INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION TUNISIA.

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1 Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized Public Disclosure Authorized RESTRICTED Report No EMA-22a This report was prepared for use within the Bank and its affiliated organizations They do not accept responsibility for its accuracy or completeness The report may not be published nor may it be quoted as representing their views INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION CURRENT ECONOMIC POSITION AND PROSPECTS OF TUNISIA May 4, 1970 Europe Middle East and North Africa Department

2 CURRENCY EQUIVAIENTS 1 dinar US dollars 1 dollar o.525 dinars 1 million dinars a 1,905,000 US dollars 1 million dollars 525,ooo dinars

3 TABLE OF CONTENTS Page No. BASIC DATA o.o... SUMMARY AND CONCLUSIONS i I. CURRENT ECONOMIC DEVELOPMENTS Recent Developments Prospects for II. ECONOMIC PERFORMANCE... 7 Economic Planning Population, Labor and Education... 9 Public Enterprise Performance Government Finance... o.o.*.* * Money and Credit *... s18 III. FOREIGN TRADE AND EXTERNAL FINANCE Commodity Trade Services and Current Transfers Foreign Capital Inflow External Reserves... *..... I External Debt * 25 IV. OUTLOOK... os STATISTICAL APPENDIX MAP This report is based on the findings of a mission which visited Tunisia in January/February The mission consisted of Messrs. Michael H. Payson (Chief), Bernard A. Schmutz and Diego Hidalgo (General Economists).

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5 BASIC DATA Area 164,000 square kilometers 63,380 square miles Population Total (millions) h Tunisians (millions) Rate of growth of Tunisian population (after emigration) 2.8 -pa. 2.2% p.a. Gross national product (1969) 597 million dinars Rate of growth /, 196h % p.a % p.a. Per capita, 1969 U.S. $230 Gross domestic product at factor cost (1969) 533 million dinars Percent sectoral distribution: / Agriculture 16.1 TT Mining (incl. oil) Manufacturing h Construction Transport and communications Others 46.o h Percent of GDP at market prices h-66 Gross fixed capital formation Change in stocks Domestic savings Net factor income and current transfer payments abroad External deficit on annual account Net imports of goods and services Rate of Increase Money and Credit (millions of dinars; year end) (% p.a.) Total money supply Time and savings deposits Bank credit to Government Other bank credit /1 GDP at 1966 market prices /2 Based on 1966 price estimates

6 Rate of Increase Prices B Wholesale price Cost of living (Tunis) Rate of Increase General Government (millions Operations of dinars) (%) (% p.a.) Current revenue Current expenditures Capital outlays Rate of Increase (millions External trade of dinars) (% p.a.) (% p.a-) Exports of goods and services Imports of goods and services Composition of exports (Percent of exports of goods and services) Rock phosphate Fertilizer Crude oil A Olive oil Citrus Wine Wheat Tourism Others Balance of Payments (average) (average) (US % million) Trade, net Invisible, net Current account, net Public capital inflow, gross Private capital inflow, gross Amortization Increase in reserves, net /1 Started in 1966

7 Foreign exchange position (US $ million) End of 1969 Gross foreign exchange reserves 50.3 (less than 3 months imports) Net foreign exchange reserves IMF position Quota 35.0 Drawings 19.3 Bank/IDA operations (end 1969; US $ million) External debt (US 5 million) Total public debt outstanding (end of year) (average) Total debt service ratio (percent of exports of goods and services) Public debt service ratio (percent of exports of goods and services)

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9 SUMMARY AND CONCLUSIONS i. Tunisia's will to develop has been reflected by the high share of resources devoted to investment. However, the scarcity of natural resources, the small size of domestic market, and continuing shortage of managerial and skilled manpower have been major obstacles, and high investment imposed strains on the economy. ii. During , the period of the second Plan, output grew by 3 percent per annum, compared with a projected 6 percent. Unfavorable weather conditions affected agriculture adversely, and shortfalls occurred in mining and manufacturing production. Actual investment was close to target, and shortfalls in savings were offset by higher foreign borrowing and a decline in external reserves. Performance improved in GDP rose by over 9 percent and savings recovered, despite a sharp deterioration in Government savings. Investment was reduced, and adjusted to domestic resources and to the inflow of foreign public capital. At the same time, institutional reforms were pushed forward, particularly the creation of cooperatives in traditional activities like agriculture and trade. The decision taken early in 1969 to accelerate further these reforms went beyond financial and manpower constraints. iii. The floods which hit Tunisia in September/October 1969 caused heavy damage. Economic activity and exports were-considerably reduced during the last 3 months of the year. Full recovery of production in mining and manufacturing depends now on the re-establishment of transport facilities. A D 33 million reconstruction program for , which is being pursued, assumes substantial external assistance. iv. Opposition to the speeding of the reforms led to Government changes in the fall of Policies on structural reform were reversed and economic authority was dispersed in reaction against the former centralization. The new Government is based on on collective leadership and on the need for a period of stabilization or even retrenchment on the ambitious development goals of the past. While the need for overall economic planning is recognized, a greater role is to be left to private initiative. Most agricultural production cooperatives working private land were dissolved, trade is being reorganized, and the economic and.financial position of public enterprises, which dominate most activity outside tourism, is being reexamined. v. Real growth of GDP was close to 5 percent in 1969, compared with a projected 7.6 percent. Extreme weather conditions and the floods affected output in agriculture, mining, transport and communications. On the other hand, output of the oil and manufacturing industries was greater than expected despite the floods. Capital formation was less than projected and remained a stable proportion of GDP. The Government reduced its investment outlays and domestic borrowing; this, and the floods contributed to restrain the absorption of external finance. National savings were below expectations and contributed a smaller proportion of investment finance than in The balance of payments had a D 9 million surplus.

10 - ii - vi. Agricultural prospects are good, and achievement of the projected 7.7 percent real increase in GDP in 1970 will depend on the re-establishment of activity in mining and manufacturing. and on the ability to implement public investment as scheduled. This investment is projected to increase by 23 percent despite a decline in Government savings. The Government budget gives priority to those investments for whichi foreign financing has been arranged and which have the greatest effect on employment. As total savings are expected to remain almost stable, external financing is to rise further in' proportion of investment; disbursement on external aid already contracted is to accelerate. The balance of payments is expected to have again a surplus. vii. The present economic and financial situation and the importance of the public sector limit the potential release of economic controls. The public sector remains dominant and it is important that the investment program for the years ahead be re-examined. Investment decisions often lack flexibility, and project preparation gives insufficient attention to economic criteria. Efforts to improve made during the last two years should be continued. New policies also need to be formulated to promote progress in agriculture. Delimitation of responsibilities and better coordination are essential to prevent the present fragmentation in economic authority weakening Government action. viii. Tunisia t s population has been growing at about 2.8 percent per annum for several years, and was 4.9 million in Family planning was initiated in 1962 and substantially expanded, but progress has suffered from insufficient organization and personnel. The Government is willing to expand the program further, and prospects of success are enhanced by a favorable environment and the availability of external assistance. ix. Unemployment is a major problem; about 20 percent of the rural labor force and a high proportion of young school leavers are without work. The Government intends to give a special priority to job creation. More attention is to be given to regional development and the labor intensity of projects; efforts initiated in 1969 to promote emigration, including training programs, will be reinforced; the project basis and the training function of work relief programs will be strengthened. x. The long term demand for high grade and skilled manpower is being assessed to guide labor and education policies. More information on the labor market, and close coordination of all Government agencies involved, including in ministries responsible for education and project design, are needed. xi. The number of secondary education graduates now greatly exceeds manpower requirements. The educational system and the Plan objectives are being re-examined in the light of employment and financial constraints. Improvement of vocational training and youth programs is a necessary complement to reforms of the educational system.

