Document of C I 5ECO The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE

Transcription

1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Document of C I 5ECO The World Bank FOR OFFICIAL USE ONLY REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR AN ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT March 2, 1982 Report No. P-3224-TUN 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 authoriation.

2 REPUBLIC OF TUNISIA CURRENCY EQUIVALENTS Currency Unit - Tunisian Dinar (D) The exchange rate of the Tunisian Dinar is floating. The rate used in the President's and Staff Appraisal Reports, which approximates the current rate, is: US$1 = D 0.5 DI = US$2.0 FISCAL YEAR January 1 - December 31 ACRONYMS AND ABBREVIATIONS API BCT BDET BTKD CTM EEC EMI NIS SIAT SOGITEX SSI STUSID Industrial Investment Promotion Agency (Agence de Promotion des Investissements Industriels) Central Bank of Tunisia (Banque Centrale de Tunisie) Economic Development Bank of Tunisia (Banque de Developpement Economique de Tunisie) Tunisian-Kuwaiti Development Bank (Banque Tuniso-Koweitienne de Developpement) Technical Center for Mechanical Industries (Centre Technique de la Mecanique) European Economic Community Electrical and Mechanical Industries National Institute of Standardization and Quality Control Tunisian-Arab Investment Company (Soci4te d'investissement Arabe de Tunisie) General Textile Industries Inc. (Socidte G4nerale des Industries Textiles) Small-Scale Industries Tunisian-Saudi Investment and Development Company (Societe Tuniso-Saoudienne d'investissement et de Developpement)

3 FOR OFFICIAL USE ONLY REPUBLIC OF TUNISIA ELECTRICAL AND MECHANICAL INDUSTRIES Loan and Project Summary Borrower: Guarantor: Amount: Terms: BDET Relending Terms Project Description: Banque de Developpement Economique de Tunisie (BDET) Republic of Tunisia US$30.5 million in various currencies, including a capitalized front-end fee. The loan would be repayable according to a composite amortization schedule not to exceed 15 years, including a 3-year grace period, and reflecting the amortization schedule of the subloans; interest at 11.6 percent per annum. Interest rates would be 11 percent per annum at the minimum, including commissions and fees, with repayment periods of eight to twelve years. The foreign exchange risk would be borne by the Government. The proposed $30.5 million loan to BDET would consist of a $28 million Credit Line of which one half (Part A) for financing priority electrical and mechanical industries (EMI), the other half (Part B) for general purpose lending to industry; a $2 million Technical Assistance Subloan from BDET to the Government (Part C) to support the establishment of a Technical Center for Mechanical Industries and a National Institute of Standardization and Quality Control, and the preparation of an Effective Protection Study; and a $0.5 million to finance the front-end fee. Also, in the context of the project: BDET would be required to allocate $30 million of its overall lending to EMI in , of which two-thirds to priority EMI subsectors; a set of incentives specific to EMI affecting tariff protection, price controls, exports and financing would be implemented; and two studies on development strategies for the platework and foundry subsectors would be prepared. 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.

4 - ii - Benefits and Risks: The proposed project would contribute 20 percent of projected investments in EMI under the Sixth Plan ( ), would create 6,000 jobs, and generate about *30 million in foreign exchange savings. It would also improve the institutional and policy framework affecting the development of EMI in Tunisia. The possible risk of delays in the effective operation of the two institutions to be created under the project, and in the quality of their services, will be minimized through intensive Bank monitoring and supervision. bank Loan US$ Million Disbursements: Fiscal Year: Annual; Cummulative: Appraisal Report: Report No TUN of March 2, 1981

5 INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE IBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE BANQUE DE DEVELOPPEMENT ECONOMIQUE DE TUNISIE WITH THE GUARANTEE OF THE REPUBLIC OF TUNISIA FOR AN ELECTRICAL AND MECHANICAL INDUSTRIES PROJECT 1. I submit the following report and recommendation on a proposed loan to the Banque de D4veloppement Economique de Tunisie (BDET) to be guaranteed by the Republic of Tunisia, for the equivalent of US$30.5 million of which $28 million would be relent to finance electrical, mechanical and other industrial subprojects; $2 million would be relent to the Government of Tunisia to finance the technical assistance required for the establishment of a Technical Center for Mechanical Industries and a National Institute of Standardization and Quality Control, and the preparation of an Effective Protection Study; and $0.5 million would finance the front-end fee. The interest rate would be 11.6 percent per annum. The $28 million would be relent by BDET at a minimum interest rate of 11 percent per annum with repayment periods of eight to twelve years. The proposed loan would be repaid according to a composite amortization schedule not to exceed 15 years, including 3 years of grace, and reflecting the amortization schedule of the subloans. PART I - THE ECONOMY 1/ 2. The last economic report entitled "Tunisia - Country Economic Memorandum" (No.3399-TUN) was issued on September 15, An economic mission visited Tunisia in October 1981 to review a draft of the Sixth Development Plan ( ); this part reflects its preliminary findings. Country Data sheets are attached in Annex I. 3. Much of Tunisia is arid or semi-arid. Only three percent of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuation in rainfall. Tunisia's most important raw materials are phosphates, petroleum, and natural gas; although the known exploitable reserves of oil and gas are approaching depletion, and those of phosphate deposits are of relatively low quality, there are recent promising indications of new reserves, but it is too early to assess their exact potential. There is also considerable tourism potential, and efforts have been made during the last decade to develop it rapidly. 4. Since independence in 1956, Tunisia has undertaken a massive effort towards development of its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, the 1/ Part I is reprinted from President's Report No. P-3219-TUN of February 26, 1982 for a Fifth Highway (Rural Roads) Project.

6 infant mortality rate declined from 150 per thousand in the early 1960s to 90 per thousand at the end of the 1970s, the adult literacy rate increased from under 15 percent to about 62 percent, and average caloric supply per capita increased from about 80 to 112 percent of minimum standard requirements. The sharp decrease in mortality rates was not fully compensated by the simultaneous decrease in fertility and birth rates, despite an active family planning policy pursued by the Government. Therefore, the annual demographic growth rate decreased only slightly from 2.6 percent in the 1960s to 2.4 percent in the 1970s. Moreover, after 1976, the net emigration of Tunisians abroad was sharply reduced by restrictive measures taken in the EEC countries and Libya. As a consequence, the residential population of 6.57 million by the middle of 1981 exceeds the level projected five years earlier by 130, Agriculture still occupies nearly one out of every three Tunisians in the labor force. To accelerate job creation, more than half of total investments of the Fifth Plan ( ) was allocated to directly productive sectors, but the direct employment effects of the leading sectors (petroleum, phosphate mining and processing, and tourism) are small. These sectors, however, make a vital contribution to GDP, public savings, and exports. They provided 65 percent of the country's foreign exchange earnings in 1980 while manufacturing activities, except phosphate-based chemicals, provided 17 percent. 6. Recent Economic Developments. During the Fifth Plan the growth performance differed from the impressive growth achieved from 1971 to 1976, not so much in terms of overall growth (6.3 percent p.a. vs. 8.6 percent p.a.) as in terms of the underlying growth factors; output in agriculture and in food industries has grown on average below the demographic rate since 1976, partially as a result of bad weather conditions; textile production declined in 1978, and tourism development slowed down in 1977, both because of the slump in European markets. By contrast, industry other than textiles, particularly energy, phosphate processing, construction, and construction materials, expanded at a fast pace. 7. In spite of the considerable increase in domestic demand, particularly in investments, the balance of payments situation remained favorable from 1976 to Imports in current prices grew at a slower pace than exports, and the terms of trade improved significantly due to sharply higher post-1974 export prices for crude oil. As a result, the resource gap remained relatively small, and domestic savings financed on average over 76 percent of investment, which increased from an average of 23 percent of GDP for to 30 percent of GDP for The current account deficit averaged $450 million per year ( ), and was easily financed; grant aid and private investments (mainly for oil exploration) provided about 30 percent, while the remainder was mainly covered by long-term foreign borrowing. Thus, during the 1970s total foreign debt increased little relative to GDP, and the debt service ratio dropped. 8. The public sector has played a major role in mobilizing and redistributing domestic resources. Central Government revenues were equivalent to about one-third of GDP on average for the Fifth Plan period, one of the

7 highest shares among middle-income countries. Over 30 percent of these revenues was saved, and public savings financed close to two-thirds of total Government capital expenditures. This comfortable public finance situation permitted a rapid increase in subsidy payments to private consumers and public enterprises. Such tranfers accounted for 16 percent of total current budget outlays and over 4 percent of GDP in Open and hidden unemployment is the most serious problem for the Tunisian economy at present. During , although job creation objectives were achieved in all non-agricultural sectors except construction, these sectors could only absorb 70 percent of new job seekers at a time when migration to Libya and Europe decreased rapidly. The overall unemployment rate, estimated at about 13 percent of the labor force in 1980, has therefore not declined. 10. Medium-term Prospects. The main objectives of the Fifth Development Plan will probably be achieved, except for the employment target. It is estimated that the actual GDP growth will fall short by about 1 percent of the planned rate of 7.3 percent p.a., while the investment objective of $9.8 billion in current prices, or 30 percent of GDP, will be fully met. Completion of some large projects in the public sector (steel, expansion of the oil refinery) has, however, been delayed. Private sector investments, both foreign and national, will exceed Plan targets. 11. The draft Sixth Development Plan ( ) has been prepared and should be discussed by the newly elected Parliament in June The main objectives are employment generation, export promotion, and more rapid growth in the three least developed regions of the country (North-West, Center-West, and South). Sectoral priority is to be given to agriculture, tourism, and electrical and mechanical industries. 12. The outlook for investment and growth during this period and beyond will partly depend upon future developments in the oil and natural gas sector. Based on known reserves, and with the possible exploitation of smaller fields that recently became profitable, it is generally expected that domestic oil and gas production would at best be stabilized after 1981 at about its present annual level of 5-6 million tons of oil equivalent. Oil and gas exploration programs under way have been encouraging but do not yet justify a reassessment of proven reserves. Thus, barring large new oil or gas discoveries, and given the rapid rise in domestic demand for energy, Tunisia will have to face the consequences of a decline in energy revenues over the next five years. The Government considers that the situation requires immediate policy changes and is analyzing the most urgent ones to be included in the Sixth Plan. By introducing these changes on time, Tunisia expects to reduce the associated economic and social strains, and avoid major balanceof-payments problems. 13. The draft Sixth Plan recommends a GDP growth objective in the range of percent depending on agricultural performance. This growth rate is in line with recent trends. Projected growth of traditional exports

