Blogs

Tunisia faces the challenging task of consolidating its fiscal accounts in a difficult sociopolitical and external environment. While the country pursued a generally conservative fiscal policy throughout the 2000s, with deficits declining from 3.8 percent of gross domestic product (GDP) in 2000 to 1.3 percent in 2010, the fiscal deficit rose to 5.1 percent in 2012 and 7 percent in 2013 as the government shifted to an expansionary fiscal policy in the aftermath of the 2011 revolution, combined with a decline in economic activity. A similar trend was observed at the level of public debt: After declining from an average of 60 percent of GDP in the 1990s to 40.4 percent of GDP in 2010, the debt-to-GDP ratio increased in 2011 to 46 percent of GDP and was projected to be 51 percent in 2013.

In such a difficult economic situation, the immediate challenge is to maintain macroeconomic stability, but authorities should, at the same time, start implementing several budgetary reforms, seeking to reach, in the medium term, a balance among supporting growth, enhancing equity, strengthening revenue collection, and preserving economic competiveness and improving the business climate.

Critical short-term fiscal policy reforms include:

1. Meeting the banking recapitalization needs: Based on International Monetary Fund (IMF) and government estimates, those needs could reach as much as 2.6 percent of GDP during 2013–14.
2. Subsidy reform: Government reform strategy is articulated on the adoption of a household compensation policy to accompany the energy subsidy, in addition to designing a new automatic fuel pricing formula.
3. Control of the wage bill, which rose significantly in recent years from 53 percent of tax revenue in 2010 to 59 percent in 2013[1] Over the medium term, keeping the wage bill at a sustainable level will require maintaining wage increases within the available fiscal space and taking into account productivity increases.
4. A better composition of public expenditures to support growth: The gradual replacement of generalized subsidies with targeted compensation system and wage bill containment will free budget resources for growth-supporting public investments coupled with higher social expenditures. In this context, the government plans to increase public investment above 7 percent of GDP by 2015 (a 0.6 percent of GDP increase).

In the medium term, authorities should plan to undertake reforms focused primarily on the following structural areas:

1. Tax revenue mobilization through a comprehensive program of reforms that boost equal distribution of the tax burden, efficiency, and transparency of the tax system.
2. Reforming the pension system: The two main pension funds in Tunisia, (the National Pension and Social Security Fund [CNRPS], which is reserved for public sector employees, and the National Social Security Fund [CNSS], which serves the private sector) are considered to be financially unsustainable. If these systems are not reformed, the combined deficit could amount to 2 percent of GDP by 2018.[2] Based on the demographic developments, the parameters of the Tunisian pension system—(retirement age, contributions rates, and retirement benefits) will need to be adjusted to maintain the financial viability of the funds.
3. Reforming public enterprises: The financial situation of public enterprises, which are accumulating losses close to 4 percent of GDP, constitutes a major risk for fiscal policy^[3]and an urgent concern for authorities to undertake a program of reforms to remedy this situation.