percent of GDP in 2008). The reduction was entirely due to a drop in FDI which decreased from 5.7 percent of GDP in 2008 to 3.5 percent in 2009. This was only partly compensated by a proactive public investment policy which saw public investment increase from 5.8 percent of GDP in 2008 to 6.6 percent in 2009, resulting in a reduction of just over 1 percent in total investment between 2008 and 2009. Private investment increased back to 19.8 percent in 2010 bringing total investment back to pre-crisis levels. However, this has been driven by domestic private investment which increased from 14.8 of GDP in 2009 to 16.6 percent in 2010, while FDI remained at 3.2 in 2010 which is substantially below pre-crisis levels.

Fiscal Policy

The authorities maintained a flexible fiscal stance to accompany the economic recovery. The fiscal position improved markedly in 2010 as a result the incipient recovery. The initial 2010 budget maintained a mildly expansionary fiscal stance to ensure that the ongoing economic recovery would not be undermined by a withdrawal of the fiscal stimulus measures introduced in 2009.55 Nevertheless, the budget deficit narrowed to 1.3 percent of GDP in 2010 (two percentage points smaller than anticipated in the 2010 budget law), from 3 percent of GDP in 2009. The good fiscal performance was due the better than anticipated revenue performance and lower than budgeted current and capital expenditures.56 The food and fuel prices were relatively stable resulting into an unchanged envelope for the cost of subsidy measures at approximately 2.2 percent of GDP in 2010.57 Development expenditures stayed relatively high as a result of the fiscal stimulus plan adopted by the government to mitigate the impact of the global crisis (mainly accelerating public investment projects and providing direct support to businesses affected by the crisis). The 2010 budget deficit was fully funded on the

55 Expenditures in 2009 were increased by a supplementary budget introduced at end-June 2009 to provide a further economic stimulus in response to the global economic slowdown by earmarking approximately 1.4 percent of GDP (or US$480 million). 56 On the revenue side, tax revenues were conservatively estimated to remain constant in the budget, but budget execution data for 2010 indicates they were approximately 1.2 percent of GDP above projections (a marginal increase in tax revenues from 19.9 percent of GDP in 2009 to 20.0 percent in 2010), mainly due to good performance in direct taxes and VAT. On the expenditure side, current and capital expenditures were below budgeted levels (by on 0.6 percentage points, which corresponds to a reduction in expenditures by 1.4 percentage points compared to 2009). 57 Public wages remain a major source of fiscal pressure in a context in which the wage bill represents 50 percent of current expenditures. On the other hand, the authorities intended to control expenditures on food subsidies by setting a ceiling of TND1500 million (approximately 0.8 percent of GDP) annually for the next 5 years, and to better target these expenditures to the poorest and most vulnerable households.

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internal market and from external official borrowing, as the authorities preferred to refrain from accessing international capital markets in the context of the financial crisis and the uncertainties about sovereign debt.58

Table A1. Fiscal Framework 2008-2013

2008 2009 2010 2011 2012 2013Act. Act. Est. Proj. Proj. Proj.

(Percent of GDP)

Total Revenues and grants 24.1 23.1 23.1 23.4 23.5 24.4Revenue 23.8 22.8 23.1 23.2 23.3 24.2

Of which: Tax revenues 20.5 19.9 20.1 19.3 20.3 21.4Total expenditure and net lending 24.8 25.8 24.4 28.2 27.4 27.0

Current expenditure 19.0 18.1 18.1 20.6 20.5 20.4Total Transfers and Subsides 5.0 3.7 3.6 4.4 4.2 4.2Wages and salaries 10.4 10.7 10.7 11.2 10.8 10.8Interest payments 2.1 2.0 1.7 1.5 1.6 1.6

Capital expenditure 6.1 7.7 6.4 7.6 6.9 6.5Domestic primary balance 1.1 -1.0 0.3 -3.2 -2.5 -1.1Overall balance (excluding grants) -1.0 -3.0 -1.3 -4.8 -4.1 -2.7Total financing 1.0 3.0 1.3 4.8 4.1 2.7

External (net) 0.2 0.2 -0.3 0.2 0.5 0.6Domestic (net) 0.8 2.8 1.6 4.6 3.5 2.1

Memorandum items:Total external debt 49.2 49.9 47.4 45.7 44.9 43.2Public debt (as percent of GDP) 43.3 43.4 40.4 43.6 43.8 43.5

Domestic Debt 16.9 17.6 15.9 18.1 20.0 21.2 External Debt 26.3 25.8 24.5 25.5 23.8 22.3Sources: Tunisian Authorities, World Bank estimates; (Projections for 2012 and 2013 by World Bank staff).

