Explanatory Memorandum to COM(2013)860 - Macro-financial assistance to Tunisia - Main contents
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| dossier | COM(2013)860 - Macro-financial assistance to Tunisia. |
|---|---|
| source | COM(2013)860  |
| date | 05-12-2013 |
· Grounds for and objectives of the proposal
The Tunisian economy has been negatively affected by the domestic unrest that followed the 2011 revolution, regional instability (notably the war in Libya), and a weak international environment, particularly in the euro area, with which Tunisia maintains close trade and financial links. The economy experienced a recession in 2011 and, despite the moderate economic recovery witnessed in 2012, when tourism and foreign direct investment (FDI) rebounded and economic activity picked up, the macroeconomic situation remains very vulnerable. In particular, the fiscal and balance of payments situation has deteriorated quite markedly, generating important financing needs.
At the same time, following the ousting of President Ben Ali on 14 January 2011, the country is taking significant steps towards the establishment of democratic mechanisms, including the organisation of free elections and the creation of a National Constituent Assembly. Although the political transition has not been without difficulties and episodes of instability, the process is expected to result in the approval of a new Constitution and the organisation of new elections in the first half of 2014.
Against this background, the Tunisian authorities reached in mid-April 2013 an agreement with the International Monetary Fund (IMF) staff on a 24-month Stand-By Arrangement (SBA) in the amount of USD 1.75 billion (400% of quota), which was approved by the IMF Board in June. The aim of the SBA is to support the government’s economic reform programme, reduce economic vulnerabilities and foster sustainable and inclusive growth.
In this context, the Tunisian government requested Macro-Financial Assistance (MFA) from the EU in the amount of EUR 500 million on 28 August 2013, with a portion in the form of a grant (see the request letter in Annex). The European Commission submits to the European Parliament and the Council a proposal to grant a MFA to the Republic of Tunisia amounting to a maximum of EUR 250 million. The assistance would take the form of medium-term loans, with no grant component being envisaged given that Tunisia does not meet the eligibility criteria for the use of grants in MFA operations.
The proposed EU MFA would help Tunisia cover part of its residual external financing needs for the period 2014-15 in the context of the IMF programme, estimated at USD 3.0 billion. It would reduce the economy’s short-term balance of payments and fiscal vulnerabilities, while supporting the adjustment and reform programme agreed with the IMF and the World Bank, as well as the reforms agreed under the EU’s budgetary support operations, in particular the State Building Contract Programme d’Appui à la Relance (PAR), which is financed in part by the EU’s Support for Partnership Reform and Inclusive Growth (SPRING) programme.
The proposed MFA is in line with the aims of the G8’s Deauville Partnership initiative and the orientations of the new European Neighbourhood Policy (ENP). It would signal to the other countries in the region that the EU is ready to support countries embarking on political reforms, in moments of economic difficulties.
In this context, the Commission considers that the political and economic pre-conditions for a MFA operation of the proposed amount and nature are satisfied.
· General context
After a severe recession in 2011, when the economy contracted by 1.9% due to the domestic political unrest and the Libyan conflict, a moderate recovery started in 2012 despite an adverse international and domestic environment, with real GDP growth picking up to an estimated 3.6%, helped mainly by the rebound in tourism and FDI inflows. Despite the promising pick-up in manufacturing activity and increase in tourism shown by mid-2013, the ongoing political stalemate, lower than expected growth in the EU (Tunisia’s main trading partner) and emerging markets, and a bad harvest have slowed down economic activity. The IMF recently revised its forecast for GDP growth in 2013 to 3% from 4%. The growth forecast for 2014 has also been revised downwards from 4.5% to 3.7%, with risks strongly tilted to the downside reflecting the domestic political situation.
Unemployment remains a key concern with an unemployment rate of 15.9% at end-June 2013 compared with 13.5% before the revolution, and is particularly high among young people and women. There have been inflationary pressures since early 2012, largely explained by increases in administered energy prices, and by higher food prices.. However, inflation has dropped back to 5.7% (and core inflation to 4.4%) by September and is expected to remain stable at around that level.
Monetary policy was accommodative during 2011 and the first months of 2012 in response to the existence of a large output gap and relatively stable core inflation. However, as inflation started to accelerate and external and fiscal balances further deteriorated, the Central Bank of Tunisia (CBT) took some tightening measures, increasing its benchmark policy rate by 50 bps since August 2012 (to 4%).