11 - iii - xii. The performance of public enterprises is often disappointing. With the help of the Bank, the Government intends to improve accounting, expand training and re-organize a first group of enterprises. Financial reorganization and, in a few cases, reconversion, are needed. xiii. Investment opportunities in export industries are to be examined by the Government. The promotion of industrial exports, particularly to EEC countries, also requires a sustained marketing effort. This could be associated with further efforts to attract foreign private investment and to extend cooperation between Tunisian and foreign firms, including subcontracting. xiv. Government's savings recovered substantially in 1969, but did not reach the pre-1967 level. They are projected to decline in 1970, and will fall substantially short of projections in the four year Plan. The already high tax burden (Government current revenue is over 25 percent of GDP) limits the possibility of expanding revenue by raising taxes, and the major need in budgetary policy is for a much smaller rate of increase in current spending. However, current expenditure is budgeted to rise by over 10 percent in 1970, education again accounting for a large proportion of the increase. Improvement of the overall fiscal position also depends on more effective financial control of public enterprises and flexibility in investment. Projects submitted for Government's approval since October 1969 show a revival of private investment outside tourism, and the demand for credit from the private sector is likely to rise above expectations. The anticipated money expansion already exceeds projected real economic growth; the measures taken by the Government should prevent public domestic borrowing from exceeding projections. xv. The total external public debt outstanding by the end of 1969 was about $700 million, equivalent to 60 percent of GDP; the corresponding debt service in 1969 amounted to 21 percent of receipts from commodity exports and non-factor services (respectively 25 percent for the service on total external debt). Interest and amortization payments due on the present public debt total imply almost the same amount in each of the next few years as in These commitments limit the scope for further borrowing, especially of medium term credits. They also call for further effort to promote exports, and to raise domestic savings and improve the productivity of capital.

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13 I. CURRENT ECONOMIC DEVELOPMENTS 1. Rainstorms hit Tunisia between September 27 and October 22, Heavy floods occurred, in particular in northwestern and central Tunisia, and 93 percent of the territory was decreed a disaster area. More than 500 people died, about 50,000 houses were demolished, and direct damage to infrastructure (excluding housing) was roughly estimated at D 27 million. The toll of destruction included 270 km of highway, 25 bridges, and a high proportion of secondary roads; a large portion of the railway network and 20 bridges; irrigation works and livestock; telecommunications; water and sewerage systems in some major cities. Consequently, both production and exports were considerably reduced during the last three months of the year. Preliminary Estimates of Direct flood Damages Million Dinars Railway 5.4 Public Works 5.0 Agriculture 14.5 Irrigation (6.1) Livestock, arboriculture (3.5) Others Full recovery of production in mining and manufacturing depends on the re-establishment of transport, especially railways, as production facilities were not too seriously damaged. Emergency work on major railway lines should restore capacity during the first half of Damage to roads will slow down traffic considerably in several regions until repair is completed. Agricultural production will also depend on reconstruction although the present soil moisture makes immediate prospects promising. 3. A reconstruction program is being prepared, providing for contribution by the Government of about D 5 million per year during External assistance anticipated is D 15 million, of which D 4 million are committed at present. Re-examination of the Development Plan is to take into account the additional financial needs for reconstruction and coordinate them with other investments. 4. There were also governmental changes in 1969 due to widespread opposition to accelerated institutional reforms. The Government was modified in September, because of the growing opposition to the drive towards cooperatives in agriculture, and again in November after the presidential and parliamentary elections. Policies on organization of production under cooperatives were reversed and economic authority was dispersed in reaction against the former centralization. Until now, the Government has been reviewing the situation and reexamining options. 27.0

14 Institutional reforms had been a major part of an active approach to economic development aiming also to modernize Tunisian society. Cooperativization of traditional activities, in particular agriculture, handicraft and trade, was assigned a major role in this effort. The establishment of state-owned enterprises in other sectors was to overcome handicaps set by limited natural resources, a small domestic market and lack of managerial and skilled manpower. The decision early in 1969 to introduce production cooperatives throughout the agricultural sector by the end of the year added to the dissatisfaction resulting already from the poor performance of existing cooperatives. In other sectors, apart from tourism and housing, the privileged position of public enterprises and the reliance of Government policies upon direct intervention and control limited the scope for private initiative. 6. While recognizing the need for economic planning and reforms, the new Government intends to favor individual freedom, to leave a greater role to private initiative, and not to impose reforms as was done in the past. A law of September 20, 1969 reversed policies on agricultural organization and re-affirmed the co-existence of public, cooperative and private farming, and the right of individuals to join or leave cooperatives. Previous re-organization measures introducing cooperatives in handicraft and trade were adjusted and restrictions on individual enterprise to a large extent eased. A recent law permits dissolution of retail trade cooperatives. The economic and financial position of public enterprises is being re-examined. Special efforts have been started to attract foreign investment for export industries, for which association with the EEC offers most prospects. 7. Private land owners have withdrawn their land from production cooperatives. Organization and management of state land are being reviewed and several alternatives are considered, such as cooperatives grouping the farm labour on large cereal farms, division of some large farms in family units, re-organization in state-farms (agro-combinats), or assignment of land to agricultural schools or research establishments. Service cooperatives could operate at regional and national levels, in addition to the Government Offices for oil, wine, livestock production and large crops. 8. Release of direct controls and a greater reliance upon market forces in economic policies are to be gradual as the external financial position leaves little scope for adjustment. Financial re-organization of public enterprises has been roughly estimated to require about D 50 million. A re-examination of this additional charge on financial projections is now being considered. 9. The creation of cooperative farms was causing great additional burden on financial and manpower resources. The change in agricultural policies removes this potential burden, but does nothing to solve the problem of modernizing a backward subsistence farming. Promotion of agriculture will remain difficult to administer efficiently as long as new extension services have not been organized.

15 Coordination of economic and financial affairs, financial control, public bids and statistical services are part of the newly established Prime Minister's Office, as well as the investment budget and transfers to public enterprises under the Secretary of State for Planning. Supervision of mining, industry, transport and trade, and the chairmanship of the investment agreement committees, have been assigned to the Ministry of Economic Affairs. The preparation of the current budget, treasury operations and Government borrowing remain responsibilities of the Ministry of Finance. Such fragmentation is intended to re-enforce collective leadership and financial control in a period of austerity and prevent hasty decisions while the economy is being re-organized and eevelopment strategy re-examined. While a period of reflection after the developments of the past few years is probably needed, it is important that the establishment of new administrative structures, the full allocation of responsibilities, and development of working relations do not weaken and delay Government action. Recent Developments 11. The economic budget for 1969, the first year of the Plan, aimed at maintaining a rate of growth close to the high 1968 level while pursuing improvements in resource allocation. Actual results failed to come up to expectations owing largely to unfavorable weather conditions. Gross domestic product at market prices at an estimated V 622 million was 6.8 percent more than in However, real output grew by less than 5 percent, compared with the 7.6 percent projected. Major short-falls occurred in agriculture, extractive industry, transport and communications. On the other hand the expansion of oil and manufacturing exceeded projections. Output rose by 33 percent in the textile industry where capacity utilization and marketing were improved. The contribution by tourism increased by 12 percent, but fell short of expectations as a result of the floods. Government services were 8.2 percent above the 1968 level and accounted for 38 percent of the real addition to gross domestic product at factor cost. 12. Gross fixed investment in 1969 was less than expected and remained a stable proportion of gross domestic product at 21.8 percent. Floods delayed progress on several projects in agriculture, manufacturing, transport and communications. More significant was the postponement of local currency investments of the Central Government in an effort to reduce domestic borrowing. This, in additon to the floods and organizational difficulties, also set limits to the absorption of external finance. On the other hand, public enterprise investments were increased by 21 percent to a level close to 1967, and well above 1969 projections. Construction of a paper mill in Kasserine and higher outlays in housing were the major contributions. Investments in tourism went up by 13.8 percent and slightly exceeded projections, private investment alone rising by over 26 percent. Private investment concentrated in this sector, as total investment by private enterprises outside agriculture were almost unchanged. The introduction of procedures to speed up the granting of foreign exchange authorizations, the promulgation of an investment code and the holding of an international conference on investment opportunities had little effect outside tourism, and even in that sector the high level of private investment was more the result of a liberal environment, contrasting with the controls prevailing in other sectors.