8 (tourism, textiles, and phosphates-based chemicals) is insufficient to compensate for the projected decline in oil export revenues; these exports would be supplemented by new ones, in particular electrical and mechanical products. Production diversification and export promotion will, however, take time to bear fruit, given in particular, the depressed world market prospects. The Plan strategy therefore rightly aims at containing domestic demand in order to control import growth. The macroeconomic scenario assumes no improvement in terms of trade, as was brought about by oil price rises in and in This would not only affect the external account but also result in slower growth of domestic savings, particularly public savings. 14. Consequently, the draft Sixth Plan projects a drop in the fixed investment rate from 30 percent of GDP in to about 26 percent for the Plan period. This would still imply an increase of 24 percent in constant prices relative to the Fifth Plan investment. A major objective is to correct recent capital intensive biases in projects by appropriate sectoral allocation of investments. More resources would be allocated to small and medium manufacturing enterprises in the underdeveloped regions, in order to ease the unemployment problem, and reduce income disparities between rural and urban areas. Since June 1981, a new set of policy measures has targeted the incentive system toward this objective. The Investment Code was modified to offer free industrial zones and direct subsidies to job creation for new projects in underdeveloped zones, and a Promotion Fund for Handicrafts and Household Workshops was created. In order to promote a more efficient technical and financial management of the public and private modern sector, the draft Plan assigns a major role in project promotion and supervision to an expanded network of new Development Banks (two opened in 1981 and three are planned for 1982); they are to be joint ventures with foreign investors, and should alleviate the pressure on the budget to finance too large a share of public investments. 15. Increasing budgetary constraints will require a reassessment of the present policies of subsidies for energy, basic foodstuffs, transportation, and public sector enterprises. In addition, interest rate policy and a better-adjusted fiscal system should be used to restrain final consumption, and stimulate savings. As a first encouraging step in 1981, sizeable price increases in energy and animal feed products were implemented, and the whole interest rate structure was revised upward, rates on saving accounts and term deposits being increased by 1.5 to 2 points. Wage and salary policies will have to keep labor cost increases (including social costs chargeable to enterprises) in line with productivity increases, particularly since Tunisia wants to stimulate tourism, and improve its international competitiveness. 16. Social Issues. Tunisia's social performance has been impressive since independence, and the country has come a long way towards meeting the basic needs of its population and reducing absolute poverty. About 16 percent of GDP is now devoted to social programs. However, unemployment among the young, and regional pockets of poverty still present serious social problems. 17. Recently published data show that the continued attention of the Government to poverty oriented social programs resulted in a reduction of the ratio of people under a minimum standard income from 17 percent of the total

9 - 5 - population in 1975 to 13 percent in During this period, the overall number of this group declined in urban areas but increased in some rural zones in the center of the country, as a consequence of poor agricultural performance. Income differentials between the coast (East) and the interior (West) widened, in part because the system of price controls and subsidies as well as the budgetary expenditures had a weak redistributive impact. The Government is using the forthcoming Plan to focus on the most deprived zones, with a view to eradicating poverty before the end of this century. Reducing the demographic growth rate is considered an important factor in this endeavor. 18. Education expenditures rank first among budgetary outlays. The comprehensive education system provides free access to all students, and the gross enrollment rate has reached 100 percent for primary education, and 22 percent for secondary education. The performance of the system could, however, be improved by expanding vocational training programs, improving their relevance and responsiveness to labor demand, and to the special needs of the poor and rural groups. 19. Public health services are second among social expenditures, and their overall beneficial effect is reflected in the improvement of the vital statistics (para. 4). There remain, however, regional disparities in the availability of hospital beds, doctors and nursing personnel; health services have concentrated largely on curative medicine, and the medical referral system is not functioning properly. As a result, the rural poor are often excluded. Closely linked to nutritional deficiencies, infant mortality remains high relative to middle-income countries. 20. In the draft Sixth Plan, investment in education, health, housing and water supply is focussed more on deprived areas, provided at lower costs (health, shelter), and made more relevant to the needs of the economy (training). In education, two reforms are under discussion: the first one would provide a nine-year schooling period for all children, and the second would create polytechnical high schools combining basic and technical education. In health, the draft Sixth Plan allocates more resources to preventive medicine and nutrition education. Finally, as regards housing, public subsidized programs will be directed to the neediest population groups. The housing demand from households above the minimum standard income limit could be satisfied by the private sector; to this end, adequate incentives need to be provided. 21. External Assistance and Foreign Debt. As mentioned above, the growth of foreign borrowing was modest during the second half of the 1970s, and a growing share of foreign funds was provided by public sources at relatively soft terms. During the period, foreign loan commitments averaged about $700 million per annum, 62 percent of which in the form of official development assistance (ODA). About 65 percent of ODA commitments came from bilateral sources, chiefly France, the Federal Republic of Germany, Canada, and some oil-surplus countries. About 24 percent of total ODA was committed by the Bank Group, and some 11 percent by other multilateral sources. Borrowing terms were favorable, averaging 5.8 percent interest and

10 18.5 years maturity, including a grace period of 5 years. At the end of 1980, debt outstanding and disbursed was estimated at about $3.4 billion, or 40 percent of GDP; debt service was 12 percent of exports of goods and services, as compared with 17.7 percent in The current account deficit may exceed $450 million in 1981, and is projected to grow to about $1 billion in New loan commitments from abroad, projected at one billion dollars per year on average (at present dollar exchange rates), should not be difficult to obtain, with ODA providing half of the total. Leaving aside the possibility of major oil and gas discoveries, and assuming oil prices continue to increase modestly in real terms, external debt service could reach 13 percent of total export revenues in These relatively favorable prospects would depend on a timely implementation of the already mentioned policy changes to curb domestic demand, promote exports, and improve public sector savings. It should be noted, however, that the draft Sixth Plan recommends a low growth scenario in order to preserve the country's relatively high financial stability and credit-worthiness. This objective is even more crucial if the country is to succeed in mobilizing the large inflows of direct foreign capital assumed in the Plan. Foreign investments were small during most of the 1970s but have gained momentum during the last three years in line with increased activities in the oil sector, and new incentives offered to foreign investors in manufacturing. Such investments have increased from $50 million in 1976 to about $200 million in 1981, and have been equivalent to 10 percent of total investments for The draft Plan's growth scenario estimates that about 15 percent of total investment could be financed by foreign capital, equivalent to an annual inflow of $400 million. The newly created Development Banks (para. 14) are expected to play a significant role in this context. 24. In conclusion, the balance-of-payments outlook can be considered favorable in the medium term. In the longer term, much will depend on the policy changes to be initiated during the next few years, and on developments in the hydrocarbon sector. Considering its long record of prudent and skillful balance-of-payments and external debt management, there are good grounds to assume that Tunisia will formulate and implement the necessary policy changes, and will continue to be creditworthy for future Bank lending. The Bank's close dialogue with the Government on several policy aspects at the macro and micro levels will be pursued in connection with the preparation of the Sixth Development Plan. PART II - BANK GROUP OPERATIONS IN TUNISIA 1/ 25. Since 1962, the Bank has committed to Tunisia forty-eight loans and eleven IDA credits amounting respectively to $933.7 million and $70.1 million 1/ Part II is substantially the same as that in President's Report No. P-3219-TUN of February 26, 1982 for a Fifth Highway (Rural Roads) Project.

11 -7- (net of cancellations) of which twenty-one loans and nine credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of September 30, 1981, and notes on the execution of ongoing projects. Project implementation is generally satisfactory. As of June 30, 1981, overall disbursements amounted to 66.1 percent of appraisal estimates, which is slightly above the regional average. In a number of sectors, important institutional improvements have been achieved, and autonomous agencies have been created or strengthened to ensure the efficient management of the related sectors or subsectors. 26. The Bank's lending strategy in Tunisia aims at supporting Government efforts to; (a) increase employment; (b) encourage more balanced growth and distribution of income among regions and income groups with particular emphasis on rural areas; (c) promote export-oriented policies and investments; and (d) provide selective support for the development of basic infrastructure and for institution building in key public services. An important feature of this strategy is to support the Tunisian authorities in the timely and wellcoordinated preparation of projects through missions and advice by Bank staff, the assistance of the IBRD/FAO Cooperative Program, and the use of the Bank's Project Preparation Facility. The Bank is also supporting the Government in its efforts to increase the mobilization of domestic resources, and to secure cofinancing for the projects it assists. The latter is particularly important in view of the extent of Tunisia's external resource needs. 27. Within this broad framework, past lending emphasized support for long-term investments in infrastructure and social development. Lending for urban and social development, including water supply, sewerage, education, health, urban development, and the Tunis planning and public transport project has accounted for 25 percent of Bank/IDA commitments in Tunisia since Lending for transport, power and tourism infrastructure has accounted for 33 percent. Agriculture and fisheries have received 25 percent, and industrial and hotel financing, mostly through the Banque de Developpement Economique de Tunisie (BDET), 17 percent of total commitments. 28. In line with its lending strategy, the Bank will pursue its efforts in key sectors of the economy that offer prospects for economic and social development. It will also assist projects which enhance regional integration, and help reduce the gap between income groups, and between urban and rural areas. Particular attention will be paid to employment creation, institution building, and agricultural development. In addition to the proposed industrial development project, and the rural roads project which has been distributed to the Executive Directors on March 4, 1982, the Bank is actively considering a project in support of the investment programs for rural areas and house connections of the national water supply agency (SONEDE), a project aimed at improving irrigation and marketing facilities in the Medjerda and Nebhana irrigation perimeters, and a project to provide technical assistance for project preparation. Other projects under consideration would focus on energy, urban development and education.

12 The Bank's economic and sector work will continue to focus on strengthening the macroeconomic and sector base for our lending program; it will be more centered in the future on the analysis of economic issues and policies related to the necessary adaptation process from a petroleum exporting to a petroleum importing country. A 1980 Bank report on the mechanical and electrical industries (Report No TUN of June 4, 1980) assessed the country's industrial development policies and prospects in these subsectors. Also in 1980, the Bank report on the social aspects of development (Report No TUN of June 18, 1980) provided a better understanding of income disparities by evaluating the Government's social policies aimed at poverty alleviation. Future economic and sector work will include a review of pricing and subsidy policies in the rural sector, of the Sixth Plan, and of the agricultural, education and training, urban and energy sectors. 30. The Bank and IDA accounted for about 12 percent of total public commitments to Tunisia during Their share in total debt outstanding and disbursed at the end of 1979 (including loans from private sources) was 10 percent and their share in debt service during 1979 was 11 percent. The shares of the Bank and IDA in Tunisia's disbursed external debt is expected to decrease to about 7 percent by 1986, and their share in the debt service would increase to about 16 percent. 31. IFC has invested in NPK Engrais (a fertilizer plant), in BDET, in Compagnie Financiare et Touristique (COFIT, a company to promote and invest in tourism projects), in Societe Touristique et Hoteliare RYM (a large hotel development), in Industries Chimiques du Fluor, which produces aluminium fluoride from local fluorspar for export, and in the Sousse-Nord integrated tourism development project. IFC's net commitments in Tunisia total $12 million, as of September 30, PART III - ELECTRICAL AND MECHANICAL INDUSTRIES 32. Sectoral Background. Manufacturing plays a major role in Tunisia's economic development in view of its employment and export potential, and its ability to attract foreign investments. In the s, the industrialization drive aimed at import-substitution, and was led by the public sector which established capital-intensive, resource-based industries (construction materials, textiles, phosphate derivatives), and a core of basic metal industries (steel mill, foundry). This strategy contributed little to employment creation, and was constrained by the small domestic market. The shift to more liberal economic policies in the 1970s, with increased emphasis on labor-intensive and export-oriented activities, provided generous incentives to foreign and domestic private investors. As a result, manufacturing grew at a rate of 10.2 percent during the Fifth Plan period ( ) from about 6.4 percent per annum in the 1960s. It accounted for 45 percent of total new employment (33 percent in the early 1960s), exceeding the Plan's target. It has become less capital-intensive, and overall