Monetary Policy, Inflation and Exchange Rate

Inflation remained subdued at 4.5 percent in 2010. Consumer and producer price inflation slowed down during 2009 and averaged 3.7 percent and 2.2 percent respectively, mainly as a result of a decline in food prices and lower world prices for raw materials and semi-finished products. The recovery in food prices, which started in the first half of 2010, together with the previously planned annual increases in public-sector pay and the minimum wage (which led to an increase also in non-agricultural private-sector wages by more than 4 percent), contributed to the acceleration of year-on-year CPI to 5 percent in May 2010 leading to an average inflation of 4.5 percent in 2010. The increase in inflation was however contained by an appropriate monetary policy and moderate price increases in other sectors such as housing, transport, and services (nonfood CPI hovered around 3 percent).59

The Central Bank of Tunisia (BCT) had kept a flexible and prudent monetary stance during the international financial crisis, initially easing liquidity and lowering interest rates, and subsequently intervening to absorb excess liquidity and control inflationary pressures. The BCT reduced the reserve requirements for all banks from January 2009, to ease credit flow and increase liquidity in the banking system and also reduced its key policy rate by 75 basis points in February 2009 to 4.5 percent. It also increased the capital base of the Bank for Small and Medium Firms (Banque de Financement des Petites et Moyennes Enterprises). Subsequently, the authorities successfully tried to strike a balance between not undermining domestic demand and absorbing the abundant liquidity. The BCT maintained a relatively tight monetary stance, intervening sporadically to 58 In order to address financing needs without crowding out the private sector and without recourse to the international capital markets, the government decided to significantly increase external official borrowing in 2009 and 2010. 59 Tunisia has a good track record in prudent monetary policy and keeping inflation under control. The average CPI has been hovering below 3.5 percent since the year 2000, except for a few short spells such as in mid-2008 where inflation reached 5.5 percent in July 2008 as a result of the food and fuel price spike.

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absorb any excess liquidity in the banking system to contain inflationary pressures. This led to the recent policy mix of keeping interest rates constant while gradually increasing back the reserves requirements ratio. As liquidity was still abundant and credit growth was edging up in early 2010, the BCT increased the reserve requirement ratio twice, from 7.5 percent to 10 percent in March 2010 and then to 12.5 percent in May 2010. These actions, combined with a decline in foreign exchange reserves, reduced excess liquidity in the banking system.

Balance of Payments

The current account deficit increased in 2010, reflecting deterioration in the trade balance and stagnating services and income balance. The current account deficit decreased from 3.8 percent of GDP in 2008 to 2.8 percent in 2009 mainly the result of the global economic slowdown (falling commodity prices and imports of capital goods), but widened to 4.8 percent of GDP in 2010, reflecting the re-launch of re-exports and capital goods sector (which has high import content). Tunisia’s revenues from tourism and remittances from Tunisians abroad remained broadly stable in 2010.

Financial and capital inflows were much lower in 2009 and 2010 as a result of the substantial drop in FDI. This was compounded in 2010 by a reduction in short term capital flows.

Table A2. Balance of Payments 2008-2013

2008 2009 2010 2011 2012 2013Act. Act. Est. Proj. Proj. Proj.

(USD millions)Current account balance (excluding grants) -1,712 -1,234 -2,118 -2,892 -1,972 -1,416

Trade balance -4,010 -3,701 -5,092 -5,471 -6,666 -5,717Exports, f.o.b. (millions of U.S. dollars) 19,184 14,418 15,852 16,936 16,497 17,357Imports, c.i.f. (millions of U.S. dollars) 23,194 18,119 20,944 22,407 23,163 23,074

Net Factor Income -2,282 -2,019 -1,182 -1,651 -1,922 Net transfers 2,223 2,287 3,110 2,723 3,104

Of which: workers remittances 1,952 2,127 1,915 2,298 2,849

Capital account 79 146 122 191 201 203Financial account 3,295 2,762 624 892 1,885 1,971

Direct foreign investment (net) 2,558 1,525 1,417 834 1,370 1,545Medium- and long-term loans (net) -10 196 -533 -312 137 56

Disbursement 1,416 1,543 1,850 2,215 2,429 2,058Amortization (-) -1,426 -1,346 -2,383 -2,527 -2,293 -2,002