16 The allocation of a larger proportion of investment to projects in services in 1969 reflects the Government's difficulties in identifying opportunities for fast yielding projects in agriculture and manufacturing. Lower outlays in the oil sector reflect a slowing of exploration and the absence of any significant discovery whilst production is close to full capacity. Fixed Capital Formation by Sector (in percent of total) Economic Provisional Economic Budget 1969 Budget Agriculture Mining Power Manufacturing Transport, Communications Other Services Housing (9.2) (9.9) (9.9) (12.6) (10.0) Tourism (10.3)(10.8) (10.7) (11.6) (9.4) Education (7.3) (7.3) (9.0) (7.6) (6.6) Public administration (6.4) (7.9) (6.3) (7.2) (5.5) Other (7.5) (6.1) (6.8) (7.3) (8.8) Reconstruction Total Source: Appendix Table Public consumption was higher than expected. There was a shortfall in private consumption, and real consumption per head is likely to have remained little changed. Stocks were replenished after the 1968 draw down, and domestic demand slightly exceeded projections. The external deficit on trade and services was also higher than expected. Imports came up to projections and increased by 15.8 percent, after a sharp drop in 1968, but the expansion of exports remained at 6.9 percent, instead of 9.6 percent as projected, as a result of poor agricultural production and interruption of phosphate deliveries late in the year. Crude oil and tourism remained the leading components in exports. 15. National savings fell short of the 1969 objective, notwithstanding a 13 percent increase due largely to general Government savings. Savings by public enterprises increased, but improvements in industrial undertakings compensated partly for deteriorations in the service sector.

17 All told, the proportion of investment financed domestically declined from 63.5 percent in 1968 to 59.2 percent in On the other hand, foreign capital inflow was greater than anticipated. Substantial additional public capital transfers included foodstuffs and grants in kind (partly flood emergency relief). Disbursements on public loans rose by 33 percent to close to the high 1967 level, but even so did not come up to expectations. The inflow of private capital was much less than in 1968 although the projected reduction did not materialize completely. Additional capital inflow made up for the deterioration on external current account, and the balance of payments experienced a D 9 million surplus. 17. Agricultural production declined by 3 percent in Drought early in the year affected grain production, which dropped by almost 25 percent. Hard wheat production was 324 thousand metric tons, 20 percent below The date crop was damaged by rain; the olive crop harvested late in 1969 did not come up to expectations as a result of drought, excessive rains and flood damage to the trees. Wine production was little changed. 18. In recent years, overall agricultural production is likely to have suffered from the poor performances of the cooperatives, discrimination against private farming in credit allocation and subsidies - the major instrument to promote cooperatives prior to January and insufficient price incentives to farmers. The decision in January 1969 to extend producers'cooperatives throughout agriculture was little implemented as the new policy to abandon this decision was announced before the beginning of the agricultural year. However, the adverse reaction among private farmers resulted in livestock and equipment liquidation. Depletion of the livestock population through sale for domestic slaughter or illegal export may have been as much as 25 percent. Prices dropped until September and then rose again sharply. Additional losses occurred from the floods and imports of sheep from Yugoslavia were needed to meet the shortage. Prospects for Projections for 1970 have been established in the economic and the financial budgets. They anticipate a 7.7 percent real increase in gross domestic product at factor cost; and a D 149 million fixed capital formation, or 22.3 percent of GDP. The deficit on external trade and services is expected to rise as a result of a faster expansion of imports than of exports. 20. About half the additional output is to come from services, a large proportion resulting from higher current spending by general Government. Real output is anticipated to increase by 6.2 percent in manufacturing, 11.4 percent in construction and 9.6 percent in transport and communications. Achievement of these objectives will depend on the re-establishment of activity in these sectors. An adjustment of capital outlays may be made necessary by the internal financial situation or result from difficulties such as already experienced in the past in mobilizing external finance. Good results anticipated from the on-going agricultural season will come to frui-

18 tion partly in 1971, and agricultural output is expected to rise by only 6.2 percent in The 16.8 percent increase projected in tourism is in line with favorable developments in the past. The contribution by the oil sector is to remain stable as full production capacity' is being reached. The extractive industry is to recover to a level slightly above Major differences compared with the Plan projections are short-falls in extractive industry and manufacturing, and a substantial excess in Government services. 21. Total fixed capital formation is expected to rise by 10 percent as a result of higher public investment. The Government's program has been fixed at about D 54 million, D 7 million above tihe 1969 level. Greater reliance upon external resources is anticipated as the Government's current surplus is to decline, and foreign debt amortization and capital transfers to public enterprises to remain little changed. Tiie-proposed project allozcation gives priority to investments with foreign financing and high employment generation, and to infrastructure and reconstruction. A large proportion of the additional investment is to take place in transport and communications. D 11 million are to be spent on employment-programs, including for reconstruction works, and total outlays for reconstruction are to amount to D 4 million. An effort was made to restrain local,, currency investments in agriculture and in general public services, including education, health and administrative building, where very few projects' are to'be initiated Investments by public enterprises are to increase by 30 percent to D 59 million, and substantial external financing is anticipated. This contribution is likely to have been over estimated. On the other hand, the decline projected in private investment, particularlyin, manufacturing and tourism, may reflect overly pessimistic viewsc. Notwithstanding present constraints, the Government's favorable attitudettowards:both local and foreign private investment seems to have an immediateincentive'. Projects submitied for Government approval since October 1969 show a revival of private investment in industry. 23. Private consumption is expected to rise faster than in 1969 as a result of the Government decision to reduce prices for basic commodities and extend rent control, which will slow down the overall increase in retail prices. Public consumption is to reflect the sharp increase in current budget expenditures. The increase in exports of goods and services should reach the 7 percent target while the expansion of imports will be influenced by the level of domestic investment. 24. National savings may remain stable in Public enterprises are expected to achieve increases while savings by Government and private. enterprises are to deteriorate. As a result domestic. financing of investment is to decrease further in proportion of gross investment, from 59.2 percent in 1969 to 56.6 percent. External finance is to rise by 5 percent' to D 92.5 million, which is below the Plan target. Disbursements of public loans are expected to be speeded up but private borrowing is to decline. The overall D 6 million balance of payments surplus projected. at present' may be over estimated.