13 productivity has improved. However, the productivity and contribution to GDP and employment of total manufacturing, as well as of each subsector, remained below those in comparable middle-income countries. The manufacturing base is still concentrated in two traditional subsectors: food processing and textiles which, together, accounted for about 50 percent of total manufacturing value-added and employment, and about 60 percent of total manufacturing exports during the Fifth Plan period. 33. EMI Growth Trends and Structural Patterns. The engineering (electrical and mechanical) industries, by providing the design, the development and production technology of industrial parts and components, and the link between supplier and end-products assembly industries, represent a crucial sector at the present stage of Tunisia's industrial development. Almost inexistent twenty years ago, Tunisian EMI grew rapidly by 18 percent per annum in the 1960s, and by about 13 percent per annum in the 1970s. Yet, they currently contribute only 1.9 percent of GDP, and, with an average value-added/ output ratio of a low 30 percent, they represent the least developed manufacturing activity. They consist of about 300 enterprises of which 70 percent have less than 50 workers, and are dominated by a dozen large (more than 100 workers) public enterprises accounting for over 50 percent of the sector's output. 34. Tunisian EMI can be classified in three categories: (a) Consumer and durable goods industries (hardware, metal products, household appliances, automobile assembly) account for 40 percent of total EMI output, and cover about half of domestic demand for these goods. These are end-products assembly enterprises relying for percent of their output value on imported inputs; they are generally inefficient, capital-intensive and weakly integrated; (b) Intermediate goods industries (foundries, construction rods, wires, pipes and parts) represent 40 percent of EMI output, cover one-third of domestic demand, and rely more on local inputs. They use more appropriate technologies, and in most cases operate efficiently. Prices are generally percent of European FOB prices; and (c) Capital goods industries represent 20 percent of EMI output, and meet only 10 percent of domestic demand. They comprise mainly steel and platevork industries, ship repair yards, electrical and agricultural machinery plants, and small diesel engine assemblies. These industries use local inputs for up to 35 percent of output value. Their labor-intensive techniques, with an overall labor cost equivalent to one-third of the European average, more than offset fiscal charges and the low productivity of labor, thus allowing reasonable competitiveness. Prices are between 90 and 110 percent of European FOB prices. 35. While consumer and durable EMI goods are highly protected (30 to 200 percent), tariff duties on capital/intermediate goods are low, ranging from 0 to 16 percent (26 percent for steel structure and platework). In principle, according to the Investment Code, EMI capital goods can be imported free or after payment of these duties in the case of imports competing with local production. However, in practice, these duties have not been generally levied, and, in order to protect nascent engineering industries, the

14 Government has used an import licencing procedure controlling imports of EMI goods in those cases where Tunisian products are competitive in terms of prices and quality, and limiting these imports to the share of the local market which cannot be satisfied by local producers. Import licences are currently issued for about half of the capital goods imports. A review of this complex protection structure is to be undertaken through an Effective Protection Study for manufacturing. The proposed project would support this study, and would provide for measures aimed at a progressive liberalization of import through a program of adjustment of the protection system and of price controls as they affect Tunisian EMI (paras ). 36. The EMI concentration on end-product assembly industries relying on imported inputs has resulted in a low domestic value-added, has slowed sectoral development, and led to growing imports of EMI products from 35 percent of total imports in 1970 ($120 million) to 47 percent in 1978 ($800 million). This imposes an increasingly heavy burden on the balance of payments, and is distorting and constraining the growth of the manufacturing sector at a time when the rapid expansion of the leading subsectors (food processing and textiles) is levelling off because of market and resource constraints. A recent Bank report on EMI (para. 29) stressed the priority need for a well balanced diversification and expansion of these industries, and proposed guidelines for a development strategy which has been largely incorporated in the Sixth Development Plan ( ). The proposed project will support the implementation of this strategy. 37. EMI Potential and Development Strategy. Tunisia has a well trained labor force whose wages are still well below European levels; it has liberal investment policies with regard to foreign and private investments, is close to Europe and the Arab Countries, and has preferential access to the EEC market. This gives the country a comparative advantage in efficient import-substitution and export production of capital and intermediate goods, particularly in sub-sectors using labor-intensive and simple or intermediate technologies, where economies of scale are available at low level. 38. The development strategy would therefore give priority to the following three categories of production activities. (a) Capital and intermediate goods with domestic markets large enough to sustain economic production. This includes foundries (ferrous castings), steel structures and platework (boilers, furnaces, pressure vessels, lifting and hoisting machinery) for which imports more than doubled between 1977 and 1979 (from $36 to $75 million), selected mechanical works (agricultural and small earth-moving and construction machinery, railroad freight cars, pumps, compressors) for which imports rose from $60 to $90 million between 1977 and 1979, and electromechanical and electronic machinery (motors, transformers, switchgears, cables and telephone equipment) for which imports reached $105 million in 1979; (b) Diesel engines and derived machinery, and their components and parts, for which the fragmented domestic market would be rationalized and complemented by exports; and (c) Selected export-oriented production lines with a high level of intra-sectoral integration and value-added content, and

15 established or potential markets (handtools and cutlery, mechanical and electrical components and appliances, heavy metal structures and electrical gear). These production activities could, in the medium-term, substitute for about 11 percent of total imports of manufactured goods (about $600 million in 1981 prices), and for 20 percent of total EMI imports. The proposed strategy would also diversify and expand EMI exports which accounted in 1979 for 18 percent of total EMI output ($315 million) and only 8.5 percent of total manufacturing exports ($642 million). 39. Constraints. Low labor productivity and biases in the incentive framework have hampered EMI development. These factors are essentially related to the general policy and institutional framework affecting Tunisia's industrial development. The latter have failed to generate efficient sub-sectoral strategies and adequate incentives fostering productive exportoriented and well-integrated EMI, and to address specific productivity and efficiency issues at the firm level. The discussions held with the Government during project preparation resulted in the selection of two EMI priority subsectors, foundries and steel platework, for an in depth review under the project (para. 68) to define development strategies and investment programs, and identify cost-effective production lines. With regard to incentives, the Investment Codes, in spite of their general beneficial impact on investment and employment creation, had some negative secondary effects which, combined with the complex protection and price control systems, have created biases against firm specialization and rationalization of product mix, and have constrained intra-sectoral integration, the production of capital and intermediate goods, and export-oriented activities. 40. Law , aiming at employment creation, introduced tax exemptions based on job creation with no regard to labor productivity or capital intensity. As protection and price policies did not encourage efficiency, manufacturing firms have tended to expand into a large variety of activities, seeking self-sufficiency beyond economic justification. In addition, the lack of established quality standards and controls has further discouraged intrasectoral and inter-enterprise linkages and integration. With regard to EMI exports, law , which encouraged foreign investments and exports, while attracting foreign investors (para. 23), has tended to promote exports of foreign rather than local firms. Also, rigid procedures in applying complex fiscal provisions have prevented the exemption of inputs used for exports from duties and taxes, and the lack of standards and quality controls has further contributed to discourage exports. The proposed project will address some of these major inadequacies of the industrial incentive framework (paras. 65, 67). 41. The above constraints have affected EMI at the enterprise level, generating poor plant and workshop design and lay-outs, low labor productivity and management efficiency, and discouraging firms from engaging in production lines with higher value-added content. Although labor productivity (value added per worker) in EMI has steadily increased, averaging $2,900 in 1980, it is still low compared to similar Mediterranean countries. This is partly related to the shortage of production engineers, and to the low proportion of skilled to unskilled labor. The output of the vocational training system

16 (technicians and skilled workers) will substantially increase during the 1980s when the recently approved Fourth Education project (Loan No TUN of 1981) becomes operational. A major increase in the number of production engineers is envisaged during the coming years through the establishment, under the Sixth Plan, of Institutes of Technology and the strengthening of the National School of Engineering. The current need for technical and technological assistance at the enterprise level will be addressed under the proposed project (paras ). 42. Government's Objectives. The draft Sixth Plan ( ) gives first priority to EMI in the industrial sector. During the Plan period, the Government intends to more than double annual investments in EMI (to $150 million), bringing the annual growth of these industries from about 15.5 to 18.7 percent, thus increasing the share of EMI in manufacturing output from 14 percent in 1981 to about 19 percent by This is a very ambitious program requiring a major promotional effort. If achieved it would allow the Tunisian engineering industries to catch up a substantial part of their development lag and would bring the structure of Tunisian manufacturing in line with that of comparable countries. One third of total investments in EMI would come from the public sector, and would go to foundries and a steel mill. The other two thirds would come mostly from the private sector, and be directed mainly to the production of capital and intermediate goods; hardware and consumer goods would receive only 6 percent of total investments in EMI. The shift away from consumer goods industries would allow a considerable investment effort towards higher value-added and technology-content subsectors, such as mechanical works and electrical industries. As a result, these two EMI subsectors together would increase their shares in EMI output to 45 percent by 1986 as compared to 27 percent in A recent revision of the Investment Code (Law No of June 23, 1981) introduced measures to promote regional decentralization, expand exports, and reduce capital-intensive tendencies. However, additional and more refined incentives specific to EMI are needed. The focus of the proposed project on a set of incentives and policy and administrative adjustments which can be easily and rapidly implemented would represent a major contribution to the achievement of the Government's objectives for EMI, and for Tunisia's industrial development during the Sixth Plan. 44. The Financial Sector. Large industrial development projects in Tunisia are generally sponsored by the public sector, and financed by the Government or through direct foreign borrowings. The banking system finances small and medium-scale industrial projects. The Banque de D4veloppement Economique de Tunisie (BDET), the principal development finance company, plays a central role in this respect providing medium and long-term financing mainly to private small and medium-scale enterprises. In 1980, it held about 39 percent of all long-term, and about 30 percent of all outstanding private industrial credit. Ten commercial banks provide mainly short-term financing, but are encouraged to engage in medium-term lending. 45. This relatively well developed financial system is currently undergoing important changes. The creation of major development finance companies (para. 14) will have a far-reaching impact on the industrial finance scene.

17 In 1981, the Tunisian-Kuwaiti Development Bank (BTKD) and the Tunisian-Saudi Investment Company (STUSID) were established with a capital of D100 million ($200 million) each (as compared to BDET's capital of DIO million), and other similar institutions are expected to be established in the near future (Tunisian-French, Tunisian-Qatari and Tunisian-Algerian banks). These banks will be allowed to lend and take equity participation in all sectors, whereas BDET is limited to industry, tourism and transportation. BTKD aims at building up a portfolio divided equally into loans and equities, of which 60 percent would be allocated to industry, and 20 percent to tourism. However, these new banks, which are expected to finance mainly large-scale projects in the public sector, cannot match BDET's twenty years experience in promoting and appraising industrial projects in the private sector. BDET will therefore continue to play a major role in the development of medium and small private manufacturing industries in Tunisia. 46. The interest rat-e structure was revised effective April 1, The Central Bank (BCT) basic rediscount rate for short-term credits was raised from 5.25 percent to 7 percent, and to percent for rediscountable medium-term credits to industry. Interest rates on long-term loans (above 7 years) have been freed, subject to a minimum rate of 10.5 percent, as compared to the previous 9 percent ceiling. To face competition from commercial banks, and from the new development banks, which have an average cost of resources (essentially share capital) substantially lower than that of BDET, the latter kept in 1981 its lending rate to local industries at 10.5 percent per annum (11 and 12 percent for foreign industries and tourism respectively), with commission and fees amounting to about 0.5 percent per annum. As of 1981, these rates have been, and are expected to remain significantly positive in real terms, given projected inflation rates at 9 percent in 1982, 8 percent in 1983, and 7 percent in BDET's current financial projections assume an increase in its lending rates of about 0.5 percent every year from 1982 to This is in line with the revision of the interest rate structure currently under consideration by the Government in the context of the preparation of the Sixth Plan. 47. Bank Role in the Manufacturing Sector. Apart from the recently approved loan to SOGITEX (Loan No.2012-TUN of 1981), Bank financing of manufacturing in Tunisia has consisted of loans provided through BDET. The latter has received to date seven Bank loans totalling $95.8 million (net of cancellations), of which $3.4 million remained undisbursed as of February 25, Most of these funds financed manufacturing industries. Through its loans to BDET, the Bank aimed at promoting industrial decentralization, exportoriented, and labor-intensive industries. Bank loans have helped meet BDET resource requirements while assisting in strengthening its organization and improving its performance. Through its representative on BDET's Board, IFC has offered a substantial contribution in this regard. 48. The Project Performance Audit Report of September 1981 on loans Nos. 648-TUN, 798-TUN and 881-TUN, covering the third (1969), fourth (1972) and fifth (1973) loans to BDET, concluded that considerable progress had been made