Short-term/other capital flows 747 1,040 -260 370 378 369

Capital and financial balance 3,374 2,907 746 1,083 2,085 2,174

Overall Balance 1,662 1,673 -1,372 -1,810 113 757Changes in reserves

1-1,027 -1,673 1,459 1,900 -23 -667

Memorandum items:Current account balance/GDP (excluding grants) -3.8 -2.8 -4.8 -6.2 -4.0 -2.7Current account balance/GDP (including grants) -3.6 -2.5 -4.5 -6.0 -3.8 -2.5Gross international reserves (USD billion) 9.0 11.1 9.6 7.7 7.7 8.4

In months of imports of GNFS2

4.0 6.3 5.0 3.5 3.5 3.7Exchange rate (TND per USD, period average) 1.232 1.350 1.430 1.445 1.482 1.519

Sources: Tunisian authorities, World Bank staff estimates; (Projections for 2012 and 2013 by World Bank staff). Notes: 1. Differs from the overall balance because of valuation effects.2. End-of-year reserves over current year imports.

A tightening in global conditions during the global financial crisis also led the government in 2009 to revise its sources of financing to rely solely on domestic sources and development

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partners. To address financing needs without crowding out the private sector and without recourse to the international capital markets, the government decided to limit domestic financing and increase external official borrowing.60 The domestic bond market financed 100 percent of the budget deficit while the World Bank, the African Development Bank and the EU together provided budget support of US$600 million (through a development policy loan) that helped Tunisia address additional financing needs. Along the same lines, the central government deficit in 2010 and 2011 was expected to be financed mostly through domestic sources and development partners. This stance is likely to be maintained in 2011 as credit ratings have been revised downwards and spreads have widened due to the uncertain political situation.61

The exchange rate policy pursued by the BCT has stabilized the real exchange rate of the dinar. Against the backdrop of high volatility among the major currencies, the real exchange rate of the dinar remains in line with its fundamentals. Gross official reserves decreased from US$ 11.1 billion in 2009 to US$ 9.6 billion as of December 2010, which is still a comfortable level (around 5 months of imports).

60 The global financial crisis led to a sharp increase in international spreads in the late 2008 and first half of 2009. While spread decreased gradually in the second half of 2009, they remain higher than their pre-crisis levels. 61 Following the upheaval, Moody’s, R&I, S&P, and Fitch all downgraded Tunisia's sovereign rating by one notch. The EMBIG Tunisia Sovereign Spread increased by 150 bpt between January 10 and February 7, but has since stabilized. Despite the recent increase in January jump since December, Tunisia’s EMBI is still the lowest in non-GCC MENA.

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ANNEX 8: COUNTRY AT A GLANCE (includes country map)

Tunisia at a glance 5/6/11

M . East LowerKey D evelo pment Indicato rs & North middle

Tunisia Africa income(2010)

Population, mid-year (millions) 10.4 331 3,811Surface area (thousand sq. km) 164 8,778 31,923Population growth (%) 1.0 1.8 1.2Urban population (% of total population) 67 57 40

GNI (Atlas method, US$ billions) 42.8 1,076 7,709GNI per capita (A tlas method, US$) 1,070 3,311 2,046GNI per capita (PPP, international $) 7,820 7,710 4,481

GDP growth (%) 3.7 4.8 7.5GDP per capita growth (%) 2.7 2.9 6.3

(mo st recent est imate, 2003–2010)

Poverty headcount ratio at $1.25 a day (PPP, %) 3 4 ..Poverty headcount ratio at $2.00 a day (PPP, %) 13 17 ..Life expectancy at birth (years) 74 71 68Infant mortality (per 1,000 live births) 18 29 44Child malnutrition (% of children under 5) 3 12 25

Adult literacy, male (% of ages 15 and o lder) 86 82 87Adult literacy, female (% of ages 15 and older) 70 65 73Gross primary enro llment, male (% of age group) 108 106 109Gross primary enro llment, female (% of age group) 106 104 105

Access to an improved water source (% of population) 94 87 86Access to improved sanitation facilities (% of population) 85 84 50

N et A id F lo ws 1980 1990 2000 2010 a

(US$ millions)Net ODA and official aid 240 391 222 479Top 3 donors (in 2008): European Commission 1 25 71 230 France 79 76 93 160 Japan 5 27 72 54

Aid (% of GNI) 2.8 3.3 1.1 1.1A id per capita (US$) 38 48 23 46

Lo ng-T erm Eco no mic T rends

Consumer prices (annual % change) .. 6.5 3.0 3.8GDP implicit deflator (annual % change) 12.8 4.5 3.3 2.9

Exchange rate (annual average, local per US$) 0.4 0.9 1.4 1.4Terms of trade index (2000 = 100) .. 64 100 100