19 25. Prospects for the agricultural season are favorable. Floods delayed planting in some areas, but the Government made special efforts to expand seasonal credit and allocate equipment. Sowing included land usually left fallow and helicopters were used for seeding wheat in some of the wettest areas. Ample soil moisture should also offset livestock losses somewhat as grazing and forage conditions improve. Support of the current policy by farmers could be reflected in the overall agricultural production. 26. Production is anticipated to increase by 39 percent for hard wheat, to a level still below 1965, and to almost triple for barley, as acreage was expanded to marginal lands. Citrus and olive crops sold early this year still reflect 1969 weather conditions, but the next season appears as promising. Date production is projected to rise back to a normal level in Low yields associated with traditional farming and the lack of experienced management will remain major problems in agriculture. In the short run priority should be given to improving the use of existing facilities in the sector. Large investments have been made in the past, particularly for irrigation and farm mechanization, which are currently underutilized; therefore, efforts should concentrate on improving production from this capacity, and projects included in the Plan (D 128 million or 21 percent of total) be re-examined. It is also important that new projects be initiated only if additional extension services are available. These services need to be greatly enlarged and strengthened, if possible with foreign technical assistance. More adequate use of price and credit incentives as an instrument of agricultural policy is also to be achieved. II. ECONOMIC PERFORMANCE Economic Planning 1/ 28. The planning office has been transferred from the Ministry of Finance and National Economy to a Secretariat of State in the Prime Minister's office. It now consists of three branches working closely together. The Directorate of Planning and Research establishes plans, economic budgets and short term economic indicators; analyzes current economic situation and prospects; works out planning methods and is undertaking preliminary work for the fourth plan. The Directorate of Sectoral Programming and Projects is in charge of sector surveys, sectoral development strategy and programming, the supervision of sectoral program implementation. There are separate divisions for agriculture, industry and services, employment and education, social affairs. This Directorate is also responsible for 1/ The Economy of Tunisia (Report DIA - 8, dated August 25, 1969) includes an analysis of the Plan objectives (previous plans covered and , respectively).

20 -8- prograuming and implementing Government's direct investments, and for capital transfers to enterprises and equity participations. However, approval of investment projects is reserved to committees chaired by the representative of the Ministry of Economic Affairs. The Directorate of International Economic Cooperation deals with external relations, including regional economic integration. 1/ 29. During the 1960's investment decisions were insufficiently related to the shortfall of domestic savings and external public aid below expectations.' Project selection gave insufficient attention to economic criteria and investment yields were comparatively low. However, performance improved in 1968 and both high economic growth and adjustment of investment to savings and foreign public aid were simultaneously achieved. The implementation of the Plan is to be adjusted to current developments through annual economic budgets and investment programs, and greater efforts are being made to improve short term economic indicators. 30. Tunisia's financial position still requires flexibility in investment and more is to be done to improve short term programming. The Government also intends to re-examine projected investments in 4griculture, mining, industry and transport in the light of more strict economic criteria and the need for flood reconstruction. Both additional financial needs and the larger contribution now expected from private capital may call for a review of financial projections. Alternative investment opportunities, particularly in industry, need to be investigated first by making an inventory of the studies already completed and their major findings. Such information is to guide a more selective procedure of investment approval and the financial reorganization of public enterprises. Economic association with EEC is a new element and raises opportunities for industrial exports and foreign private investment. Priorities in planning also require an assessment of' long term demand for middle and high level manpower, necessary for education development. 31. The new planning organization is well conceived. However, the inter-ministerial allocation of responsibilities in project appraisal and the formulation of sectoral policies still needs to be specified, and a strengthening of planning services in major technical ministries may be needed. Effective coordination between ministries will also be essential. Staff shortage is likely to remain a serious handicap and foreign technical assistance will continue to be needed. 32. Resources projected in the 1970 Central Government investment budget amount to about D 69 million, of which D 39 million are external. Direct investment is to amount to about D 40 million; allocation gives priority to projects with external financing, to employment creation (work 1/ Negotiation with bilateral donors remains the responsibility of the Ministry of Foreign Affairs.

21 relief programs), payment of arrears (agriculture), reconstruction and productive services (transport and communications). Few new projects and no major programs were intended to be initiated this year. Population, Labor, and Education 33. The population of Tunisia increased at an annual rate of 2.8 percent for several years and was about 4.9 million in Indicated birth rates averaged 44 per thousand and death rates 16 per thousand. About 46 percent of the population is under 15 years of age. While the number of non-tunisians declined from about 340 thousand in 1956 to 70 thousand in recent years, emigration of Tunisians has not been important; the total for the ten years was about 66, Continuation of the present birth rate with a reduction in mortality of 5 per thousand over twenty years would result in an 8.4 million population by 1986, growing at 3.4 percent per annum. On the other hand, a reduction of the birth rate to 35.0 or 28.9 per thousand would result in a population of 7.8 million or 7.3 million, respectively, by 1986, growing at 2.6 or 2 percent per annum. These two projections assume reasonable progress in family planning. 35. Family planning was initiated in 1962 and substantially expanded. However, the program suffered from insufficient organization and shortage of medical and paramedical personnel. The Government is now willing to expand it further, and external technical and financial assistance is anticipated. Family planning is recognized as a necessary measure to control labor supply in the long run, and generate higher resources for development, including by slowing down demand for education. The Government intends to appraise further the needs for population planning and the most appropriate measures to be taken in the light of development prospects and priorities. 36. Employment expansion remained below both the rate of economic growth and the increase in working age population during the intercensus period. While additional jobs were created in manufacturing, construction, and services, and a large number of foreigners were replaced, employment in agriculture may have decreased as a result of structural and technical changes. Unemployment and underemployment are now large. The Secretariat of State for Social Affairs and Housing roughly estimated unemployment at about 180,000 on average during the past few years, a level close to 15 percent of the total labor force. Unemployment of men was over 17 percent in rural areas, where 60 percent of the labor force is located, with large differences among regions. Half of the unemployed are under thirty years of age, and include a rapidly growing number of educated school leavers. 37. Measures to increase employment included the promotion of education and training in general, work relief programs in agricultural areas (LCSD), and work programs for youth (Service Civil; production-training). The role of education was certainly over-estimated. Expansion of employment is a major objective of the Plan, which projects the creation of

22 about 30,000 jobs per year, compared with an average of about 20,000 ourlng The Government now intends to put particular emphasis on this objective. The labor force can be expected to increase more rapidly in the years ahead than in the past few years, and unemployment would increasingly threaten social and economic stability. 38. The large proportion of the labor force in rural areas calls for special attention to be given to agricultural development. In other sectors, large differences exist in the investment per new job; they need to be considered while reviewing development potentials. Branches of industry such as mechanical and electrical, textiles, clothing and leather seem to have comparatively low investment labor ratios. Close cooperation is needed between Government services responsible for employment planning and for project design. 39. Emigration until 1969 was unorganized and averaged only about 6,000 workers per year, going mainly to France. Efforts are now being made to promote and organize it, particularly by the National Service of Vocational Training and Employment (OFPE), and emigrants totaled over 9,000 in France received 5,100 Tunisians and normalized the status of 8,700 workers already in France; Germany had 2,600 workers and other countries,, including Libya, 1,300. France established a recruiting service in Tunis and intends now to receive 6,500 workers per year, slightly more than the past average. Labor agreements were signed with Belgium in 1969 and with Germany in early Emigration to Libya reached a maximum in 1967 (5,700) and subsequently declined. Emigration is expected to reach 12,000 in 1970, of which 7,100 are expected to go to France (including trainees) and 3,500 to Germany. This latter country has recently established a permanent recruiting commission in Tunis. 40. It is suitable that manpower training for emigration be expanded. This may even require an adjustment of some youth programs. Financial participation by foreign countries in this training, such as initiated by France and Germany in 1969 would accelerate emigration. Tunisia also needs to increase its promotion efforts abroad and invite further countries to establish recruiting centers in Tunisia. 41. Work relief programs will be needed for many years. The Government intends to integrate them more into economic development by improving their project basis and their training function. The programs provide for about 140,000 workers in the first half of 1970, and give a large place to flood repair. Programs for the young unemployed also need strengthening. Establishment of pilot centers and the initiation of systematic manpower planning at the regional level are now being undertaken with UNDP assistance. Other measures considered include widening the activity of regional employment offices, reexamining retirement systems and reviewing wage structures in order to determine possibilities of altering the supply/demand situation for specific occupations and encouraging labor productivity.