18 in terms of institution building and management performance, and that these loans have contributed to changing BDET's role from a supplier of equity funds for public sector industries, to that of financier and advisor of private investors. However, BDET's promotion and supervision capacity, and its evaluation of physical and financial contingencies of projects needed strengthening. The seventh loan to BDET (No TUN of 1978) addressed some of these issues, and included a credit line for a pilot Small-Scale Industries (SSI) scheme (Loan No TUN of 1978) which prepared the ground for a $30 million loan to SSI through commercial banks and BDET as intermediaries (Loan No TUN of 1981). 49. The Bank loans have strengthened the leading role that BDET has played, and will continue to play in the development of medium and smallscale manufacturing industries in Tunisia. The proposed project would represent a continuation of the Bank involvement in Tunisia's industrial development, and a first sectoral approach to the development and expansion of a crucial manufacturing subsector. The proposed development of EMI, the implementation of improved industrial policy measures, and the institution building aspect of the project are expected to increase the efficiency of the Tunisian manufacturing industries, and expand their import-substitution and export capacities. PART IV - THE PROJECT 50. Background. The groundwork for the proposed project was laid in the Bank sector report on EMI prepared in ; the Tunisian Government agreed with the report's major recommendations, and the project was identified in December 1979 on the basis of a review of BDET's past and prospective lending to EMI. Preparation work started in June 1980, and the project was appraised in June Negotiations were held in Washington, D.C. in February The Tunisian Delegation included representatives of BDET, and the Ministries of Planning and Finance, and of National Economy. The Staff Appraisal Report (No TUN, dated March 2, 1982) is being distributed separately to the Executive Directors. The main features of the project are listed in the Loan and Project Summary at the beginning of this report and in Annex III. 51. The Borrower. Established in 1959, BDET has been successful, particularly in recent years, in mobilizing domestic as well as foreign currency resources from concessional lenders. As a result, the share of Bank funds has declined from 37.4 percent of its long term resources in 1974 to 24.3 percent in BDET is gaining increasing access to the international capital market; its share capital increased from D 3 million in 1971 to D 10 million in 1978, and is expected to be increased again to D 30 million ($60 million) by BDET is owned in majority by private shareholders, and is free from major Government interferences in its lending and borrowing policies.

19 BDET's Statutes and Policy Statement have not changed since the last Bank appraisal (Report No. 1734b-TUN of November 29, 1977). Effective July 1, 1981, its management has been strengthened through the creation of new Personnel and Internal Auditing Services. Also, the integration of the Supervision Division into the Credit Department is expected to improve BDET's supervision capacity by associating follow-up with appraisal activities. Nevertheless, supervision and promotion activities need to be substantially expanded to meet BDET's lending targets during the Sixth Plan (para. 55), and maintain the quality standard of its operations. BDET has already hired five additional professional staff in It was agreed during negotiations that BDET will further strengthen its management through the recruitment of an appropriate number of well qualified supervisory staff and promotion engineers. 53. Financial Situation and Resources Requirements. BDET has maintained an overall satisfactory financial performance. Its successful mobilization of foreign resources will cover about two-thirds of its projected foreign exchange requirements for , leaving a gap estimated at D 14.2 million ($28.4 million). The proposed credit line to BDET would cover this gap, and would represent about 25 percent of all long-term foreign resources to be borrowed during this period. The planned issues of bonds in 1982 and 1983, and the forthcoming capital increase would cover all the dinar requirements. In view of the increasing cost of foreign borrowings, it is expected that the Government will allow BDET to raise a larger share of its resources in dinars on the local financial market. In 1980, BDET's auditors issued an unqualified opinion; arrears affected 9.7 percent of the total portfolio, and debt rescheduling was kept within reasonable limits. Some deterioration of the portfolio is expected in However, BDET's portfolio is, overall, well diversified and sound. Accumulated provision for risk exceeded the auditors' recommendation by 19 percent. Total assets amounted to about $236 million equivalent, a 44 percent increase between 1977 and Although BDET plans to borrow about $850 million equivalent during , its planned capital increase will maintain its debt-equity ratio well below the 8.1 ceiling required by its Policy Statement, and the Bank Seventh Loan Agreement (Loan Agreement, Section 4.06). BDET's debt service ratio is expected to improve from 1.1 in 1981 to 1.3 afterwards, and its interest coverage ratio has been, since 1977, and will remain satisfactory, at 1.2 or above during the period Operations. Since 1978, BDET's approvals have been growing on the average at the annual rate of about 6.5 percent assumed at the time of the last Bank appraisal. Between 1977 and 1979, industry accounted for over 81 percent of total approvals, but for only 58 percent in 1980, mainly due to a large increase of tourism financing. Lending to the private sector represented about 75 percent of total approvals during The promotion and financing of EMI have enjoyed BDET's priority attention; these industries accounted for over 13 percent of BDET's total portfolio, and over 22 percent of its lending to manufacturing. BDET contributed to the creation of 4,600 and 10,300 jobs in 1980 and 1981 respectively. The average cost per job for all projects was $37,000 in 1980, mainly due to a few capital-intensive public projects. This average was, however, below $12,000 for small-scale industrial

20 projects which represented 36 percent of total projects financed by BDET (up from 14 percent in 1978). While BDET will pursue its dual strategy of lending to both small/ labor-intensive, and large/capital-intensive projects with satisfactory rates of return, the emphasis on low-cost job creation under the Bank credit lines to SSI (para. 48) is expected to keep a low average investment cost per job. Although employment creation is not its primary objective, the proposed project is expected to create about 6,000 jobs at an average investment cost of about $13,500 (at 1980 prices). 55. Starting in 1982, BDET will scale up considerably its financing operations to contribute to the objectives of the Sixth Plan. Total approvals are projected to increase by 66 percent in , and to stabilize in 1984 at 180 percent of their level. BDET is expected to finance about 11 percent of total investments in manufacturing under the Sixth Plan, a major contribution as total investments in manufacturing are expected to more than double. BDET's lending target to EMI is expected to cover 20 percent of projected investments in EMI under the Sixth Plan. 56. A Government subsidy has in the past maintained a minimum 3 percent spread on foreign currency borrowings. Following the recent decision to increase and liberalize long-term interest rates (para. 46), the Government had indicated its intent to discontinue this subsidy as soon as possible. Based on an assumed increase in its lending rates by half a percentage point every year, as of 1982, and excluding any Government subsidy, BDET's spread is projected to be 1 percent in 1983, 1.6 percent in 1985, and 2 percent in Government support may therefore be warranted in the coming few years to compensate BDET for the major responsibility it will have to carry under the Sixth Plan (involving substantial additional costs), and for the high cost of its foreign borrowings. It was agreed during negotiations that BDET will review its lending rates annually with the Government, and make adjustments satisfactory to the Bank to achieve a spread between its interest income and interest payments ensuring sufficient provisions and reserves, and a reasonable return on its capital; and that the Government would make adequate arrangements, including lending rates adjustments and greater access to lower cost local resources, to allow BDET to achieve and maintain this profit margin, with the additional objective of eliminating its direct financial support by the end of 1986 (Loan Agreement, Section 4.13 and Guarantee Agreement, Section 3.03(b)). 57. Project Objectives and Content. The major objective of the proposed project would be to foster the development of the Tunisian engineering industries, improve their efficiency and productivity, and increase the local production of capital and intermediate goods at competitive prices. The project would increase BDET's financing of EMI projects, improve the policies and institutional framework affecting these industries, and provide finance to BDET for its regular lending operations to industry. The project would consist of a $30.5 million loan, channelled entirely through BDET, to finance: (a) a Credit Line of $28 million of which Part A ($14 million) would finance

21 subprojects in priority EMI subsectors as defined under the project (para. 58), and Part B ($14 million) would finance sub-projects in other industrial subsectors; and (b) a Technical Assistance Subloan to the Government under Part C amounting to $2 million, for the establishment of a Technical Center for Mechanical Industries (CTM) and a National Institute of Standardization and Quality Control (NIS), and for the preparation of an Effective Protection Study for manufacturing. The foreign exchange risk will be borne by the Government. In the context of the proposed project, BDET has agreed to allocate from its foreign currency resources, during a two-year period between July 1982 and June 1984, a minimum of $30 million equivalent to EMI, of which at least two-thirds to the priority subsectors, including the $14 million under Part A of the Bank loan (Loan Agreement, Section 3.08). This would double BDET's annual commitments to EMI as compared to the annual average achieved during On the basis of the Bank review of BDET's pipeline of projects, and with the understanding on the recruitment of additional professional staff (para. 52), it is expected that BDET will be able to meet the agreed lending target. In addition, a set of policy and incentive measures geared to EMI in the areas of tariff protection, price controls, export and financing would be implemented, and two studies on the development strategies of the foundry and steel platework subsectors would be prepared and reviewed by the Bank. 58. Eligibility Criteria. Subprojects to be financed under Part A of the Bank loan would have to be within the priority EMI subsectors, producing capital and intermediate goods, to be defined for this purpose as those currently protected by nominal tariff duties of up to 18 percent (21 percent for the steel structure and platework subsectors). The Government has agreed that the current tariff levels on priority EMI products will not be raised above these ceilings without prior consultation with the Bank (Guarantee Agreement, Section 3.04(a)(i), and Loan Agreement, Section 1.02 (e)). 59. The project would seek to foster the gradual liberalization of the import licencing procedures which are currently used as a policy instrument in appropriate circumstances. In order to maintain efficiency and competitiveness in priority EMI subsectors, an understanding has been reached with the Government, and confirmed during negotiations, that, in these subsectors, all projects involving foreign partners would have to produce at prices not exceeding 118 percent (121 percent for the steel structure and platework subsector) of the ex-factory price of the foreign partner in his domestic market for products of similar quality, plus an estimate of the insurance and transportation costs. This would be achieved during the first three years of production through price controls. After these first three years, projects producing above these price levels would be exposed to gradually liberalized imports. In the case of projects with no foreign partner, an understanding was reached with the Government that similar pricing control measures would be applied, using for comparison an ex-factory price in the domestic market of Tunisia's major traditional partners. It was agreed that, in all cases, the Government would ensure that appropriate measures are taken by promoters to guarantee products satisfactory quality standards.