Regarding the public finances, the IMF programme envisaged a modest fiscal adjustment for 2013, with the fiscal deficit targeted to increase to 7.3% of GDP, broadly reflecting the cost of the planned recapitalisation of banks and the repayment of arrears. However, recent trends suggest that in the absence of new measures, there will be a considerable fiscal slippage (the deficit is now projected to reach 8.4% of GDP unless corrective measures are taken). This fiscal deterioration in 2013 is expected to be partially compensated, like last year, by a lower execution rate of public investments.
For 2014, the IMF is calling for an additional adjustment of about 2 percentage points of GDP in order to reach the programmed deficit target of 6.4% of GDP. Corrective measures are likely to include adjusting energy tariffs while developing a better targeted social safety net, increasing control over the public wage bill (which represents about 13% of GDP and 60% of revenues), increases in excises and measures to improve the efficiency of public expenditures. The recapitalisation needs for the financial sector should also be properly budgeted in the law.
The general government debt remained at 44% of GDP in 2012, but it is projected to increase slightly to 45.3% of GDP by the end of this year and to peak at 49.5% of GDP in 2014. Debt service remains at a manageable 6% of total budget expenditures.
The rebound in growth throughout 2012 amid subdued world demand (particularly from the EU) and persistently high commodity prices contributed to a widening of the current account deficit to 8.1% of GDP. The deficit has further increased in 2013, with the latest projections indicating a worsening to around 8.3% of GDP compared with the 7.5% of GDP targeted under the IMF programme. In addition, so far in 2013 FDI inflows have been about 40% below those initially assumed in the IMF programme. Moreover, disbursements of official assistance are well below what had been programmed. As a result of these shortfalls in financing and the higher than programmed current account deficit, Tunisia faces a significant balance of payments gap (of around USD 750 million) for 2013, although a potential loan from Qatar may contribute to reducing it. The IMF expects this shortfall to be covered by a decline of USD 600 million in foreign reserves compared to the original programme targets and by a further compression in public investment (which has high import content).
After recovering partially in 2012, official foreign exchange reserves started to decline rapidly in early 2013. By end-October 2013, reserves stood at USD 6.9 billion, covering only 104 days of imports. They are expected to finish 2013 at USD 7.5 billion, a decrease of USD 1.1 billion in 2013, which compares to an originally targeted increase of USD 400 million for the year. The dinar has depreciated, in nominal effective terms, by around 12% since the revolution, and by around 6% since the beginning of 2013.
The 2011 crisis had a negative impact on a number of key banks, notably the public ones, who were more exposed to the hard-hit tourism sector. This led the CBT to provide substantial liquidity to the commercial banks during 2012 to help them cover their refinancing needs, although a gradual unwinding of liquidity injections has already been initiated. Under the programme agreed with the IMF, the authorities intend to proceed with the recapitalisation and rehabilitation of the banks affected by the crisis.
In addition to the need to restructure and strengthen the banking system, other key structural reform challenges include reducing unemployment while raising participation rates (notably among women), reducing income and regional disparities, reducing the excessive reliance on the development of a low value-added export industry located in the coastline, and reforming the inefficient price subsidy system while strengthening the social safety net.
On 7 June 2013 the IMF Board approved, as noted, an USD 1.75 billion (400% of the Tunisian quota), two-year, SBA. The main objectives of the IMF programme are: i) to maintain macroeconomic stability, partly through the implementation of structural reforms and the selective recapitalisation of banks; ii) to support inclusive growth; iii) to reduce external vulnerabilities; and iv) to strengthen investor and donor confidence.
Revised projections point towards significant balance of payments needs for the 2014-2015 period, with the overall external financing gap estimated at USD 4.4 billion. This financing gap is broadly attributed to two factors; a persistently large current account deficit and the need to build up foreign exchange reserves over the period 2014-2015. Net of disbursements under the SBA and the World Bank's Development Policy Loan (DPL), Tunisia faces a residual external financing gap of USD 3.0 billion over this period. The proposed EU MFA would contribute to cover some 10.8% of the residual financing gap for the 2014-2015 period.
