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~~''%lY-~tl:S''::-'c- - __ ~" :.-0"':" • ';-:t~ ,t!E..'~"'~,;j• l 80nqut €mtrolt bt arunisit Letter of introduction to the 39th Annual Report of the Central Bank of Tunisia on Tunisia's economic, monetary and financial activity in 1997 presented to His Excellency the President of the Republic of Tunisia Moharned El Béji Harnda Governor of the Central Bank of Tunisia Your Excellency the President of the Republic, It is my honour to present you with the thirty-ninth Annual Report of the Central Bank of Tunisia, covering the year 1997. This report analyzes the development of the economic and financial situation during the first year of the ninth development plan, and attempts to evaluate our country's ability to manage the effects of the economic situation and to adapt tofinancial globalization. Mr President, the most outstanding feature of the international situation in 1997 was undoubtedly the major monetary andfinancial crisis that began, in the middle of the year, to shake certain countries of South-East Asia, leading to the collapse of their economies and their financial systems. The resulting domino effect was not only detrimental to the region but had negative repercussions on other areas of the world, confirming once again the "global village" aspect of our planet. The crisis revealed the incoherences in the overall management of the region's economies, which until that time had been considered quite successful, and especially the fact that inflation in these countries was higher than in their partner countriès, a phenomenon which inevitably created an interest rate differential. Added to this were the effects of free circulation of capital in a context of fixed exchange rates pegged to the US dollar. The resulting erosion of the domestic purchasing power of those currencies, at the same time that their external value remained stable, pushed economic operators to excessive recourse to external indebtedness, and the banks, finding themselves in a situation of high liquidity, began granting easy and risky credit o~ terms that failed to respect even the most elementary rules of banking orthodoxy. This situation favoured the execution of large project'l which were of liule value and even less profit-making potential, leading to excess debt and reduced competitiveness, factors which naturally aroused mistrust on the part of funders. Despite the effects of this crisis, vigorous economic growth in the United States and a firming of activity in western Europe stimulated world trade, which advanced in volume by 7% in 1997, compared with 5% in 1996, maintaining world growth at the 4.1% level registered a year earlier. Foreign exchange was marked by the contrast between relative stability in parities among the currencies of the European Union, favoured by the effort to meet the criteria of convergence, and an upsurge in the US dollar which increased the cost of the debt in developing countries. Mr President, following a decade of development characterized by structural reform and increased diversification of production, Tunisia's economy has succeeded in improving not only its competitiveness but also its ability to withstand the effects of unpredictable weather and of the international situation. This has enabled the country's production apparatus to draw maximum advantage from a recovery in foreign demand, particularly in partner countries, and with the resulting revitalization of exports the economy has succeeded in positioning itself on a new level of growth. The growth rates of 7.1% and 5.4%, in real terms, registered in 1996 and 1997 respectively place Tunisia among the countries with high growth rates. lndeed, if the farming and fisheries sector is excluded, economic. expansion rose from 4% to 5.9% between these two years. This development has been supported by confirmed recovery in investment, and the ratio of investment to GDP advanced from 23% in 1996 to 24.4% in 1997. Mr President, concurrently with its efforts to assure appropriate financing of the economy, the Central Bank of Tunisia continues to ensure a balance between growth in the money supply and growth in economic activity; this contributes to containing inflation, which in 1997, for the second consecutive year, remained at 3.7%, the lowest rate reached since 1973. At the same time, vigilant control of banking activity has improved the compliance of the banks' situation with prudential rules that are comparable to international standards. The banks reduced the proportion of their unsecured debts and thereby strengthened their financial base, guarantee of a sound contribution to economic development. These positive results improved the credibility of our banks on international financial markets, a situation which led them to use modern means of satisfying their financial needs. Jn 1997, for the first time, a Tunis bank.floated a bond issue for international Japanese investors; a second bank opened ils capital at the beginning of 1998 by trading global depositary receipls on lhe London Stock Exchange. There was, in fact, a forerunner to this positive action in the activities which the Central Bank of Tunisia initiated in 1994 on various capital markets as a means of raising foreign funding on behalf of the State. Jn addition to obtaining favourable terms which made it possible to lower the cost of foreign financing, Ihese operations were intended to demonstrate to foreign investors lhe results lhat had been achieved by Tunisia's economy. The strategy wasfirst 10 make new potential partners aware of Tunisia, then in a second stage to lead them 10 become direct investors. JI should also be stressed that a government initiative to assume responsibility for Ihe unpaid debts of public enterprises will complete the strenglhening of financial equilibrium for the banks, and will at the same time avoid any effect of eviction with respect tofinancing of the economy. Mr President, our country's external position continues to be favoura!Jle, despite a widening of the current deficit to 3.1% of GDP, compared 102.5% in 1996, related to an increased deficit in the trade balance. The accentuation of this deficit should not be viewed with alarm. It resulted from increased cereals imports in response to the effects of drought, and from increased imports ofraw materials, semi-finished products and capital goods, a foundation for sustained economic activity and cumulative future development. Thetrade balance was marked by cyclic trends in olive oil exports and by a structural decline in the exportation of energy-related products. Excluding these two product groups, exports increased over the last ten years by an average of 16.8% per year, a rate which is higher than growth in GDP in current priees during the same period (10.2%). This development reflects greater competitiveness in our economy, a result of our structural reform policy aimed at removing ail constraints on enterprise. Mr President, the international consensus that Prin managing its economy, Tunisia has achieved a growth rate which is, in real terms, twice the inflation rate" should not lead us to be complacent. Having achieved some of the preconditions for regular, more sustained growth, we must now improve containment of the effects of unpredictable weather on the main crops and activities, through recourse to the seeds that are best adapted to the country's conditions and rational use of water and fertilizer; these measures will enable the farm sector to assure that it is duly competitive in the context of world priees. lnvestment remains inadequate, and must be increased to absorb ail of the new job demand. University graduates must be incorporated into the working world, and this will be achieved when operators understand the necessity of increasing the proportion of skilled managers in their companies; nevertheless, employment in Tunisia is a question not only of quality but also of numbers. Our approach should favour the sectors that provide the greatest number of jobs corresponding to the different skills. Ali forms of training must target the sectors in which we have the greatest capacity to crea te jobs, and supply and demand in employment must always be ready to adjust to each other. The degree of maturity that our economy has reached means that it is increasingly in need of fine-tuned solutions of a more qualitative nature. Our goal is still to reduce the inflation differential, which remains high in comparison with our partner countries. Achieving this will require continued rationalization of government expenditures. Similarly, acceleration of accomplishments outstanding under the programme to privatize public enterprises will also help to strengthen the production sector. Mr President, much can be learned from the crisis in the South-East Asian countries. Above all, in revealing the inadequacy of banking system control and the failure of global management of that region's economies it shows us what must be avoided in conducting our policy of economic development. Not only that, but it confirms us in the choices we have made, particularly the decision for pragmatic management of the exchange rate, and eliminates any inclination to be dogmatic in the eminently sensitive area of quotation of the dinar. By the same token, our country was well advised in being selective regarding the admission of foreign capital, an attitude which spared our economy the tremors that would undoubtedly have resulted from flows of floating capital. Mr President, the pressures of adapting to the conditions of our association with the European Union, whose member countries are obliged to pursue their policy of convergence because of the establishment of the euro, which gives the Central Bank of Europe exclusive control over monetary and foreign exchange policy, require that we step up our efforts to draw maximum benefit from this framework of cooperation. Against this background, we must modernize our economy and keep step with the increasing thoroughness of reform in those partner countries.