23 Better information on employment and the labor market is a condition for improving manpower planning and policies, and the efforts initiated recently need to be pursued. The various agencies dealing with employment and training (Plan; OFPE; Ministries of Agriculture, Economic Affairs, Education; Institute of Productivity) also need better coordination. 43. Education was expanded considerably during the 1960's. School places were increased by 60 percent in primary education between , and by 165 percent in secondary education. About 75 percent of the relevant age group is now enrolled in primary schools, and nearly 21 percent in secondary schools. Education accounts for over 20 percent of Government investment (over 7 percent of total domestic fixed investment), and about 30 percent of Government current expenditure. Improved planning is needed to arrive at qualitative and quantitative targets consistent with other priorities. 44. The Plan anticipates a 17 percent increase during four years of primary school enrollments (35,000 per year), a much lower rate than in the past. Various measures are intended to improve quality, in particular a more strict implementation of rules on class repetition. This is also an important condition for raising productivity at the secondary level. The Plan anticipates a doubling of enrollments in secondary schools, including vocational education, while higher education enrollments are to rise by 35 percent only. Total investment projected in education by the Plan is D 46 million, of which over half in secondary education. This amount seems under estimated compared with enrollment targets. 45. Expansion of secondary education is rapidly exceeding manpower requirements. School leavers from the first cycle already face difficulties in finding employment, and a similar situation is likely to develop for school leavers with complete secondary education, 8s indicated by a manpower study undertaken in the Secretariat of State for Planning. The Plan also underestimates the shortage of qualified secondary school teachers and education costs. Implementation of the targets beyond financial resources would reduce the quality of education and prejudice primary and higher education. Already at present, failure rates are high; technical secondary education is not sufficiently directed to employers' needs and fails to develop its full potential; agricultural schools need to be made more relevant to agricultural development. 46. An interministerial committee has been set up to reexamine the educational system and the plan's targets in the light of employment and financial constraints. Measures considered include higher standards for admission into secondary education and changes in programs. Expansion of higher education is to be made more selective, and priority given to secondary school teacher training, particularly in sciences, and to agricultural engineering. Selection at the end of the first year of university is also being made more severe, and a growing proportion of students are to be directed to a short program, training post-secondary technicians (at present

24 in mechanics, civil engineering, and agriculture) and assistant secondary school teachers. Steps have been initiated to establish a comprehensive plan for the development of Tunis University, which will also help to identify major needs for external assistance to this institution. 47. The National Service of Vocational Training and Employment provides vocational training at various levels (preapprenticeship, apprenticeship, adult training) in nearly one hundred centere throughout the country. rhese centers have served increasingly as work relief programs for school dropouts and leavers, and have insufficient connection with job creation and replacement, since large numbers of unfilled jobs do not exist. On-the-job training, apprenticeship programs and managerial and foremen training also need to receive more attention; this may require more assistance from the, National Service of Vocational Training and Employment to employers. The reexamination of youth programs is a necessary complement to reforms in education and training. 48. Manpower training for tourism expanded since While high level manpower still needs to be trained abroad, hotel schools have been created with external assistance to provide low level training, and the new Monastir school now also includes middle level courses. However, manpower requirements in the years ahead will exceed 300 per year with high level and 1,000 with middle level training. Present training efforts need to be strengthened, particularly at the middle level. It is also important that Tunisia receives sufficient assistance for high level training abroad. Public Enterprises 49. During the 196U's, public enterprises have;been a major instrument of economic development and accounted for about 80 percent of total investment by enterprises outside tourism. Only this latter sector has so far attracted substantial private capital after efforts had been initiated by the Government. Public enterprises have remained in a dominant position in most of other activities where private investors have been discouraged either by the magnitude of investments required for major projects (mining, metal industry, chemicals), or by direct controls and the facilities granted to the public sector. 50. Many public enterprises had to rely upon subsidies and set a heavy burden for the Government's budget. The creation of enterprises and the Government's approval of projects were often based on insufficient studies, concentrating on technical rather than economic and financial aspects. Dispersion of responsibilities prevented managers devoting sufficient time to their enterprises while the shortage of upper and middle management personnel has been serious. Poor accounting practices, particularly the lack of cost accounting, have undermined financial control, and regulations and policies on pricing and protection have failed to encourage efficiency.

25 At Tunisia's request a Bank mission reviewed the performance of state-owned enterprises (Report EMA-13a, August 31, 1969). In accordance with its recommendations, the Government decided to take immediate measures to improve accounting through the promotion of independent accounting firms and the introduction of independent auditing; to amplify the existing program of upper and middle management training; and to prepare the reorganization of a first group of 6 to 10 enterprises. 52. The implementation of these measures was delayed by floods and governmental changes. Contacts have been established with foreign auditing firms. The Graduate Business School was opened at the University in September and 35 students were admitted to attend a 2 year MBA program. Training at the National Institute of Productivity and Management is being enlarged with external assistance. The Ministry of Economic Affairs is now exploring opportunities within public enterprises for foreign private investment or subcontracting, but enterprises to be reorganized must still be selected and major problems remain to be studied. The Government requested Bank help to implement recommendations. 53. The financial structure of many public enterprises is weak, in some cases because a large share of their equity capital had been subscribed but not paid by the Government, obliging them to rely excessively on bank financing, despite large budgetary grants. Improving the working capital position of these enterprises might require D 50 million, which would allow them to transform into long-term debt or equity present high cost bank overdrafts used to finance fixed investment. A reorganization would first imply a substitution of bank lending to enterprises by Government borrowing from the Central Bank, and perhaps external financial assistance. A part of the Government's participation might subsequently be transferred to Government holding companies or to the private sector, including foreign, or converted into long-term debt. The participation of private local or foreign capital in some state-owned enterprises is desirable as further development of several undertakings calls for an expansion or improvement of existing facilities rather than the creation of additional concerns. A financial re-organization of state-owned enterprises is a prerequisite for such participation. An interministerial committee has been established to study the problem. 54. Savings by public enterprises rose less than investments in 1969, and greater reliance than in the past was put on borrowing, both domestic and foreign. Reduction of transfers from the Government was not as large as anticipated. The increase of savings was short of expectations as deterioration in the earnings of undertakings in the service sector, mainly commerce, offset to some extent the generally better results in mining, power and manufacturing. Even in these sectors, flood damage and the interruption of activity affected a number of enterprises and resulted in a worsening of their working capital position as debt service payments had to be met without sales revenues. However, because of improvements in manufacturing, present conditions for a financial re-organization of some large enterprises are better than a year ago.

