Annual Report 2016
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Annual Report 2016 June 2017 Note of the Governor Note of the Governor 05/07/2017 The latest published figures related to economic growth over the first quarter of 2017 (2.1% in annual shift against 0.7% a year earlier) bode well for a positive inflection of economic activity, the expected confirmation of which for the rest of the year is mainly justified by a promising tourist season and resumption of production at a consolidated pace in the mining basin, recently fostered, moreover, by the IMF’s successful conclusion of the first review of the «Extended Fund Facility » programme, signed by the authorities in May 2016 and disbursement of the second tranche of the related financing. Yet, beyond the optimism that may be inspired by these premises, it has to be recognized that, obviously, after having successfully achieved a political transition which paved the way for the emergence of a burgeoning democracy, institution building and recognition of liberties, Tunisia continues, six years after the Revolution, to go through the same economic difficulties, even with more acuity. This delay in the long-awaited economic recovery originates, partly, from international and regional environments that are adverse on the whole, but mainly from internal factors, particularly political and social ones, that have always been destabilising. Economic transition seems, thus, to take longer time, while the world economy outlook has already posted tangible recovery signs boosted by the American economy, main driver of world growth, in favour of the expansionary budgetary policy advocated by the new administration. The expected renewed dynamism of the world’s leading economy will not miss out on giving impetus to its main partners’ economic activity, notably the European Union, our first trade partner, where recovery signs have already been perceptible in Germany and France. Thus, it has to be acknowledged, in this regard, that the new decisive step of the history of independent Tunisia has not succeeded, so far, in reversing the current situation and remedying to an economic and social situation which remains basically worrisome amidst a context of political instability (not less than six governments since 2011), the business community’s prolonged wait-and-see attitude, tendencies to social turmoil which appears in a certainly sporadic, however recurrent way in deprived regions. As a consequence, the country is still confronted with major challenges given the situation of stagnation and even the stoppage of main growth drivers, namely private investment and productivity, hence export, while an omnipresent parallel economy continues to suffocate and jeopardise the State resources, annihilating every likelihood to yield the budgetary margin needed to public investment recovery. In this context, neither the growth rate recorded so far nor its structure, dominated by consumption (extremely imports-intensive) and a budget-devouring public sector, Annual Report 2016 i Note of the Governor weighed down by a plethoric staff, can possibly help to achieve, within a reasonable time, the goals of the revolution in terms of employment and improvement of the Tunisian population’s living conditions. The purpose here is neither to draw up an exhaustive assessment of the country’s economic and financial situation - which the present report analyses with a wealth of detail in its economic part -, nor to cover the BCT management, elaborated in the second part of the above-said report, but mainly to emphasize the worsening, over 2016, of internal and external vulnerabilities reflected by the previous year’s main macroeconomic indicators: a flat economic growth (1% vs. 1.1% in 2015) outstripped by increasing macroeconomic imbalances, the most harmful of which are relevant to the State budget deficit (6.1% of GDP) and the one of the current payments balance (8.8% of GDP), notably foreign trade, its main component. These counter-performances affecting the real sphere were soon transmitted to the monetary one, contributing jointly to maintain a negative spiral which is persisting over 2017 with resurgent inflationary pressure, a clear depreciation of the Dinar and a heavier weight of external indebtedness which, in turn, are more and more weighing down on foreign current reserves and bank liquidity. Faced up with these exacerbated challenges, and in order to reduce distortions and remove obstacles that have not stopped impeding recovery of domestic and foreign investment and re-establishment of financial balances, heading thus towards a sustained and inclusive economic growth, the structural reforms movement, which constitutes its cornerstone, remains stifled despite the efforts made by the authorities. Thus, the situation requires a new dynamics in implementing, within a shortened deadline, the reforms already set by the authorities in cooperation with international partner institutions, likely to meet the requirements of a sound business climate, offering adequate conditions for a renewal of confidence and initiation of a tangible recovery of economic activity: Accelerating the financial sector’s reforms to fully play its role of financing the economy and allocating resources, finalising the undertaken tax reform to reinforce the State resources and boost budgetary policy, moving ahead in the public institutions reform in order to improve the quality of its services and optimise salary and social costs and ultimately ensure public finances sustainability, persevering in governance consolidation and combating corruption, and rapidly enforcing the economic emergency law draft, already adopted by the board of ministers in 2016, with a view to effectively launching major investment projects. In such a context, the Central Bank continued to face up to the multiple challenges that it has been encountering throughout the transition period. Its action took, therefore, a double trajectory: conducting its monetary and foreign exchange policies under the pressure of day-to-day management of liquidity shortage both in dinar and in foreign currency, while anticipating risks of inflationary pressure resurgence and watching over the ones likely to affect financial stability; and upholding the deep-seated reforms Annual Report 2016 ii that it sets, so as to consolidate and modernise the analytical and operational framework of its assignments and strengthen its capacities, by targeting compliance with international standards, helping it to accomplish the missions and meet the objectives assigned to it by law. Thus, faced up with the increase in the banking sector’s needs for liquidity due to the combined effect of the current account deterioration and the banking loan’s expansion to the State and their corollary and the higher demand of banks for refinancing in dinar and in foreign currency, the Central Bank conducted a proactive and cautious policy in the monetary and foreign exchange fields, led in this regard by the need to watch over price stability and meet the economy’s needs for liquidity for fear of a payment block of our external commercial and financial liabilities and a slippage of the dinar’s interest and foreign exchange rates. All this is obviously constrained by maintaining foreign exchange reserves at a minimum acceptable level. This task is by all means one of the most delicate ones given the challenges and antagonistic positions of different economic agents: Administration, businesses, individuals, importers, exporters, investors, savers, speculators, experts…, some of whom have not always acted in the most judicious manner, evidently, therefore contributing to pressure exacerbation on the money and foreign exchange markets. In these conditions, the monetary policy adopted by the Central Bank of Tunisia was a cautious one, with the inflation rate being curbed at 4.2% in 2016 against 4.1% in 2015. Thus, the monetary authorities kept unchanged the key rate till the end of April 2017. However with the resurgence of inflationary pressure over the first quarter of 2017, the monetary authorities were brought to initiate a raising of the key rate twice (50 base points on 25 April and 25 base points on 23 May 2017). Aside from supporting measures advocated by the Government, so as to rationalise imports, this action should contribute to stimulating national savings that were so weakened over the previous years, easing pressure on the monetary and foreign exchange markets and alleviating inflationary pressure. Worth of note that monetary policy has quintessentially a conjunctural scope and could not bear, on its own, for a longer term, the deep deficiencies affecting both the real and the financial sectors. An ongoing deterioration of the external sector, coupled with the expansion of public (and household) consumption expenditure and resurgent inflationary pressure could not possibly be compatible, for long, neither with the dinar’s exchange rate’s stability, nor with real negative interest rates. Aside from the simple basic economic logic, this is a matter of credibility and of monetary policy and monetary authority. Both the interest rate and its foreign exchange rate have to be aligned on economic basics, to fully play their role in the optimal allocation of the country’s [rare] resources. Aware that its action conducted in the framework of accomplishing its missions has to be constantly fostered and modernised, taking account not only of the trend in the Annual Report 2016 iii Note of the Governor national economic environment and economic agents’ requirements,