Challenge
Since the 1970s, Tunisia pursued an economic policy based on strict macroeconomic discipline. This policy approach was successful in promoting relatively high rates of economic growth and foreign direct investment and low rates of inflation. While this resulted in impressive improvements in living conditions, weaknesses associated with this approach were beginning to emerge, most notably the persistence of high rates of unemployment that continued to hover around 14 percent of the labor force. In addition to facing these structural pressures, a recent decline in European economic growth in 2008 translated into less demand for Tunisian exports and a deceleration in economic growth (only 4.5 percent in 2008).
Solution
The Integration and Competitiveness Policy Loan (ICL) supported the key strategic elements of Tunisia’s National Development Plan (2007-11), which sought to strengthen growth and ensure that this growth is translated into employment. The main thrust of the ICL was to continue growth-enhancing reforms anchored around a deeper integration of Tunisia to the global economy. More urgently, the ICL would assist the government in responding to the global financial crisis, which was beginning to expose Tunisia’s inherent macroeconomic vulnerability to growth in Europe. The development objectives of the ICL were: (i) to reduce trade transaction costs and deepen Tunisia’s global integration; (ii) to improve further the business climate to enhance competitiveness of Tunisian firms, including services; and (iii) to enhance the development of the financial sector to increase its capacity to finance private investment.
Results
While the operation was largely implemented without problems, assessment of this operation must take into account the political change that occurred in Tunisia in early 2011. One of the key factors underpinning the civil unrest was dissatisfaction with the performance of the economic system, which was viewed by many as rigged in favor of politically well-connected individuals. As such, the development objectives of the ICL were highly relevant and made progress in enhancing the country’s ability to absorb an increasingly educated work force, as well as reduce anti-competitive practices. Improvements in domestic competitiveness were achieved in part through reductions in tariff rates and improved cargo entry and exit from commercial ports. Some of the measurable results include:
- Capitalization of the stock market increased from 16.3 (2008) to 24.1 percent (2010) of GDP.
- Average level of trade protection reduced, the simple mean of average Most Favorite Nation (MFN) import tariffs dropped from 21.7 (2008) to 16.6 percent (2010).
- Mean time of port clearance reduced from 5.6 days (2008) to 3.65 days (2010).
Bank Group Contribution
The International Bank for Reconstruction and Development (IBRD) provided financing of US$250 million.
Partners
The operation was co-financed by the African Development Bank (in a structural adjustment loan of US$250 million) and the European Union (Euro 70 million).
Moving Forward
Given the economic undercurrents that led to the political change, the new government appears to be better positioned to more aggressively pursue a number of areas covered by the operation and build upon the measures already taken. Government counterparts repeatedly indicated the strategic importance to return to the agenda planned for the next phase of the ICL as soon as political/constitutional circumstances allowed. Hence, a redesigned operation, entitled the Governance and Opportunity Development Policy Loan (DPL), was approved by the World Bank Board of Executive Directors in June 2011.
Beneficiaries
The reduced number of tariff bands helped to lessen the average protection rates and thereby increase competition in the domestic economy, particularly the on-shore sector. Reduced tariffs and processing costs facilitated trade through the Port of Rades and made it less cumbersome for businesses to use the port. A Logistic Index survey of Tunisian businesses found that the vast majority (over 65 percent) felt that procedures for customs clearances and other official procedures were much improved. The financial sector also increased capacity to finance investment for trade for the benefit of businesses.