26 The excess of investment over savings by public enterprises is projected to increase substantially in 1970 as project implementation is speeded up, more finance is expected from disbursements of external loans, and less transfers from the Government. 56. Mining. The floods damaged large sections of the Sfax-Gafsa railway. Traffic was interrupted and then re-established well below capacity. Although facilities in the mines were only slightly affected, production had to be reduced considerably. Rock phosphate production fell from 3.4 million tons in 1968 to 2.6 million in 1969 and resulting losses amounted to D 2.4 million. Damages to the Djerissa iron mine amounted to D 500 thousand. In mining as a whole, recovery to the 1968 production level by mid-1970 as anticipated depends on the re-establishment of transport facilities to their pre-flood level of operations. 57. Tunisia's competitive disadvantages in phosphate quality and mining conditions are serious handicaps in face of growing international competition. However, exhaustion and closure of the Moulares mine in 1971 is to be offset by the opening of two mines at Mrata and El Sehib. Estimated reserves have risen in the last few years, and new markets have been found, mainly in Eastern Europe. Large investments are underway (Gabes port and chemical plant) or planned (Gafsa-Gabes railway), and it is intended to increase phosphate production up to 6 million tons by 1974 and possibly 10 million by Such enlarged production would imply increasing mechanization of mining and enrichment of the rock phosphate produced. However, the studies undertaken to determine whether and how it would be economical to mine mechanically and to enrich such large quantities will not be completed before 1971, and the market study to have been completed in November 1969 is not yet available. In these circumstances, not only the investments projected but also those underway call for caution and for an exploration of alternative investment opportunities, including of a more labor-intensive nature. 58. Manufacturing. The 10 percent increase in industrial output in 1969, notwithstanding floods, contrasts with lower rates of expansion in previous years. Textile production rose by 33 percent after having been stable in 1968 and exports of industrial products, particularly steel, pulp and fertilizers, were increased by about 10 percent. Savings by public enterprises improved by D 3.1 million to D 8.5 million and an overall profit was realized for the first time since SOGITEX (textiles) and EL FOULADH (steel) contributed substantially to this improvement. 59. The position of several enterprises improved because of better management and favorable external factors. SOGITEX's marketing and distribution systems were improved, and EL FOULADH benefitted from a sharp rise in local demand for steel, associated with higher investments in construction, and an unexpected increase in export prices to a level close to Tunisia's. Production is now at full capacity and exports at favorable prices have been contracted for However, both companies still face severe liquidity problems. The national pulp company (SNTC) was granted

27 rescheduling of a foreign loan; it also managed to proceed with the construction of the Kasserine paper mill as scheduled in spite of the floods. SIAPE, a fertilizer plant, benefited from the fall in world prices of sulphur, a major raw material, and made profits after three consecutive years of losses. 60. Food processing suffered much from the floods. Every public company had lower savings and profits than in 1968, and profits of the largest private company (Societe Frigorifique de Tunis) also dropped by about 60 percent. Production of basic commodities like sugar, beer and butter was reduced. In the mechanical and electrical sectors, AMS (hardware) and SOCOMENA (ship construction and repair) remained in a difficult position. 61. Industrial output in 1970 is expected to increase by about 6.2 percent. The increase in overall profits and savings of public enterprises is likely to continue, although the Government's projection of a doubling in profits and a 50 percent rise in savings seems rather optimistic. Improvement of SIAPE may be short lived as the company will likely face increasing marketing problems and may even have to reconvert its facilities by 1971 to produce the more demanded higher grade superphosphates. EL FOULADH will remain with a heavy debt burden until In construction materials, the increase of the Libyan production of cement and bricks is likely.to result in the gradual loss of this export market for Tunisia. SNTC's profitability depends on the re-establishment of the Sousse-Kasserine railway, whose interruption has obliged the company to ship production by road at high cost. In the mechanical and electrical industries, the lack of viability of AMS and SOCOMENA is likely to continue. Food processing has been handicaped by a dispersion of production capacity, obsolete equipment and high cost of intermediary products, linked with low agricultural yields. In most industrial branches, a review of the prospects for further operations and of investment opportunities is needed. Scope exists for promoting industrial exports to the EEC and the efforts initiated to attract foreign skills and private investment to export oriented activities, including subcontracting, need to be pursued. 62. Other sectors. Profit and savings of other large state-owned enterprises improved during SHTT (tourism) had much higher profits than anticipated, notwithstanding the floods. The company is handicaped by high financial and depreciation costs due to high investment cost per bed in past hotel investments, and a high proportion of short term borrowing in its capital structure. However, prospects are good, and the company is to be among the public enterprises to be reorganized first. SITEP (crude oil) increased profits and savings as a result of a larger production. STEG (electric power) increased electricity production, and savings were 32 percent higher than in 1968; however, the company's debt equity ratio is high, and return on capital is still low. SONEDE's (water supply) savings increased substantially to reach D 1.5 million in Further improvements should be achieved in 1970, with the exception of SITEP as oil production has reached full capacity.

28 Government Finance 63. General Government savings improved substantially in 1969 after a sharp deterioration in 1968, but remained below the level. An effort to reduce domestic and foreign private borrowing limited both total investment and the capacity to absorb external public aid. Gross fixed investment declined and was D 9 million short of projections. On the other hand capital transfers to enterprises were little reduced, as the financial position of public enterprises and the large increase in their investment left little scope for flexibility. Debt amortization payments rose further and accounted for 16 percent of total capital outlays. The overall cash deficit was reduced substantially. External financing was also less than expected and fell slightly as a proportion of capital outlays. While capital grants were higher than expected, short-falls occurred in other finance. General Government Finance (in millions of dinars) Economic Economic Plan Budget Provisional Budget Projections Current revenue Current expenditure Current surplus Capital outlays Overall cash deficit Domestic borrowing External financing Source: Appendix Tables 5.1, The low level of savings results mainly from the Government's inability to restrain current spending and to adjust it to shortfalls in revenue as current revenue is equivalent to over 25 percent of GDP at market prices. Central Government current revenue rose by 19 percent in 1969 as a result of a 10 percent increase in most direct and indirect tax rates, once-for-all additions due to a change in the timing of pipeline royalties, and the replacement of a business income tax (patente) by a gross revenue tax (droit d'exercice). Facilities granted to handicrafts and incentives for housing (registration duties on land purchases) had little effect on tax receipts. Changes in the collection system for agricultural taxes improved their yields. 65. Central Government current expenditure rose by 8 percent, compared with 6 percent as projected in the plan. Education, mostly teacher salaries, accounted for 73 percent of the increase. Enrollments during the school year were larger than projected as more girls entered school than