22 Export-oriented subprojects in non-priority EMI subsectors would also be eligible under Part A of the credit line when based on buy-back arrangements with foreign partners covering at least 70 percent of the subproject output (Loan Agreement, Section 1.02 (d)). Other requirements for financing under Part A of the Bank loan would be: (a) a financial rate of return of at least 12 percent, and an economic rate of return of at least 10 percent; (b) a total investment cost, including permanent working capital, of less than $12 million equivalent, and a foreign exchange cost not exceeding $2 million; and (c) private ownership (less than 50 percent Government equity) (Loan Agreement, Sections 1.02(d) (g) and 2.03(d)). BDET has agreed that all EMI projects to be financed by BDET in priority subsectors, and one out of three EMI projects to be financed by BDET in non-priority subsectors will be reviewed by the Bank (Loan Agreement, Section 3.04(c)), and that appraisal reports of EMI subprojects would follow a detailed format (Loan Agreement, Section 2.04 and Schedule 3). It was also agreed that industrial subprojects other than EMI to be financed under Part B of the Bank loan would have to satisfy the criteria under (a) above (Loan Agreement, Section 1.02(f)), and that, for these subprojects, a free limit of D500,000 ($1 million equivalent) will be applied (Loan Agreement, Section 2.03(c)). The final date for submission of projects for financing under the Credit Line would be December 31, 1984 (Loan Agreement, Section 2.04(c)). 61. BDET's procurement procedures require borrowers to obtain at least three price quotations from suppliers/contractors. BDET's procurement and disbursements procedures are satisfactory, and would continue to be carried out as under the previous Bank Loans (Loan Agreement, Section 3.02). ICB procedures would not be suitable because of the small amount of subprojects' foreign exchange financing, and the great variety of the goods and types of equipment, and the requirements of foreign partners. 62. Technical Assistance to be financed under Part C of the Bank loan represents a fundamental aspect of this project, that would extend beyond it to cover the entire EMI sector and affect Tunisia's overall industrial development, as it would support the creation of two new institutions (CTM and NIS), and the preparation of an Effective Protection Study for manufacturing. Because of the importance of this component, the signature of the $2 million Technical Assistance Subloan between BDET and the Government would be a condition of effectiveness of the Bank Loan (Loan Agreement, Section 6.01(d)). This Subloan would cover the foreign exchange cost, including salaries, fees, and travel of consultants, whose terms of reference and conditions of employment would be satisfactory to the Bank (Guarantee Agreement, Section 3.07). An understanding was reached during negotiations that a Project Coordinator would be appointed by the Government to expedite the implementation of Part C of the proposed project. 63. The Technical Center for Mechanical Industries (CTM) would provide technical and technological assistance through advisory services and on-thejob training to improve technical management and labor productivity at the shop level, adapt and develop new products and processes, and help introduce and generalize the use of standards and quality control procedures. The CTM would be established as an autonomous semi-public institution under the

23 Ministry of National Economy, and would incorporate the Tool and Die Center, established in 1971 in Sousse to develop and produce tools and dies. Its activities would focus at the initial stage on two priority subsectors, steel structure/platework and mechanical works, where the need for technical assistance is most urgent. BDET will be required to include in the appraisals of subprojects in these industries the scope and timetable of the technical assistance to be provided by CTM (draft Loan Agreement, Schedule 3(g)). 64. Four of the nine members of the CTM's Board would be representatives from small and medium-size private enterprises. During the initial two years, the CTM would be staffed with a minimum core of eighteen Tunisian engineers and technicians, and eight foreign specialists. Assurances were obtained during negotiations that at least four foreign specialists will be in place by October 1, 1982 (Guarantee Agreement, Section 3.07(e)), and that the CTM's terms of reference, funding, staffing, equipment and work program during its first 2 years of operation would be satisfactory to the Bank (Guarantee Agreement, Section 3.06(a)). The foreign exchange costs for the technical assistance required during the first two years of CTM's operation is estimated at $1.5 million (192 man/ months of consultants-engineers and mid-level technicians-at an average cost of about $7,500 per man/month), and would be financed under the Technical Assistance Subloan. The draft Law establishing the CTM was reviewed during negotiations; the signature of this Law and of the Decree organizing the CTM, and the employment of its Director would be conditions of effectiveness of the proposed loan (Loan Agreement, Section 6.01(b) and (c)). 65. The National Institute of Standardization (NIS), a semi-public autonomous agency under the Ministry of National Economy, would be responsible for establishing and enforcing standards in cooperation with industries. It would start with a minimum core of about ten technical staff, and would give priority to the elaboration of EMI standards. The foreign exchange cost of the foreign specialists' services (30 man/months at about $10,000 per man month) for the two first years, to be financed under the Technical Assistance Subloan, are estimated at $0.3 million. The NIS terms of reference, funding, staff requirements and work program during the first two years of operation would be agreed with the Bank (Guarantee Agreement Section 3.05). The draft Law establishing the NIS was reviewed during negotiations; the signature of this Law, and of the Decree organizing the NIS, would be a condition of effectiveness of the proposed loan (Loan Agreement, Section 6.01(a)). 66. The Effective Protection Study, which would cover manufacturing as a whole, would focus as a priority on EMI, and would provide the necessary background for the Bank's dialogue with the Government on the appropriate levels of protection for EMI. It would be undertaken by the Ali Bach Hamba Institute, the economic research agency of the Ministry of Planning and Finance. Assurances were obtained during negotiations that this study, to be financed under the Technical Assistance Subloan, would cover EMI as a first priority, and that its terms of reference, financing plan and staff requirements would be agreed with the Bank (Guarantee Agreement, Section 3.04(c)).

24 Protection and Incentives Measures. A set of policy measures specifically geared to EMI would be implemented under the project. These would include protection measures aimed at improving the efficiency and competitiveness of these industries (Guarantee Agreement, Section 3.04(a)(ii)), and incentives measures aimed particularly at EMI promoters. With regard to protection, an agreement was reached with the Government during negotiations on the details of a program of adjustment of the protection measures related to the establishment and application of tariff duties ensuring a reasonable degree of protection for capital and intermediate goods currently produced in Tunisia. The Government has prepared a list of these goods which should bear the established tariff duties. This list was reviewed during negotiations, and an understanding was reached that it would be published by the Ministry of National Economy, widely distributed, and systematically used by the authorities responsible for granting import licences and tariff exemptions. Incentives to industrial promoters to be implemented under the project, and which would particularly benefit EMI, include revised administrative procedures to streamline the existing system of refunding duties and taxes paid on inputs used for exports. The revised procedures have been incorporated in the 1982 Finance Law, and were reviewed during negotiations to the Bank's satisfaction. In addition, to broaden and expand the use of special credit facilities, the Government confirmed during negotiations that the permanent working capital needs of EMI projects would be eligible for medium-term financing, and that EMI enterprises producing goods included in the list mentioned above would have access to BCT's suppliers' credit facility (Guarantee Agreement, Section 3.08). To better publicize the incentives to EMI promoters, an understanding was reached that the Industrial Promotion Agency (API) would prepare a booklet summarizing these incentives, to be published before July 31, Subsectoral Studies. Two subsectors, steel platework and foundry, have been selected for an in-depth review to define long-term development strategies, identify economically efficient production lines and investment programs, and rationalize and specialize production among the various firms. The study of the steel platework subsector has been commissioned by the Government to BTKD under terms of reference reviewed by the Bank. The study of the foundry subsector is being undertaken by Bank consultants. It was agreed during negotiations that the conclusions and recommendations of these studies would be reviewed and discussed with the Government by September 30, 1982 (Guarantee Agreement, Section 3.04(b)), and an understanding was reached with BDET that only the subprojects meeting the recommendations of these studies would be financed under the Bank Loan. 69. Benefits and Risks. BDET's minimum two-years ( ) lending target of $30 million to EMI should result in the financing of projects totalling investments of about $80 million, representing 20 percent of projected investments in EMI under the Sixth Plan. This would create about 6,000 jobs at a relatively low average investment cost, and would generate an output estimated at $45 million per annum, representing about $30 million in annual foreign exchange savings. 70. The proposed project would also have a major institution building effect. The strengthening and improvement of BDET's management and performance would directly benefit EMI and manufacturing as a whole. The impact of

25 CTM and NIS, and the implementation of the proposed program of adjustment of protection and price controls, and of incentive measures to EMI promoters are expected to bring about significant policy changes which should substantially increase productivity and product quality of EMI, with a view to making Tunisia a competitive producer and exporter of engineering goods. The proposed project would, in addition, allow for a continuing dialogue with the Government on protection and pricing policies affecting the EMI, a priority industrial development objective of the Sixth Plan. 71. A possible risk is that delays may occur in the actual start-up of the proposed major institutions (CTM and NIS), and in the eventual quality and effectiveness of their services. This risk is well worth taking in view of the expected benefits. It will be minimized through close and intensive supervision efforts by the Bank. PART V - LEGAL INSTRUMENTS AND AUTHORITY 72. The draft Loan Agreement between the Bank and the Banque de Developpement Economique de Tunisie, the draft Guarantee Agreement between the Bank and the Republic of Tunisia, and the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement are being distributed to the Executive Directors separately. Special features of the draft Loan Agreement are referred to in the text, and listed in Section III of Annex III. Special conditions of effectiveness are: (a) the signature of the Law establishing, and of the Decree organizing the Technical Center for Mechanical Industries; (b) the employment of its Director; (c) the signature of the Law establishing, and of the Decree organizing the National Institute of Standardization and Quality Control; and (d) the signature of the Technical Assistance Subloan between BDET and the Government (draft Loan Agreement, Section 6.01). 73. I am satisfied that the proposed loan would comply with the Articles of Agreement of the Bank. PART VI - RECOMMENDATION 74. I recommend that the Executive Directors approve the proposed loan. Attachments Washington, D.C. March 2, 1982 A. W. Clausen President by Moeen A. Qureshi

26 ANNEX I TUNISIA - SoOCIAL INDICATORS DATAPage 1 of 6 TUNISIA RESURNCL GROUPS CWSIATTEDATAS LAND AREA (THOEUSAND 50. K.) TOTAL 164.0DLI-NC S AGRICULTURAL 76.7 MOST RECENT NORTH AFRICA & MIDDLE INCOME 1960 /b 1970 a1 ESTIMATE /b MIDDLE EAST LATIN A CER&CA CARIBSEM GNP PER CAPITA (USS) t* ENERGY CONSUMPTION PER CAPITA (KILOGRAMS OF COAL EQUIVALENT) POPULATION AND VITAL STATISTICS POPULATION, MID-YEAR (THOUSANDS) * URBAN POPULATION (PERCENT OF TOTAL) POPULATION PROJECTIONS POPULATION IN YEAR 2000 (MILLIONS) 9.4 STATIONARY POPULATION (MILLIONS) 16.0 YEAR STATIONARY POPULATION IS REACHUED 2070 POPULATION DENSITY PER SQ. KM PER SQ. KM. AGRICULTURAL LAND POPULATION AGE STRUCTURE (PERCENT) U-1 YRS YRS YRS. AND ABOVE PUPULATION GROWTH RATE (PERCENT) OITAL 1.8 Ic l.9/c 2.1* URBAN CRUDE BIRTH RATE (PER THOUSAND) CRUDE DEATH RATE (PER THOUSAND) GROSS REPRODUCTION RATE FAMILY PLANNING ACCEPTORS, ANNUAL (THOUSANDS) USERS (PERCENT OF MARRIED WOMEN) FOUD AND NUTRITION INDEX OF FOOD PRODUCTION PER CAPITA ( ) PER CAPITA SUPPLY OF CALORIES (PERCENT OF REQUIREMENTS) PROTEiNS (GRAMS PER DAY) OF WHICH ANIMAL AND PULSE CHILD (AGES 1-4) MORTALITY RATE HEALTH LIFE EXPECTANCY AT BIRTH (YEARS) INFANT MORIALITY RATE (PER THOUSAND) ACCESS TO SAFE WATER (PERCENT OF POPULATION) TUTAL URBAN RURAL ACCESS TO EXCRETA DISPOSAL (PERCENT OF POPULATION) IOTAL URBAN RURAL POPULATIOUN PER PHYSICIAN POPULATION PEK NURSING PERSON POPULATION PER HOSPITAL BED TOTAL O/e URBAN RURAL ADMISSIONS PER HOSPITAL BED HOUSING AVERAGE SIZE OF HOUSEHOLD TOIAL f 6.0 URBAN /f 5.8 RUKAL /f 6.1 AVERAGE NUMBER OF PERSONS PER ROOM TOTAL f URBAN RURAL * ACCESS TO ELECTRICITY (PERCENT OF DWELLINGS) TUTAL * f. URBAN.... RURAL....