· Existing provisions in the area of the proposal
· Consistency with the other policies and objectives of the Union
The EU seeks to develop a close relationship to Tunisia and to support Tunisia’s economic and political reforms. In 1995, Tunisia became the first country in the Southern Mediterranean to sign an Association Agreement with the EU. This agreement continues to be the legal basis for bilateral cooperation. Bilateral relations have been further reinforced under the EU’s ENP, including through the adoption of five-year ENP Action Plans establishing strategic objectives for this cooperation, the latest of which covers 2013-2017. Tunisia is also a member of the Union for the Mediterranean. Economic ties with the EU are important. Tunisia conducts the largest share of its trade with the EU. In 2012, the EU was the source of 59.3% of Tunisia’s imports and the destination of 68.1% of its exports. Tunisia has also a high dependence on the EU in terms of FDI and other financial flows, remittances and tourism inflows. Tunisia finalized the dismantling of tariffs for industrial products in 2008, thus becoming the first Mediterranean country to conclude a free trade agreement with the EU. The EU has offered Tunisia to negotiate a Deep and Comprehensive Free Trade Agreement with the goal to allowing the full access of Tunisia to the EU’s single market, although negotiations have not yet started.
The EU MFA would complement the total EUR 445 million in grants mobilised under the ENPI and the SPRING Programme, and in particular the conditionalities envisaged under the PAR III package in which the EU is participating. Close coordination will be ensured in the implementation of these two programmes, since both are complementary and mutually reinforcing. While the envisaged MFA will provide short term balance of payments support the state building contract will support the completion of the democratic transition process through economic and political governance measures. By supporting the adoption by the Tunisian authorities of an appropriate framework for macroeconomic policy and structural reforms, the EU’s MFA would enhance the added value and effectiveness of the EU's involvement through other financial instruments. In addition, it would complement the resources made available by the international financial institutions, bilateral donors and other EU financial institutions, thus contributing to the overall effectiveness of the package of financial support agreed by the international donor community in the aftermath of the crisis.
In sum, while Tunisia’s road to full democracy is not without difficulties and significant uncertainties remain, the country has taken significant steps towards political reform, with the aim of strengthening democratic institutions and mechanisms, including a multi-party parliamentary system, the rule of law and the respect for human rights. The country is also envisaging an economic reform programme aimed at laying the ground for a sustainable, employment generating and equitable growth model.
The MFA proposal is consistent with the EU's commitment to support Tunisia's economic and political transition. It is also consistent with the wording of two MFA decisions on the Kyrgyz Republic and Hashemite Kingdom of Jordan[1]. In particular, and as explained in more detail in the accompanying Staff Working Document, the Commission's proposal is consistent with the following principles: exceptional character, political preconditions, complementarity, conditionality and financial discipline.
The Commission will continue to monitor and assess during the life of the MFA operation satisfaction of these criteria. Regarding the assessment of the political preconditions, Commission services will work in close liaison with the European External Action Service.
Contents
· Consultation of interested parties
MFA is provided as an integral part of the international support to the economic stabilisation of Tunisia. In the preparation of this proposal for MFA, the Commission services have consulted with the International Monetary Fund and the World Bank, which have already put in place sizeable financing programs. The Commission has also been in regular contact with the Tunisian authorities.
· Collection and use of expertise
An Operational Assessment verifying the quality and reliability of Tunisia's public financial circuits and administrative procedures will be carried out by the Commission with the assistance of external experts during the month of December 2013.
· Impact assessment
The MFA and the economic adjustment and reform programme attached to it will help alleviate Tunisia's short-term financing needs while supporting policy measures aimed at strengthening the balance of payments and fiscal positions and raising sustainable growth, as agreed with the IMF. It will notably help improve the efficiency and transparency of public finance management; promote fiscal reforms to increase tax collections and improve the progressivity of the tax system; support existing efforts to strengthen the social safety net; promote labour market reforms (to reduce unemployment and raise participation rates, notably among women); and facilitate the adoption of measures to improve the regulatory framework for trade and investment.