29 anticipated and the Government was not yet ready to implement stricter criteria for school attendance. Interest on public debt rose to D 9.4 million and accounted for 7.3 percent of total current expenditure (3.1 percent for external debt only). 66. General Government savings are projected to decline by about D 5 million in 1970 and to be substantially short of plan objectives. Further reduction of domestic borrowing is also expected. Nevertheless, capital outlays are expected to increase by D 6 million as a result of higher fixed investment, and consequently external financing is projected to rise by D 12 million. M1ost of the external aid is committed; part of it consists of funds which had been expected to be disbursed last year. However, it is possible that internal financial constraints and difficulties such as those already experienced in the past in organizing external aid disbursements will somewhat reduce actual disbursements below projections, even if locally financed projects listed in the 1970 budget are not fully implemented. 67. Central Government current revenue is projected to rise by 7.8 percent in No important tax measure is to be taken and tax receipts are expected to increase by only 4 percent (18 percent in 1969). The trade monopoly (Office du Commerce) is expected to contribute D 2 million (previous contributions were in the form of deposits with the Treasury), but direct taxes will reflect the impact of floods on private incomes. The increase in revenue from import duties will remain small as most of the additional imports will be investment goods, subject to low duties. No substantial effect is expected from the association with the EEC as the loss of receipts from preferences granted will be balanced by additional receipts on goods previously imported duty free from France. On the other hand an additional D 5.7 million revenue is expected from higher profits by oil companies as a result of the production increase in Central Government current expenditures are to rise by almost 13 percent to D 139 million, D 12 million over plan projections. This includes D 2.3 million for 1969 arrears and D 2.7 million for items previously in the investment budget (military equipment, vocational training in tourism, Center of Industrial Studies). Education is to account for 37 percent of the residual increase (8.7 percent). The wage bill is to rise by 12 percent. Education expenditures were budgeted on the basis of enrollments and actual spending will depend on the ability of the Government to control enrollment at the various school levels in school year. 69. Limited scope exists for increasing revenue at a higher rate than economic growth. A tax reform and revision of the custom tariff is now contemplated but will not change substantially the overall tax ratio; the main benefit will come from more selectivity in granting exonerations and incentives. Financial control is to be strengthened and Government finance accounting improved in These efforts, as well as improvement in public enterprise control and in the appraisal of the impact of investment projects on current spending need to be pursued. The implementation of investment projects is also intended to be adjusted in relation

30 to changes in the overall financial position of the Government. The fiscal position is likely to continue to call for careful management, especially as debt service will put an increasing and rigid burden on resources. It is timely that the large and rapidly expanding outlay for education is being considered by an inter-ministerial committee set up to re-examine objectives and policies in this field. Money and Credit 70. Domestic bank credit expanded by 6.6 percent in 1969, a rate higher than in 1968 but lower than anticipated. Total additional credit from the Central Bank was only D 1.8 million and contributed little to increase bank resources. On the other hand, the Central Bank and the deposit money banks reduced their foreign liabilities by D 9 million, instead of D 6 million as projected. Special lending funds increased by D 6 million; foreign aid funds alone rose by D 7.5 million and contributed about 25 percent of total additional resources. Less public borrowing by the Government, particularly by deposits with the Treasury, also made more resources available to the banks. Quasi-money changed little, and the 8.1 percent increase in money supply was close to projections and compared with nearly 12 percent in The Central Bank's domestic assets remained below the ceiling 1/ agreed with IMF, which had been raised by D 8.5 million to D 90.4 million by the end of Net bank credit to the Government increased by only D 3.6 million, compared with D 6.3 million as budgeted. 72. The expansion of money supply in 1969 (8.1 percent) still exceeded substantially the growth rate of GDP in real terms (4.7 percent). Increased monetization of the economy and widespread price controls only reduced inflationary effects. While wholesale prices rose little, except for food, the cost of living may have increased by over 4 percent, but information on prices is still very fragmentary. Poor crops, floods and ihigher agricultural wages contributed to the pressure on prices. 73. The ceiling on Central Bank's domestic assets is to remain unchanged in / Foreign lending to both the private and public sectors with maturities of 18 months to 10 years will be limited to D 19 million compared with scheduled repayments of D 21 million (D 4 and D 5 million respectively for loans with maturities of 18 months to 5 years). This D 2 million net repayment compares with D 5 million in 1969; the 1970 ceiling on borrowing takes into account financial requirements related to the reconstruction of dwellings destroyed by floods. 1/ Compulsory deposits with the Central Bank are adjusted to neutralize the reductions by deposit money banks of their short-term foreign liabilities. 2/ Ignoring a downward adjustment equivalent to any SDR allocations; these will be used to reduce Government indebtedness to the Central Bank.

31 Domestic bank credit is projected to rise by over 9 percent and credit from the Central Bank by over 13 percent; net foreign liabilities are anticipated to decrease by D 6 million. Special lending funds will add only D 5.5 million to bank resources, and other non-monetary sources, including quasi-money, D 10.8 million. Therefore, money supply is projected to rise by 11 percent and contribute to 56 percent of additional bank resources. Even if the expected disbursements on external aid and increase in foreign assets do not fully materialize, money expansion is likely to remain above real economic growth. 75. Additional bank credit to the Government is projected to amount to D 7.6 million, including D 5 million from the Central Bank. On the other hand, non-bank borrowing, mainly public enterprise deposits with the Treasury, and overall Government domestic borrowing are expected to decline further. Actual credits will depend on the Government's ability to adjust capital outlays if the current budget surplus and external financing are lower than anticipated. Credit to enterprises and households is projected to rise by about 10 percent, a higher rate than in 1969, as a result of higher economic activity and investments. Savings, transfers from the Government and external finance will cover only a part of additional investments by public enterprises, and substantial bank lending is likely to be needed. To improve foreign exchange reserves and avoid excessive inflationary pressure in 1970 will require restraint and selectiveness in credit. Demand of credit from the private sector will probably be higher than anticipated. III. FOREIGN TRADE AND EXTERNAL FINANCE 76. The balance of payments had a D 9 million surplus in 1969, compared with D 6 million in The current account deficit was larger than anticipated as a result of unfavorable weather and floods, but was offset by additional capital inflow. Larger grants were received, and disbursements on public loans were substantially increased. 77. Imports for flood relief and the increase in domestic investment are expected to lead to a larger trade deficit in 1970, but this is again expected to be offset by additional capital inflow, mainly higher disbursements on public loans, and a D 6 million balance of payments surplus is anticipated. Actual results will depend particularly on the capacity to absorb additional aid, and to control import and domestic credit expansion. Commodity Trade 78. The trade deficit rose by D) 19 million to D 50 million in 1969; exports rose by D 4 million only to D 87 million, while imports (f.o.b.) rose by D 24 million to D 137 million, following a sharp drop in Total imports were kept in line with the foreign exchange budget, despite stock replenishment and flood relief.

32 Excluding crude oil, exports declined by almost 5 percent. Exports of all agricultural products, except citrus, were below the 1968 figures; olive oil, which accounted for almost half agricultural exports, decreased by D I million. Export of rock phosphates declined from 2.4 million tons in 1968 to 2 million in 1969, while a rise had been anticipated. Flood damage to railways interrupted and subsequently slowed down transport from the mines, but exports in the earlier part of the year were also below projections. Phosphate prices declined further, and export receipts fell by 18 percent. Production and export of superphosphate fertilizer recovered in quantity to a level close to 1967, but receipts were down as prices declined and exports included a lower proportion of highly concentrated products. Crude oil exports rose by D 8 million to D 22 million and became the leading export, accounting for 25 percent of export earnings. Industrial exports, including iron and steel bars, construction materials, paper pulp, textiles and ceramics, rose by over 10 percent. 80. Imports of capital goods remained stable and reflected the shortfall in domestic investment. Intermediate and semi-finished goods rose by 19 percent, as a result of stock replenishment and the expansion of manufacturing output; energy products included 200,000 tons of crude oil imported under US assistance for fuel production (Tunisian crude oil is light). Finished consumer goods rose by D 3.4 million to D 21 million, a higher amount than projected, and foodstuffs, including cereals, by D 7 million to D 30 million. 81. Exports are expected to rise by D 8 million to D 95 million in This amount remains short of the Plan projection, as minerals are unlikely to reach initial targets. Good crops are expected to generate an exportable surplus of cereals, while exports of animal products, almonds, and preserved vegetables are also expected to increase; and France has increased her import quota for Tunisian wine. On the other hand, exports of olive oil are projected to fall further by D 4 million as a result of the poor season. Rock phosphate exports are expected to recover to 2.5 million tons, but prices may decline further and additional receipts may fall short of the projected 25 percent increase. A reduction in volume of fertilizer exports is to be offset by higlher prices, as highly concentrated fertilizers should contribute a larger proportion of the total. Crude oil shipments will change little at about 3 million tons and D 22 million, which is close to the present production capacity. Other exports, including manufactures, are programmed to increase by about 10 percent. 82. Imports (f.o.b.) are anticipated to rise by D 13 million to D 150 million and the trade deficit to increase further by D 5 million to D 55 million. Capital goods will rise by D 9 million; intermediate goods by D 5 million; and foodstuffs will decline by D 3 million. A shortfall in domestic investment may reduce actual imports of capital goods below projections, while the increase in other categories will depend on import control and flood relief assistance.