27 ANNEX I TUNISIA - SOCIAL INDICATORS DATA SUET Page 2 of 6 TUNISIA REFERENCE GROUPS (WEIGHTED AVERAGES - MOST RECENT ESTIMATE)L- MIDDLE INCOME MOST RECENT NORTH AFRICA 6 MIDDLE INCOME 1960 /b 1970 /b ESTIMATE /b MIDDLE EAST LATIN AMIERICA E CARIBBEAN EDUCATION ADJUSTED ENROLLMENT RATIOS PRIMARY: TOTAL MALE FEMALE SECONDARY: TOTAL MALE FEMALE VOCATIONAL ENROL. (Z OP SECONDARY) PUPIL-TEACHER RATIO PRIMARY SECONDARY ADULT LITERACY RATE (PERCENT) /f CONSUMPTION PASSENGER CARS PER THOUSAND POPULATION RADIO RECEIVERS PER THOUSAND POPULATION TV RECEIVERS PER THOUSAND POPULATION NEWSPAPER ("DAILY GENERAL INTEREST") CIRCULATION PER THOUSAND POPULATION CINEMA ANNUAL ATTENDANCE PER CAPITA Z LABOR FORCE TOTAL LABOR FORCE (THOUSANDS) FEMALE (PERCENT) AGRICULTURE (PERCENT) INDUSTRY (PERCENT) PARTICIPATION RATE (PERCENT) TOTAL MALE FEMALE ECONOMIC DEPENDENCY RATIO INCOME DISTRIBUTION PERCENT OF PRIVATE INCOME RECEIVED BY HIGHEST 5 PERCENT OF HOUSEHOLDS HIGHEST 20 PERCENT OF HOUSEHOLDS LOWEST 20 PERCENT OF HOUSEHOLDS LOWEST 40 PERCENT OF HOUSEHOLDS POVERTY TARGET GROUPS ESTIMATED ABSOLUTE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED RELATIVE POVERTY INCOME LEVEL (US$ PER CAPITA) URBAN RURAL ESTIMATED POPULATION BELOW ABSOLUTE POVERTY INCOME LEVEL (PERCENT) URBAN RURAL Not available Not applicable. NOTES /a The group averages for each indicator are population-weighted arithmetic means. Coverage of countries among the indicators depends on availability of data and is not uniform. lb Unless otherwise noted, data for 1960 refer to any year between 1959 and 1961; for 1970, between 1969 and 1971; and for Most Recent Estimate, between 1976 and /c Due to emigration population growth rate is lower than rate of natural increase; /d average; /e /f * The updated 1980 GNP per capita and population estimates to be shown in the 1981 World Bank Atlas are $ (at prices) and 6354 thousand, with a population growth rate of 2.4.

28 -24 - DFNT ONS ANNEX I OFSOCI, INDICATORS Page 3 of 6 Note. : lalotough ohs data ore dra trot eo-re geteroly judgd ohs no*t ath-tltui-. and reibebtaol loh oa htca o o ainr ntoaly nopya-bla beo... of the lank of satardnoei.d defintiona and o...ept. o.sdb dlffr.t outia it olotg o.dat.?ho.at eta ton.- aholee.. u...fil todee...nih ord.. o agiud, dioute treade, an oarntrisetain tajor diftereno... heb- roovria Tb.h feao g IIteaCl heat trnny group of the aubjeot onotr ned (2) aontygupwth ennohot highercorg inct that. It onr ri of eujeogotonry te ltoap fo Cuntl oplue oil opor-r` grou whr Itdl Inon - N tro Afriua and Middle tsar' ieh.s baon, f'.tronger eni-oloa ffi ininee l- I the rearnn gop done she averag. are population raighted arunhenip gerefan.a.h indiontor.rd ebo ony what ajor iny nt thu.tootiea It a stoop h.e dona for than Ilittiteto. tite t1he I.ver... of I.u...ie anon.- the rlotr deed ttea*tiitof data and -ant onifo--, o -nonne be...eroeod in relatingarge- f oeidic-tor to enothar. The.. e. ge ace onl f.afuf lcoten nh. -e1ca of ou idinetor at a tite aton the o-otry ad oaf erenre# grnupa. LANtD AslA (th.ucand egha.) Ttl-Tote 1 aifae re copotigcr oeediln nar.ubn Pplto r optlbo-no) oa)dntdby Mn ta,00tr)-pplto tcie ynpcoo ne o (tonal. oeialbt kareloo -Ira - tati-tcn feo lnrlae ed nepreiy rpertanetly a-atlble In publio and pri-con gwra adispec inlined hoepita1 and refor tro.a Poeurc, arhe and hitcher garden or no It fallow; 1978 dltn. abiatinoce-tera. by alee onphyelnia. foepicali ar etb tnblbwnepoiig Iih-.nt. pennety nnlel ffad coenolot PtCAITA III%0 -. GM? per canit atateeattoret noka.. pr. i nt. dial ar aret no "itutdad. tota t,oepffala hoee,iie at noleta by _at -tva.ion notbhd te told Oath Atlee ( baaotc ; 0950 mt sedica- ete. o pentt nfe yaphys~i-iaochit bya 1970, and 1979 data. adtonl.. aeignuon, nuree nidife, ant.) whtnh offer to-patient ecodation nnd proolde a liaocwd reog of nedicaj fanjiiti... For etutie- 0150Y CONSUMPeTION Pt!CPIA-Afot oo upioof oorcalatry (olticll rnpoetpb.. IC_a oeitl.i.l rrnc1.ipa1lla..ertl hoepitale, eod lignite. Petroleu., vunuatcl g.edhda,ucoradgoara l-anrrabeptllca o l ue inytoe and edioe1 end eater.tiy ttrinity> to kilogrea of on) qoraen p nia;19h , ad 1979 cetra Pet-ina1d hoepicl-eart inolo1dad-ly undan total. data. Adtlta..lone par.setna1 Be - Tota1l nubor of adeai.n. to ordianbargee foo buepitloa ditidsd by tho titer f bedo, POPULATION1 AND VCTAL, STATISTICS Tonal Pnnolatltn. Ktid-S..art... eata d dote. - 0of July 1; ,..nd 1979 HUINGlil A-arase ti.n of on-hebldiesc a nebad ttl urban, and rural - Utbn IPonlat!in (minuet of notal) -Rtni of urban to totalpp1 ein A 1,honehald untt ofogru di,fforet definttio ofubnoae-y aff.tc noera-bility of data n harto anale. At f id.oo~daawo dro oge a ehr rtytnbe ton at..e tcludd it enong.. ontrite; 1960, 1970, and 1979 dane. tha honeahald tof eac aio pu-n--e Panalation Projanni.ne Anaroewte o.f nroepr oekoal ra,ancua AnaregaS ni-- Po-talatine in vee Currant PoPulation projeotine are hae d on 19i0 hto ten e ono l ra.tdrm cuidctanna ttlppulentrn hy ag. end -tad thair yrnjecnlan pureatnre fa mrtlinyrea notality and f-oilitytatat.fdpecotge cap Iaof tbnelveteeam repetowc._ road gc parts.-.d Ottl ton sc lode o-.pere dn e--uture an Lng life enpeananoy atfbirth incrneigntbonnnye e othitt in- na A..e. to,: flortoocrrnoo tline na,ubn n oa teeeforfattiy rt la aeobe eel euing duolica In of total. rhao. and rural dotili, nonrepecti-e1y. fnrnilitya...ording 0 Inon -lve an pattily plotting perfora-.. t~t tach on0nty It then aeeignd on of nthee nbo nonhinatinta Of ana.ilt,y EIUCATIOt and fertility trenda _r for projetiow_.c p:orpee eadluat E fo1n1noo Ratia ChtatIonary ttluiot:-f.tneter dtner popolartdon. ther Se notot crepter tol- oa al n eel r total. _1m ta f_nel nh_ hrb ae a qain te ethntyteda e g titr e nnlot Ib of al a te antba pntr anla eo-tgeohreat tome tpaen to 1_ Tia nohe-d _e only after frn.iliny roe eln oprimary echoo-age Papilti-nt7= 1tlt incldae7 ctldrn age h-i nb r-lcatn d olo unth. net rattnin ae hneahgnr tn tt wr eyc.bl dcu-td far different 1nngthe of pri-yrpdocati-t; tnt of,ae raiana Inaf e-utly. Thtaaior popultion eienecut r ibuiaeleoaiwarlnn a ned 100 o6roen eaceedo hehee ofm h Cth Crojectd cherernariatice of the roo -- lati..n etriaa 1te p iptle ar dbl, r tal thw oficti_._ enl age in cht liii. yea nodthe rent f dcline of farttliny rant.n elc-boatreho tonal,paltpan t h.a '- hpo t hoe acndr Tear etulo.. b- hdyroulaio Ie reeched -Th. year abtetciotory population pvide g. eu,ncnut rmce trainingc- CinetruoIone for ptik P-iea hae benrabd cal f 12 no 17 ye..e ofagetreepneoenuaeacgntty Pnr an be.- Mi-ya ;populajtion yn equera kilotoa (100 hootoreec of -neioonl ord le. Cnsten of... P.ro -tocni...i.tto Iln toa lh, 6e an 979 dana. Pe ke.... ricultutel lad - C-'utd. abv o giclua et inld el ebie,i aru,n ra dprnueofecneytetoto nbrporn hc pot need only; 1960, 1970 and 1979 dana. -dtll-nennharoacla -tr...maro. end e. PCdr-Ttlaod oeroldi 64 oerc. adrtrd065y.. are and ove) e ponenage ofaidyou.pui- aora,einglale ate; , ted 1979 dan.t d dy.cpp. Adultf "-Y litrac tare f y diercent) -Lnrn ut Ca.. t rend-- andwi.) Powaltior inoo hotlncatr oal-aoalgot rteoionled aa-p-ditgeo. oalautpa,aia gd15yaen vr p-naie , eat data.. v tilnnr fehidltcltee.d15y.c Crude Booth gate (too thannd) A- leena t bithe par thaneat of d nit-yea..,l godeivera lee Sth edprlno)-alypefrnneefrrai poolrin; and 1979 dana. enrlpb hra"aeo ottoetdo prynltint; tenlde o-t irota awrudution sth-aaaraga--1odbtr of agthre wn ilheri Icoee rehirae n nuto. enxnpaawe ra heraiw o rdi ilinrente eanll fv-year9 aveag, etngi , -at,-9 tags!oi o'yte aholie d PIcPeig tility t od... f -11, b. fp polintotdonod riarlytorentin gewalns_ n n-pnidra laden Prouction of mad ner Capit ( Oden gof a capit aneliteodnu Atnac at ra Ya- bae an the nohe bl.o proucionofel fod tettie.prouciontelawa ne an fte an nohao ns duin naer.ioaigdla etori-nouc`ai.ia on lcdlotar yea n....nattea o pri- ary g fd... egacan et. not, unite mfed fene) hchnnhdhl n conaineu-iafe (.g oltt- foe end1 0 V b--%t tee are dnc buted) Ataaaeane oroaina o enobnoo try. hee If t non talon 101d00l eatimeal ereraga prtdnrer prine4 g.ta ,C7,td17 aa oa Labo Forc Y-osadC. -tnalu cieprna nldn Ido e energy e CdI fnloialaro Iovaen of et noiupinaalbei i froirnne oar optdf e anacvrn o re bali-nl oneat C oueiao e.y l hot ge I a etite ditig Som...int, nnr t cannt..iae Pttat. ci.,i. re.. pawday Avilblenaplie onprae anoti prtocin. lport lentotonearata er 199 dna eparne.t-i end fbaeei en qaattie Net es et n ocecindttibtin.laore on entdt -apln preeim, aimalp-n-, tet., Ariolot rret eaceg)-laorfac -Pl-ta oc in a fatis ecnaeo feet,d t llbrioo anig n neat head eat e ntiaad pyailognal y 7k..oe fr nrto ani- febig n puratge o toal aha fnre: ed 179 ete mop netea oplatna tt ealh datnbttn mandeingaevroaanaltwaatoa ed f llreng10peoattn, ody oigta,egeintkete, tat t ntelntinty,weoren -ldardint - ao oc2 ge t c lnglontutn.tonetre erenageoftoallaarfot. 160 ttr oo hny; If'1916,90 anst dane; dt. Tto the b. tonal - labor fot. tries lie tao neblen derive trot 170 and 179 dunn.of honabald.; d17. eq tb _d1910 ed 07 dana IIahfwldf.d -d ant. bec.t nt -r l brpretet withranit ate, pr tioatd liehiy o Ageri oan it ain ht oalvlblw ht iie litfp pt teol avbe, orgl C Oahy rsenhl anene et aty.."natefo b h... -ne ttntd esee,erng.oteata ) lanai relorive. Ifvrty Iote oe.ua-hr faeeg a.p ditaaea t hib nptitppti eteif"it at nrhtoowen bi.t... b rnr.b tiewldoeo firba level torv 19e trot9aedrura d tni.iftt.i tab. eaanhld n11 nal mpytense70 sifaorar of the7bd1asholdfat rural - Panrat1 of aplto(aboedoa)shav bmoe -t -PPY If.. d eerepd of nenoln Cotal, urbanf P.- total99 -t, alloesc ofc quirnemna all re fo canerie ftnlpounprdyad2 antalntbetby lil peovie rt f o noons faia o peroanagee 19hi, 1970, an f tonl, 199dt, aleeat enatbes feale paolatin nooepricano nf al agedteepilivaiyon ptlarwnn f tt_0gn.eoudb ntltan,taaeed rcfen in ae-t ainrnueo th haypepelattit. not lngtime ttetd.- the eallentian isepteal. 00th on vithena greeteat, of hm earth CWBone I contain end gondhal IlCiai e te-eerb 6 an-fte ytao the1p sot.. ofd aisrnseat_ il fonatnir taly Ie nod Pmojtwiots Bpe-ta Car Stot*llttito. ey ose-.i. it t -Popsaloelam divide I byth of. pwen.iditg pobyai pt.col nhulat nieel3 levift.oil.po--l... I. _ td a.le at. taletiraeets wet. poent area,eatdae5ineto we -d