1980–90 1990–2000 2000–10

Population, mid-year (millions) 6.4 8.2 9.6 10.4 2.4 1.6 1.0GDP (US$ millions) 8,743 12,314 21,473 43,527 3.3 4.7 4.5

Agriculture 14.1 15.7 10.0 8.2 2.8 2.3 1.6Industry 31.1 29.8 26.8 28.8 3.1 4.6 -6.1 M anufacturing 11.8 16.9 16.3 15.6 3.7 5.5 -42.9Services 54.8 54.5 51.5 54.4 3.5 5.3 6.5

Household final consumption expenditure 61.5 63.6 60.6 61.9 2.9 4.3 5.6General gov't final consumption expenditure 14.5 16.4 16.7 16.2 3.8 4.1 5.5Gross capital fo rmation 29.4 27.1 26.1 24.8 -1.8 3.6 3.7

Exports o f goods and services 40.2 43.6 39.5 45.0 5.6 5.1 3.6Imports o f goods and services 45.6 50.6 42.9 48.0 1.7 3.8 4.9Gross savings 25.1 22.2 22.1 22.0

Note: Figures in italics are for years other than those specified. 2009 data are preliminary. .. indicates data are not available.a. A id data are for 2008.

Development Economics, Development Data Group (DECDG).

(average annual growth %)

(% of GDP)

6 4 2 0 2 4 6

0-4

15-19

30-34

45-49

60-64

75-79

percent of total population

Age distribution, 2008

Male Female

0

10

20

30

40

50

60

70

80

1990 1995 2000 2007

Tunisia Middle East & North Africa

Under-5 mortality rate (per 1,000)

0

2

4

6

8

10

95 05

GDP GDP per capita

Growth of GDP and GDP per capita (%)

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Tunisia

B alance o f P ayments and T rade 2000 2010

(US$ millions)

Total merchandise exports (fob) 5,840 15,852Total merchandise imports (cif) 8,556 20,944Net trade in goods and services -705 -2,019

Current account balance -821 -2,118 as a % of GDP -3.8 -2.8

Workers' remittances and compensation o f employees (receipts) 796 2,127

Reserves, including gold 1,821 9,600

C entral Go vernment F inance

(% o f GDP)Current revenue (including grants) 21.8 23.1

Tax revenue 19.6 20.1Current expenditure 18.0 18.1

T echno lo gy and Infrastructure 2000 2010Overall surplus/deficit -3.4 -1.3

Paved roads (% of to tal) 68.4 65.8Highest marginal tax rate (%) Fixed line and mobile phone Individual .. .. subscribers (per 100 people) 11 95

Corporate .. 30 High techno logy exports (% o f manufactured exports) 3.4 4.9

External D ebt and R eso urce F lo ws

Enviro nment(US$ millions)Total debt outstanding and disbursed 11,307 21,191 Agricultural land (% of land area) 61 63Total debt service 1,906 3,009 Forest area (% of land area) 6.2 7.0Debt relief (HIPC, M DRI) – – Terrestrial pro tected areas (% of surface area) .. 1.5

Total debt (% o f GDP) 52.7 48.1 Freshwater resources per capita (cu. meters) 429 406Total debt service (% of exports) 20.1 12.6 Freshwater withdrawal (billion cubic meters) 2.6 ..

Foreign direct investment (net inflows) 752 1,595 CO2 emissions per capita (mt) 2.1 2.3Portfo lio equity (net inflows) -18 -89

GDP per unit o f energy use (2005 PPP $ per kg of o il equivalent) 7.1 8.2

Energy use per capita (kg of o il equivalent) 764 864

Wo rld B ank Gro up po rt fo lio 2000 2010

(US$ millions)

IBRD Total debt outstanding and disbursed 1,211 1,294 Disbursements 136 115 Principal repayments 150 206 Interest payments 79 30

IDA Total debt outstanding and disbursed 39 18 Disbursements 0 0

P rivate Secto r D evelo pment 2000 2010 Total debt service 2 2

Time required to start a business (days) – 11 IFC (fiscal year)Cost to start a business (% of GNI per capita) – 5.7 Total disbursed and outstanding portfo lio 11 280Time required to register property (days) – 39 o f which IFC own account 11 179

Disbursements fo r IFC own account 1 109Ranked as a major constraint to business 2000 2010 Portfo lio sales, prepayments and (% of managers surveyed who agreed) repayments for IFC own account 1 6 n.a. .. .. n.a. .. .. M IGA

Gross exposure – –Stock market capitalization (% of GDP) 13.2 21.0 New guarantees – –Bank capital to asset ratio (%) 7.5 ..

