Current Tunisian Monetary Policy

Sofiane Ghali - Co-Author: Sami Rezgui, 05 Mar 2015

Monetary sector policy should aim at containing inflation, preserving foreign exchange reserves, and strengthening the banking sector to address numerous economic and social challenges. Tunisia’s major medium-term concerns are to reduce high unemployment, especially among the youth and to mitigate regional economic disparities by establishing foundations for higher and more inclusive economic growth.

 

Since the 2011 revolution, the country has faced significant macroeconomic imbalances as authorities focused largely towards appeasing social demands and the vulnerabilities of businesses with expansionary fiscal and monetary policies. As a result, the current account deficit widened substantially to 7.2% of GDP in 2013(relative to 4.7% in 2010), inflation accelerated significantly to 6.0% (4.4% in 2010), in addition to the buildup of weaknesses in the financial sector and unemployment reaching unprecedented levels (18% in 2011 relative to 13% in 2010).

 

To date, the Central Bank of Tunisia(CBT) has taken several steps to tighten monetary policy including injecting liquidity into local banks, increasing its benchmark policy rate by 50 basis points, tightening reserve requirements for consumer credit and setting a minimal savings rate of 2.75% in 2013 to project small savers.

 

While these efforts have relieved some pressure, the CBT must now take more significant steps to remove local banks’ dependence upon CBT liquidity injections and increased exchange rate flexibility.

 

First, the CBT must create an exit strategy for its liquidity injections into the local banking sector. This strategy should include strengthening and extending the current liquidity and forecasting framework and horizon, establish a lender-of-last resort structure and establish sound collateral managements frameworks to encourage banks to manage their liquidity in a more forward-looking fashion. The CBT could also ease the existing interest rate ceilings with a view to eliminating them and improving the monetary transmission mechanism.

 

As for exchange rate flexibility, during the past decade or so, monetary policy in Tunisia has managed a floating exchange regime whereby the CBT intervenes in the market with a view to achieve a slight pace of depreciation of the real exchange rate against a basket of currencies weighted according to the country’s main trading partners and competitors.

 

However, this previous model has shown its limitation through the lack of sustainable high growth and regional equity despite undeniable macroeconomic results and stabilities. The Tunisian economy needs to be more competitive and able to provide enough jobs and business opportunities to its educated youth population.

 

Since 2012, the CBT has therefore introduced a modification in its mode of intervention in the foreign exchange market. Intervention is on the basis of interbank rates instead of a reference rate calculated using a fixed basket of currencies and allowing a more flexible exchange rate policy than in previous decades.

 

This new exchange rate regime will help preserve CBT foreign exchange reserves, facilitate external adjustment, and support demand for money by reducing the liquidity absorption due to interventions in the foreign exchange market.

 

 


Sofiane Ghali is a full professor of economics and Dean of the Higher School of Economic and Commercial Sciences of Tunis (ESSECT, University of Tunis). His fields of specialization are in the areas of industrial organizations and international economics. He has published papers in internationally refereed journals and contributed to several studies for Tunisian national agencies and organizations such as the ITCEQ and IACE, and international organizations like the World Bank, OECD, EIB, FEMISE, ERF, and GDN. He holds a Ph.D. in Economics.

 

Sami Rezgui is a full professor at the University of Manouba in Tunisia. He is specialized in the areas of macroeconomic policies, international economics, industrial economics and innovation policy. He is author of several research papers published in international journals and he is also consultant and contributor to various reports for international agencies (OECD, World Bank, Femise, Mediterranean Institute) and national institutions (Institute of quantitative Studies, Arab Institute of Business Managers, Ministry of Trade, Investment Agency Promotion). He Holds a Ph.D. in Economics.

Sofiane Ghali - Co-Author: Sami Rezgui Sofiane Ghali - Co-Author: Sami Rezgui

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