29 ANNEX I Page 4 of 6 TUNISIA - ECONOMIC INDTCATORS Population: 6.4 million (mid-1980) GNP per Capita: $1,310 (1980) Amount Annual Growth Rates (million US$ Actual (at 1972 prices) Actual" Projected (at 1979 prices) Indicator at current prices) NATIONAL ACCOUNTS Gross domestic product /2 8, Agriculture 1, Induatry 2, Services 3, Consumption 6, ( 6.6 Gross investment 2, Exports of goods and NFS 3, Imports of goods and NFS 3, Gross national product 8, Gross national savingn 2, PRICES GDP deflator Exchange rate Share of GDP at market prices (X) Average Annual Increase (2) (at current prices) (at constant pricee) Gross domestic product Agriculture Industry Services Consumption Gronss investment Exports of goods and NFS Imports of goods and NFS Gross national product Net factor income Gross national savings As X GDP (at current prices) PUBLIC FINANCE Current revenue Current expenditure Surplus ('-) or deficit (-) Capital expenditure Foreign financing OTHER INDICATORS CNP growth rate (X) GNP per capita growth rate (X) ICOR Marginal savings rate Import elasticity / data at 1979 prices. /2 GDP at market prices and components, at factor cost. EMENA cp 2C Decemher 1981

30 -26.A X * 26~~~~~~~~~~~~~~Pg * «of 6 TUNISIA - EXTERNAL TRADE Population: 6.4 millior. (mid-1980) GNP per Capita: $1,310 (1980) Amounit Annual arowth Ratee (million US$ Actual (at 1972 price.) Actuell Projected (at 1979 prices) Indicator at current pricee) EXTERNAL TRADE Merchandise exports 2, Crude oil 1, Other primary Manufactures / /2 Merchandise imports 3, , Food Petroleum / /2 Machinery and equipment Others 1, Price Index Price Index /3 PRICES Export price index Import price index Term. of trade index ( ) ( ) Composition of Merchandise Trede (8) Average Annual Increase (X) (at current price) (at constant prices) Exports Crude oil Other primary n Manufactures imports Food Petroleum Machinery and Equipment Others Share of Trade with Share of Trade with Share of Trade with Industrial Countries (?) Developing Countries (X) Capital Surplus Oil Exporters () DIRECTION OF TRADE Exports n.e ns.a. Imports n.a s.a. / data at 1979 prices. /2 Increase in refining capacity. /3 For , export and import price index is based on E14ENA CP 2C December 1981

31 AMEX8 I Page6 of 6 BALAUCE OF PAYUTB. EXTfIUL CAPITAL NltD DEBT (million UsS,t cl t picas) Popultion: 6.4 million (uid-1980) GNP per Capita: $1,120 (1979) Actual Projected BALANCE OF PAYMENTS Net exports of goods & services , ,728.0 Exports of goods & services , , , , , , , , ,106.6 Imports of goods & services , ,690:3 3, , , , , , ,838.6 Nat transfers / Current account balance , ,716.7 Direct private investment MLT loans (net) ,200.2 Official Private Other capital Change in reserves International reserves , ,134.3 Reserves as months of imports Actual Projec ted GROSS DISBURSEMENTS Official grants Gross disbursements of MLT losos , , ,358.0 Concessional Bilateral IDA Other multilateral Non-concessional , ,739.8 Private ,111.8 Official export credits IBRD Other multilateral EXTERNAL DEBT Debt Outstanding and Disbursed , , , , , , , ,896.4 Official , , , , , , , ,490.2 IBRD 'i ,192.3 IDA Other , , , , , , , ,239.7 Private , , , , , , ,406.2 Undisbursed debt , , , , , , , ,925.3 DEBT SERVICE Total debt service payments , ,657.2 Interest Payments as 1 exports Payments as % GNP Average ioterest rate of new Loans () Official Private Average maturity of new Loans (years) Official Private DEBT STRUCTURE As I of Debt Outstanding st End of Host Recent Year (1980) Maturity structure of debt outstanding (I) Amortization due within 5 years 54.8 Amortization due within 10 years 98.9 Interest structure of debt outstanding (I) Interest due within first year 6.8 /1 Including grants. EMENA CP 2C December 1981

32 ANNEX I I Page 1 of 9 A. STATEMENT OF BANK LOANS AND IDA CREDITS (As of September 30,1981) USS Million Loan or Amount (less Credit Cancellation) Number Year Borrower Purpose Bank IDA c/ Undisbursed Twenty-seven Loans and Credits Fully Disbursed Republic of Tunisia Population d/ 1972 Republic of Tunisia Tourism Infrastructure Republic of Tunisia Urban Planning and Public Transportation d/ 1974 Compagnie des Phosphates et Chemin de Fer de GAFSA Pho-sphate Development Republic of Tunisia Irrigation Rehabilitation Republic of Tunisia Urban Sewerage Republic of Tunisia Third Education Republic of Tunisia Second Highways Republic of Tunisia Population Banque Nationale de Tunisie Second Agricultural Credit 12.00? d/ 1976 Societd Tunisienne de l'electricit& et du Gaz Second Power Republic of Tunisia Irrigation Development l SONEDE Fourth Water Supply BDET Development Finance Company Republic of Tunisia Small-Scale Industrial Project Republic of Tunisia Rural Roads (Third Higbways) Republic of Tunisia Second Urban Sewerage Societd Nationale d'exploitation d'eau Fifth Water Supply Republic of Tunisia Second Urban Development Republic of Tunisia Second Fisheries Republic of Tunisia Southern Irrigation Office des Ports Nationaux Third Port Republic of Tunisia Fourth Highways Societe Tunisienne de l'electricite et du Gaz Second Natural Gas Pipeline Banque Nationale de Tunisie Tbird Agricultural Credit Republic of Tunisia Fourth Education b/ 1981 Republic of Tunisia Small-Scale industry Development b/ 1981 Republic of Tunisia Northwest Rural Development b/ 1981 Republic of Tunisia Third Power b/ 1981 Republic of Tunisia Health and Population b/ 1981 Republic of Tunisia Textile Rehabilitation _ TOTAL Of which has been repaid Total now outstanding Amount Sold of which has been repaid Total now held by Bank and IDA b/ Total Undisbursed a/ This list does not include a loan of $42 million for a Grain Storage project approved by the Board on October 6, b/ Not yet effective cl Prior to exchange adjustment d/ Fully disbursed since September 30, 1981.

33 ANNEX II Page 2 of 9 B. STATEMENT OF IFC INVESTMENTS IN TUNISTA (as of September 30, 1981) Amount in US* Million Year Obligator Type of Business Joan Equity Total 1962 NPK Engrais Fertilizers Societe Nationale dr Investissement Development Finance Co. 0.6 n COFIT (Tourism) Development Finance Co Societe Nationale d'investissement (SNI) now (BDET) Development Finance Co SocLite Touristinue & Hoteliere RYM SA Tourism Societe d'etudes & de Developpement de Sousse-Nord Tourism Industries Chimiques du Fluor Chemicals BDET Development Finance ro Total Gross Commitments Less cancellations, terminations, repayments and sales Q.8 Total commitments now held by TFC ?.n Total undisbursed 0. n.o

34 Annex II Page 3 of 9 C. PROJECTS IN EXECUTION 1/ Cr. 238: Population Project; US$4.8 million credit of April 5, 1971; Date of Effectiveness; December 29, 1971; Closing Date; December 31, Cr : Population Project; US$4.8 million Supplemental Credit _NORAD grant) of October 13, 1976; Date of Effectiveness: March 21, 1977; Closing Date: December 31, The present closing date will not be extended. The undisbursed loan balance on February 24, 1982 was $110,453. Payments are being made on amounts committed prior to the closing date. Ln. 858: Tourism Infrastructure Project; US$14 million loan of September 28, 1972; Date of Effectiveness; June 29, 1973; Closing Date; December 31, The project is completed and the undisbursed loan balance ($96,940) was cancelled on November 24, Ln. 937: Cr. 432; Tunis District Urban Planning and Public Transport Project; US$11 million loan and US$7 million credit, both of October 5, 1973; Date of Effectiveness: September 24, 1974; Closing Date: December 31, The present closing date will not be extended. The undisbursed loan balance on February 24, 1982 was $365,575. Payments are being made on amounts committed prior to the closing date. Ln. 1042: Gafsa Phosphate Project; US$23.3 million loan of October 1, 1974; Date ot Effectiveness; March 14, 1975; Closing Date; December 31, The project is completed and the undisbursed loan balance ($105,930) was cancelled on February 26, Ln. 1068: Irrigation Rehabilitation Project; US$12.2 million loan of December 31, 1974; Date of Effectiveness: September 18, 1975; Closing Date: June 30, Progress in construction and rehabilitation of irrigation, drainage and road networks in the Medjerda area continues to be satisfactory. However, l/ These notes are designed to inform the Executive Directors regarding the progress of projects in execution, and in particular to report any problems which are being encountered, and the action being taken to remedy them. They should be read in this sense, and with the understanding that they do not purport to present a balanced evaluation of strengths and weaknesses in project execution.