Note: Figures in italics are for years o ther than those specified. 2009 data are preliminary. 5/6/11.. indicates data are not available. – indicates observation is not applicable.


0 25 50 75 100

Control of corruption

Rule of law

Regulatory quality

Political stability

Voice and accountability

Country's percentile rank (0-100)higher values imply better ratings

2009

2000

Governance indicators, 2000 and 2009

Source: Kaufmann-Kraay-Mastruzzi, World Bank

IBRD, 1,294

IDA, 18 IMF, 0

Other multi-lateral, 5,412

Bilateral, 3,683

Private, 5,983

Short-term, 4,801

Composition of total external debt, 2010

US$ millions

92

Millennium Development Goals Tunisia

With selected targets to achieve between 1990 and 2015(estimate closest to date shown, +/- 2 years)

Go al 1: halve the rates fo r extreme po verty and malnutrit io n 1990 1995 2000 2010

Poverty headcount ratio at $1.25 a day (PPP, % of population) 5.9 6.5 2.6 .. Poverty headcount ratio at national poverty line (% of population) 7.4 7.6 .. .. Share o f income or consumption to the poorest qunitile (%) 5.9 5.6 5.9 .. Prevalence of malnutrition (% of children under 5) 8.5 8.1 .. 3.3

Go al 2: ensure that children are able to co mplete primary scho o ling

Primary school enro llment (net, %) 93 97 96 98 Primary completion rate (% of relevant age group) 80 92 88 93 Secondary school enro llment (gross, %) 44 58 76 92 Youth literacy rate (% of people ages 15-24) 84 90 93 96

Go al 3: e liminate gender disparity in educat io n and empo wer wo men

Ratio o f girls to boys in primary and secondary education (%) 85 92 99 103 Women employed in the nonagricultural sector (% of nonagricultural employment) .. 23 24 25 Proportion of seats held by women in national parliament (%) 4 7 12 23

Go al 4: reduce under-5 mo rtality by two - thirds

Under-5 mortality rate (per 1,000) 50 36 27 21 Infant mortality rate (per 1,000 live births) 40 30 23 18 M easles immunization (proportion o f one-year o lds immunized, %) 93 91 95 98

Go al 5: reduce maternal mo rtality by three-fo urths

M aternal mortality ratio (modeled estimate, per 100,000 live births) 130 110 83 60 B irths attended by skilled health staff (% of to tal) 69 81 90 95 Contraceptive prevalence (% of women ages 15-49) 50 60 66 60

Go al 6: halt and begin to reverse the spread o f H IV/ A ID S and o ther majo r diseases

Prevalence of HIV (% of population ages 15-49) .. .. 0.1 0.1 Incidence of tuberculosis (per 100,000 people) 29 29 24 24 Tuberculosis case detection rate (%, all fo rms) 87 93 90 94

Go al 7: halve the pro po rt io n o f peo ple witho ut sustainable access to basic needs

Access to an improved water source (% of population) 81 86 90 94 Access to improved sanitation facilities (% of population) 74 78 81 85 Forest area (% of to tal land area) 4.1 5.2 6.2 7.0 Terrestrial protected areas (% of surface area) .. .. .. 1.5 CO2 emissions (metric tons per capita) 1.6 1.8 2.1 2.3 GDP per unit o f energy use (constant 2005 PPP $ per kg o f o il equivalent) 6.6 6.8 7.1 8.2

Go al 8: develo p a glo bal partnership fo r develo pment

Telephone mainlines (per 100 people) 3.7 5.8 10.0 12.0 M obile phone subscribers (per 100 people) 0.0 0.0 1.2 83.3 Internet users (per 100 people) 0.0 0.0 2.7 27.1 Personal computers (per 100 people) 0.3 1.4 2.2 9.7

Note: Figures in italics are for years o ther than those specified. .. indicates data are not available. 5/6/11


T unisia

0

25

50

75

100

125

2000 2002 2004 2006 2008

Primary net enrollment ratio

Ratio of girls to boys in primary & secondary education

Education indicators (%)

0

20

40

60

80

100

120

2000 2002 2004 2006 2008

Fixed + mobile subscribers Internet users

ICT indicators (per 100 people)

0

25

50

75

100

1990 1995 2000 2007

Tunisia Middle East & North Africa

Measles immunization (% of 1-year olds)

93

TUNISIA COUNTRY MAP IBRD 33500

for official use only - world bank · the world bank for official use only report no. 61627-tn...

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