33 Trade with EEC countries formed a larger proportion of exports and imports in 1969 than in the preceding years; the increase among exports was largely due to oil shipments to Italy. Trade with Eastern countries declined in proportion. The greater reliance on bilateral trade in 1968 had resulted from marketing problems for traditional exports. Geographical Distribution of Tunisia's External Trade Trade Balance Exports (%) Imports (%) (D million) EEC Of which France (31.2) (23.1)(26.6) (35.2) (33.2)(33.8) (-22.3) Maghreb /1 USA Eastern countries /2 Other /1 Libya D 6.3 million /2 Bulgaria D 3.6 million 84. The agreement of association with the EEC, presently limited to trade, became effective on September 1, About 90 percent of Tunisia's industrial exports to the EEC received duty free entrance into the Community, and about half agricultural exports, mainly olive oil, citrus fruits and certain processed food, were granted tariff rebates provided their prices remain above determined levels. 1/ Tunisia granted tariff reductions to EEC countries ranging from 20 to 30 percent of the minimum tariff on about half its import trade and is to establish sub-quotas within existing quotas for imports from the EEC. 2/ The present level of liberalization is also to be maintained. Tariff cuts correspond to 70 percent of the preference which France had on these products, and are to become effective within a threeyear period, starting at 50 percent. Preferential trade with France in commodities not included in the association agreement is maintained. 1/ Tariff treatment by the EEC is as follows (based on trade figures for 1966/67): Headings with no duty 56.4% Headings subject to tariff disarmament 23.1% Headings with duties and not subject to tariff disarmament 20.5% 100.0% 2/ Tariff treatment by Tunisia (based on trade figures for 1965/67): Headings with no duty 7.9% Headings subject to tariff reductions 44.8% Headings free of quotas 62.2% Headings subject to subquotas 13.7% Subquotas are defined in terms of value and as a percentage of respective Tunisian imports.

34 The association is largely a substitute for preferential arrangements with France; the agreement provides for negotiations on financial and technical assistance, and labor, which could be concluded by the end of the third year. The main immediate effect of the agreement is to provide opportunities for developing and diversifying Tunisia's industrial exports. This requires efforts to penetrate EEC markets other than France, and to promote industrial development through selective policies. Measures to encourage foreign direct, export oriented investment, and cooperation with foreign firms, including in the form of sub-contracting, need to receive particular attention. The Government intends to pursue its inquiries to this effect. Reorganization of public enterprises is.another important step to attract private capital in industry. Measures to promote exports need further investigation; they could include the extention of export credit and the provision of export credit insurance. Tariff reform to provide more selectivity in protection, less reliance-on quotas and harmonization with other taxes on imports is being considered. Services and Current Transfers 86. The net surplus on non-factor services rose by about D 3 million to D 16 million in 1969 and exceeded projections, although,tourism receipts fell short of target. Oil pipeline receipts rose as a result of a change in the timing of payments. The deficit on factor services increased further. Interest payments went up by D 1 million; payments on wages.-and salaries., including technical assistance, increased slightly; remittances from Tunisian workers abroad changed little, although these workers were allowed to open savings accounts in convertible dinars. The overall deficit on services and current transfers was D 3 million below 1968 and is expected to rise again to D 11 million in 1970, despite a D 4 million rise in net tourist receipts, as pipeline royalties will fall to their pre-1969 level. 87. Promotion of tourism by the Government came to rely progressively less on direct investment, and more on tax and other incentives to domestic and foreign private investment. Promotional and planning services are provided by a public agency (CGTT), which became In 1969 the Directorate of Tourism in the newly established Ministry of Tourism and Country Planning. Special efforts were also directed to attracting charter parties through major European agencies. Western Europe tourists have accounted for more than 90 percent of tourist nights, Germany, France and the United Kingdom contributing together about 70 percent of the total. The increase in visitor nights and foreign exchange receipts since 1963 averaged almost 40 percent per year. 88. Good prospects of financial returns due to a long operating season, growth in demand and subsequent high rates of occupancy, reasonably low construction cost, and poor conditions for private investment in most other sectors fostered a rapid expansion of hotel facilities. The number of beds rose from 4,000 in 1962 to about 3U,000 by the end of 1969, at an average rate of 32 percent per annum. Returns on equity in well managed medium cost units has been between 15 and 25 percent, or even higher, through 1968.

35 Foreign visitors and visitor nights during the first eight months of 1969 were respectively 30 percent and 24 percent over 1968 levels. Floods reduced subsequently tourist operations, especially in Sousse, Monastir and Djerba-Zarzie-Gabes areas. Most hotels in Tunis and Hammamet remained open but tourist traffic in September-December was only half the level during the last four months of 1968, and overall results for 1969 fell short of anticipations. Two reported cases of typhoid fever developed by tourists from the United Kingdom and Germany respectively also made bad publicity. Nevertheless, visitor nights increased by 10 percent to 3.4 million, and foreign exchange receipts by 10 percent to D 24.3 million. Average daily expenditure per tourist rose from D 6.8 to D 7.2, after a decline in the previous years. Tourist NiRhts January-August (1,000) German British French Other 718 1,032 2,096 2, Barring new cases of disease, tourist demand will further develop favorably. The promotional campaign undertaken by the Government and Tunisian hotel promoters after the floods was successful and many hotels are already fully booked for the March-October season. Hotel capacity, rather than demand, is likely to continue to be the major constraint to tourist growth in the years ahead. 91. The Plan provides for D 60 million investment in tourism, mainly for the construction of 40,000 beds. Average construction cost per bed was projected to fall by D 1,000 to D 1,500. Tourist nights were expected to reach 8 million, and foreign exchange receipts D 39 million by 1972, assuming that daily expenditures per tourist would decline from D 7.2 in 1969 to about D 5 in Additional capacity realized in 1969 and projected in 1970 (6,100 and 8,150 beds, respectively) are short of Plan targets, and the average cost per bed is likely to remain higher than expected. Therefore, the actual number of tourist nights may be lower than anticipated. On the other hand, the expected decline in daily expenditure is probably too conservative. 92. Authorities should further amplify efforts to remove constraints on the expansion of capacity, such as insufficient infrastructure, particularly water supply and sewerage facilities, and the shortage of trained hotel staff. Services responsible for pre-investment work in the Directorate of Tourism need to be strengthened, if possible with foreign technical assistance. Lack of equity funds for hotel investment is a major bottleneck.