35 Annex II Page 4 of 9 farmers have not fully used the available facilities due to limited distribution hours, lack of on-farm development and poor extension. Land reform is progressing and is expected to be completed by the end of In the Nebhana area, rehabilitation investments have been satisfactorily completed. Credit demand for basins and storage facilities was less than originally expected, and a grading and packing station was not built because of lack of capacity on the part of the cooperative which was to construct and manage it, and because drought in the area reduced production. Land consolidation in Nebhana is expected to be completed by mid-1982, and production of off-season vegetables under greeenhouses is encouraging. Ln. 1088; First Urban Sewerage Project: US$28 million loan of February 18, 1975; Date of Effectiveness: August 15, 1975; Closing Date: December 15, The project suffered considerable delay as a result of a number of factors, some beyond the control of the project entity (ONAS). As a result, considerable cost escalation occurred, chiefly in local cost components. However, all components of the project are now under construction and project completion is expected by mid One of its major benefits will be release of land for development around the Lake of Tunis, which until now has been impossible because of the pollution of the lake waters by untreated sewerage. Consultants financed under the project have produced a land-use plan for the area, and acquisition of the land by Government is in progress. Ln. 1155: Third Education Project; US$8.9 million loan of August 13, 1975; Date of Effectiveness: March 1, 1976; Closing Date: March 31, 1983 Implementation of this project was delayed following a change in education priorities in Tunisia. The project was subsequently amended to reduce the number of ITM centers to be equipped under the project, increase the facilities to train teachers for ITM, and increase technical assistance. The total cost of the amended project is estimated at $11.3 million and the Bank loan has been decreased by $0.3 million to $8.6 million, representing the full foreign exchange cost of the amended project. Implementation of the project is proceeding satisfactorily and as planned in the revised schedule. There was a slight delay of about three months in construction, but the procurement of furniture and equipment is running ahead of schedule. The final bid documents for the extension of the five teacher training colleges have been received and are now under awarding procedures. All major covenants have been met. Ln. 1188: Second Highways Project; US$28 million loan of January 26, 1976; Date of Effectiveness: June 16, 1976; Closing Date: December 31, Civil works on the Tunis-Bizerte highway have been completed. Construction is almost complete on the Hammamet-Korba road in Nabeul. The

36 -32 - Annex II Page 5 of 9 remaining construction works on other roads are well-advanced. The Sfax by-pass under Lot 8 on which there is a difficult problem of expropriation has been deleted from the project. All studies under the project have been completed and their results are being implemented. Ln. 1340: Second Agricultural Credit Project; US$12 million loan of December 17, 1976; Date of Effectiveness: July 19, 1977; Closing Date; December 31, About 81 percent of the loan amount is disbursed and more than 100 percent is committed; amounts in excess will have to be financed by the Government or by the Third Agricultural Credit project. Categories 2 and 4 (subloans to commercial farmers and agro-industrial investors) are fully disbursed. Category 1 (subloans to small and medium farmers) are expected to be fully disbursed by the end of Disbursements for Category 3 (subloans to farmers' associations for the establishment of date palm plantations) have begun. Construction of irrigation infrastructure is in progress and plantation is also progressing satisfactorily. However, drilling of artesian wells is suffering some delays. Ln. 1355: Second Power Project; US$14.5 million loan of January 12, 1977; Date of Effectiveness: May 4, 1977; Closing Date: June 30, 1981l. The project is completed and the undisbursed loan balance ($93,349.98) was cancelled on October 20, Ln. 1431: Sidi Salem Multipurpose Project; US$42 million loan of July 5, 1977; Date of Effectiveness: July 31, 1978; Closing Date: June 30, For the project as a whole, progress in implementation continues to be satisfactory. The land reform and consolidation program is underway. The Sidi Salem dam is expected to be completed on schedule to catch the 1981/82 flood season. The new railroad is now completed and in commercial service. After some initial delays, construction of the Medjerda-Cap Bon interconnection canal is proceeding more rapidly, and completion by end 1983 seems possible. A 6 kms section was commissioned in June 1981, permitting the supply of additional water to Tunis during the peak consumption period. First irrigation of the 1,400 ha Testour perimeter is expected in April Ln. 1445: Fourth Water Supply Project; US$21 million loan of July 5, 1977; Date of Effectiveness: January 30, 1978; Closing Date: December 31, The procurement process under the fourth project is now completed. Project execution has accelerated during the last six months and the project is now expected to be completed by end 1982, about six months behind the appraisal schedule.

37 Annex II Page 6 of 9 Ln. 1504/1505: Industrial Finance Project consisting of a Seventh Loan to Banque de Developpement Economique de Tunisie (BDET) and a Pilot Project for assistance to SSI; Loans of $30.0 million to BDET and of $5.0 million to the Government of January 25, 1978; Date of Effectiveness: October 13, 1978; Closing Date: December 31, Both loans are fully committed. Under the project, BDET is giving priority in its financing to projects which are located in the least developed regions, sponsored by new entrepreneurs, characterized by high labor intensity or export-orientation. Under the SSI pilot project, the commercial banks' initial reluctance to utilize Bank funds for SSI financing has been overcome. Considerable progress has been made by the Tunisian authorities toward setting up a comprehensive program of Tunisian and foreign technical assistance experts, specifically catering to the needs of SSI, as agreed under the project. A new project approved by the Bank in May 1981 supports this program (see below Ln. 1969). Ln. 1601: Rural Roads Project; US$32.0 million loan of July 24, 1978; Date of Effectiveness: April 30, 1979; Closing Date: June 30, Road construction is now underway in all the eight provinces. Progress on the complementary agricultural component, after an initial delay, is now proceeding satisfactorily. The Government wishes to expand the project to cover three additional provinces. This is under consideration. Ln. 1675: Second Urban Sewerage Project; US$26.5 million loan of April 13, 1979; Date of Effectiveness: August 31, 1979; Closing Date: December 31, Consultants have been contracted and detailed design is proceeding. Tenders have been called for the first civil works, and construction has started. Ln. 1702: Fifth Water Supply Project; US$25.0 million loan of May 31, 1979; Date of Effectiveness: October 19, 1979; Closing Date: December 31, The physical execution of the project is progressing well and according to schedule. SONEDE has already approved eight urban and seventeen rural sub-projects for a total investment cost of $28.5 million. Procurement for the project is now completed and works under all project contracts are proceeding rapidly. Laying of the piping system of the production facilities included in the project has been completed. Ln. 1705: Second Urban Development Project; US$19.0 million loan of May 31, 1979; Date of Effectiveness: December 1, 1980; Closing Date: December 31, The physical works of the project both in Tunis and Sfax are progressing satisfactorily, with about 35% of works completed. Technical studies for

38 Annex II Page 7 of 9 the solid waste collection and disposal component is progressing well. The housing component is progressing slowly and experiencing cost overruns due to technical difficulties associated with the sites in Jebel Lahmar and to slow acquisition of sites in Saida Manoubia and in Cimer Nord. Ln. 1746: Second Fisheries Project; US$28.5 million loan of July 20, 1979; Date of Effectiveness: May 14, 1980; Closing Date; June 30, All contracts for port infrastructure have been awarded and construction is well underway at most sites and general progress is satisfactory. Detailed design for the boat hulls has been completed and procurement is underway. Bid awards for boat engines have been made. Ln. 1796: Southern Irrigation Project; US$25.0 million loan of February 8, 1980; Date of Effectiveness: September 30, 1980; Closing Date: June 30, The implementation of the project is proceeding according to schedule. A contract has been awarded for the sinking of the first 13 deep wells of the project and borings are underway at several sites. A contract has been awarded for supply of asbestos-cement pipes to be used in rehabilitation of irrigation infrastructure in existing oases. Ln. 1797: Third Port Project; US$42.5 million loan of February 8, 1980; Date ot Ettectiveness: June 25, 17980; Closing Date: June io _= 5. The physical execution of the project at La 3oulette is now progressing well. Dredging of the channel and of the new basin area has been completed. The reclamation at the new port area behind the project quay line is under way. The casting yard for concrete quay caissons has become operational. As a result of initial delays in starting the dredging operations, the civil works are about 5 months behind schedule. At Sfax, the contracts for civil works were awarded in July Dredging started in October 1980 but works were delayed on the landward side until the shipyards and the fishing port were removed to their new locations in late February Further problems have developed in connection with the innovative casting technique: heated concrete blocks showed cracks through testings and the causes are being investigated by the contractor which has deferred further casting. This will add to the 9 months delay from which civil works in Sfax have already suffered. Supervision is working satisfactorily in both ports. Training programs for port workers have been prepared. Ln. 1841; Fourth Highway Project; US$36.5 million loan of May 22, 1980; Date of Effectiveness: November 21, 1980; Closing Date: September 30, Project implementation is progressing well; the 1981 construction program is underway. Elements of the 1982 program for rehabilitation and maintenance have been discussed and agreed with the Government, and the 1982 action plan is being implemented.

39 35 - Annex II Page 8 of 9 Ln. 1864: Second Natural Gas Pipeline Project; US$37 million loan of October 22, amended on July 15, 1981; Date of Effectiveness: December 9, 1981; Closing Date: December 31, The original project scope has been modified because of uncertainties related to the purchase of gas from Algeria; the project has been redesigned to utilize royalty gas as a substitute for premium liquid fuel products. Ln. 1885: Third Agricultural Credit Project; US$30.0 million loan of August 6, 1980; Date of Effectiveness: June 24, 1981; Closing Date: December 31, The project will finance part of BNT's agricultural three-year lending program for medium and long-term credit to small and medium farmers, production and service cooperatives, commercial farmers and agro-industries. The loan became effective after one extension of the original date of April 30, Disbursements are expected to start immediately for those purposes where Agricultural Credit II is already overcommitted (commercial farmers, producer cooperatives and agro-industries). Ln. 1961: Fourth Education Project; US$26 million loan of May 18, 1981; Date of Effectiveness: November 18, 1981; Closing Date: December 31, The implementation of this project, which is entirely devoted to skilled worker training and apprenticeship, is proceeding satisfactorily, with assistance from the ILO. The first phase of construction has already been tendered. All the final lists of furniture and equipment have been completed and the programs reviewed. Technical assistance to aid in reinforcement of the management, logistics and programs of the network of vocational centers is under negotiation. Ln. 1969: Small Scale Industry Development Project; US$30.0 million loan of May 15, 1981; Planned Date of Effectiveness: April 30, 1982; Closing Date: December 31, The project supports the Government's comprehensive assistance program for small-scale industries through financial and technical assistance. $29.35 million is to be administered by the Central Bank of Tlunisia and made available to small entrepreneurs through participating banks. The remainder of the loan ($0.65 million) would strengthen the appraisal capacity of the Investment Promotion Agency.

40 Annex II Page 9 of 9 Ln. 1997: Northwest Rural velopment Project; US$24.0 million loan of July 15, S191 Planned Date of Effectiveness; April 30, 1982; Closing Date; September 30, The project is designed to help finance a five-year time slice of the Government's 15 year development program for the Northwest Region by concentrating on the establishment of institutions which could implement the program, and the extension, research, credit, and livestock development services. The project would also start up specific agricultural, soil conservation and forestry activities, together with productive infrastructure works. Ln. 2003; Third Power Project; US$41.5 million loan of July ; Planned Date of Effectiveness,:April 30, 1982; Closing Date; December 31, The project will assist Tunisia in implementing the first three years of a five-year program for the development of rural electrification and in rehabilitating the urban distribution systems by connecting about 990 villages in 15 Governorates to the national network and improving the supply of electricity in about 60 towns. Ln. 2005; Health and Population Project; US$12.5 million loan of July 15, 1981; Planned Date of Effectiveness: April 30, 2192 closing Date; December 31, The project is designed to support Government efforts to extend basic health care to the whole population by 1990, through the provision of better and more cost-effective health, family planning and nutrition services to lower income groups in eight selected Governorates. It would strengthen the Ministry of Public Health's management capacity, improve and expand the basic health care delivery system and health education programs, upgrade the training system, and train project personnel. Ln. 2012: Textile Rehabilitation Project; US$18.6 million loan of October 27, 1981; Planned Date of Effectiveness; February 25, 1982; Closing Date; December 31, The project will assist the Government in implementing the first phase of a rehabilitation and modernization program for the public sector textile industry. It would expand and improve production so as to enhance competitiveness in export markets. Ln. 2052: Grain Distribution and Storage Project; US$42.0 million loan of October 27, 1981; Planned Date of Effectiveness: April 30, 1982; Closing Date: December 31, The project is designed to strengthen grain storage capacity; reduce congestion, handling costs, demurrage charges and grain losses at the main Tunisian seaports and the cost of transport and handling of grain; strengthen the technical capacity and financial management of the Office of Cereals; and lay the groundwork for further modernization of the system of collection, storage and transport of domestic grain.