· Summary of the proposed action
The European Union shall make available to Tunisia MFA for a total maximum amount of EUR 250 million, provided in the form of a medium term loan. The objetives of the assistance will be to: (i) contribute to cover Tunisia's residual external financing needs in 2014-15, as identified by the Commission based on the estimates of the IMF; (ii) support the fiscal consolidation effort and external stabilisation in the context of the IMF programme; (iii) facilitate and encourage efforts of the authorities of Tunisia to implement measures identified under the EU-Tunisia ENP Action Plan, and; (iv) support structural reform efforts aimed at improving the overall macroeconomic management, strenghening economic governance and transparency, and improving conditions for sustainable growth.
The assistance is planned to be disbursed in three loan instalments. The disbursement of the first instalment (EUR 90 million) is expected to take place in mid-2014. The second instalment (EUR 80 million), conditional on a number of policy measures, could be disbursed towards the end of 2014. The third and last instalment (EUR 80 million) could be made available, provided the policy measures are met, during the first half of 2015. The assistance will be managed by the Commission. Specific provisions on the prevention of fraud and other irregularities, consistent with the Financial Regulation, are applicable.
As usual with the MFA instrument, the disbursements would be conditional on successful programme reviews under the IMF's financial arrangement (the SBA). In addition, the Commission and the Tunisian authorities would agree on specific structural reform measures in a Memorandum of Understanding. The Commission will target structural reforms aimed at improving the overall macroeconomic management and the conditions for sustainable growth (e.g. targeting the transparency and efficiency of public finance management; fiscal reforms; reforms to strengthen the social safety net; labour market reforms; and reforms to improve the regulatory framework for trade and investment).
The decision to disburse the full MFA in the form of loans is justified by Tunisia's level of development (as measured by its per-capita income) and debt indicators. It is also consistent with the treatment given to Tunisia by the World Bank and the IMF. Indeed, Tunisia is not eligible for concessional financing from either the IDA or the IMF's Poverty Reduction and Growth Trust.
· Legal basis
The legal basis for this proposal is Article 212 of the TFEU.
· Subsidiarity principle
The subsidiarity principle applies to the extent that the objectives of restoring short-term macroeconomic stability in Tunisia cannot be sufficiently achieved by the Member States alone and can therefore be better achieved by the European Union. The main reasons are the budgetary constraints faced at the national level and the need for strong donor coordination in order to maximise the scale and effectivenes of the assistance.
· Proportionality principle
The proposal complies with the proportionality principle: it confines itself to the minimum required in order to achieve the objectives of short-term macroeconomic stability and does not go beyond what is necessary for that purpose.
As identified by the Commission based on the estimates of the IMF in the context of the SBA, the amount of the assistance corresponds to 10.8% of the residual financing gap for the period 2014-2015. Given the assistance pledged to Tunisia by other bilateral and multilateral donors and creditors, it is deemed an appropriate level of burden-sharing for the EU.
· Choice of instruments
Project finance or technical assistance would not be suitable or sufficient to address these macroeconomic objectives. The key value added of the MFA in comparison to other EU instruments would be to alleviate the external financial constraint and to help create a stable macroeconomic framework, including by promoting a sustainable balance of payments and budgetary situation, and an appropriate framework for structural reforms. By helping to put in place an appropriate overall framework for macroeconomic and structural policies, MFA can increase the effectiveness of the actions financed in Tunisia under other, more narrowly focused EU financial instruments.
The proposed programme will also strengthen the government's reform commitment and its aspiration towards closer relations with the EU. This result will be achieved, inter alia, through appropriate conditionality for the disbursement of the assistance. In a larger context, the programme will signal to the other countries in the region that the EU is ready to support countries embarking on a clear path towards political reforms in times of economic difficulties.
The planned assistance would be provided in the form of a loan and should be financed through a borrowing operation that the Commission will conduct on behalf of the EU. The budgetary costs of the assistance will correspond to the provisioning, at a rate of 9%, of the amounts disbursed in the guarantee fund for external lending of the EU, from budget line 01 03 06 ("the provisioning of the Guarantee Fund")[2]. Assuming that the first and second loan disbursements will be made in 2014 for a total amount of EUR 170 million and the third loan disbursement in 2015 for the amount of EUR 80 million, and according to the rules governing the guarantee fund mechanism, the provisioning will take place in the 2016-17 budgets.
· Review/revision/sunset clause
The proposal includes a sunset clause. The proposed MFA would be made available for two and a half years, starting from the first day after the entry into force of the Memorandum of Understanding.