ISLAMIC DEVELOPMENT BANK GROUP

MEMBER COUNTRY PARTNERSHIP STRATEGY FOR TUNISIA (2013 – 2015)

COUNTRY PROGRAMS DEPARTMENT

RAJAB 1434H / JUNE 2013G

Map of Tunisia (Source: Government of Tunisia)

Table of Contents Executive Summary ____________________________________________________________ i I.

Introduction _____________________________________________________________ 1

II.

Country Context, Recent Economic Trends and Challenges ________________________ 1 A. Political-historical context _________________________________________________________ 1 B. Recent Economic Trends __________________________________________________________ 2 C. Social Context___________________________________________________________________ 4 D. Key Challenges Facing the Tunisian Economy in the Short to Medium Term __________________ 6

III. Tunisia's Vision, Development Strategy and Priorities __________________________ 10 IV. Donors Support to the Country _____________________________________________ 10 V. IDB Group Partnership Strategy ____________________________________________ 12 A. IDB Past Interventions in Tunisia ___________________________________________________ 12 B. Strategic Framework of the Member Country Partnership Strategy _______________________ 13 C. Pillar I: Contributing to the Reduction of Regional Disparities through Infrastructure Development ____________________________________________________________________ 14 abc-

Regional Disparities as one of the major constraints to Development in Tunisia _________________ 14 Government Efforts to Reduce Regional Disparities ________________________________________ 14 IDB Group Strategy to Help the Country Reduce Regional Disparities __________________________ 15

D. Pillar II: Supporting Regional Integration in the Maghreb Region __________________________ 16 abc-

Regional Integration Status in Tunisia ___________________________________________________ 16 Government strategy to enhance regional integration ______________________________________ 16 IDB Group strategy to support regional integration between Tunisia and other Maghreb countries _ 17

E. Pillar III: Reverse Linkages ________________________________________________________ 18 ab-

Opportunities I: What Tunisia has to offer to other IDB Member Countries? ____________________ 18 Opportunities II: What can be offered to Tunisia from other IDB Member Countries? _____________ 19

VI. Conclusion _____________________________________________________________ 21 Annex: IsDB Group Programmatic Results Matrix for Tunisia (2013-2014) ________________ I

List of Figures

Figure 1: GDP and Internal Demand _____________________________________________ 2 Figure 2: Distribution of the Gross Fixed Capital Formation in 2011 ______________________ 2 Figure 3: Doing Business Indicators rank out of 180 economies _______________________ 4 Figure 4: Evolution of FDIs, Workers’ remittances and current account ____________________ 6 Figure 5: Evolution of Terms of Trade ______________________________________________ 6 Figure 6: Evolution of the Public debt to GDP ratio _________________________________ 7 Figure 7: Unemployment Projections _____________________________________________ 8

List of Tables

TABLE1: KNOWLEDGE DEVELOPMENT IN 2012 ____________________________________________ 6 TABLE2: HUMAN DEVELOPMENT INDEX _________________________________________________ 6 TABLE3: UNEMPLOYMENT BY AGE GROUP _______________________________________________ 6 TABLE 4: DECOMPOSITION OF WITHIN SECTOR AND TOTAL OUTPUT PER WORKER ______________ 7 TABLE 5: POVERTY BY REGION IN 2005 __________________________________________________ 7 TABLE 6: COUNTRY ECONOMIC OUTLOOK _______________________________________________ 11 TABLE 7: MAIN DONORS SUPPORT TO TUNISIA ___________________________________________ 13 TABLE 8: IDB GROUP INDICATIVE FINANCING FOR 2013 – 2014 ______________________________ 23

CURRENCY Currency Unit = Tunisian Dinar (TND) US$1.00 = TND 1.6361 (Average Exchange Rate as of Jun 5, 2013) FISCAL YEAR January 1-December 31

ABBREVIATIONS and ACRONYMS AfD AFD ATCT BICRA CBT CDC DSNT EIB EIU ENP FDIs FEMIP FSAP GDP GTZ ICD ICIEC ICT ID IDB IMF INS ITFC JICA MCPS MCs MDG MENA NIP NPLs OECD ONAS RL S&P SME SONEDE STEG

: : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : : :

African Development Bank Agence Française de Développement (French Development Agency) Agence Tunisienne de Coopération Technique (Tunisian Agency for Technical Cooperation) Banking Industry Country Risk Assessment Central Bank of Tunisia Caisse des Dépôts et Consignations (Deposits and Consignments Fund) Development Strategy of New Tunisia European Investment Bank Economist Intelligence Unit European Neighborhood and Partnership Foreign Direct Investments Euro-Mediterranean Investment and Partnership Financial Sector Assessment Program Gross Domestic Product German Technical Cooperation Islamic Corporation for the Development of the Private Sector Islamic Corporation for the Insurance of Investment and Export Credit Information and Communication Technologies Islamic Dinar Islamic Development Bank International Monetary Fund Institut National de la Statistique (National Institute of Statistics) International Islamic Trade Finance Corporation Japan International Cooperation Agency Member Country Partnership Strategy Member Countries Millennium Development Goal Middle East and North Africa National Indicative Program Non-Performing Loans Organisation for Economic Co-operation and Development Office National de l’Assainissement (National Sanitation Utility) Reverse Linkages Standard & Poor Small and Medium Enterprises Société Nationale d'Exploitation et de Distribution des Eaux (National Company of Exploitation and. Distribution of Water) : Société Tunisienne de l’Electricité et du Gaz (Tunisian Company of Electricity and Gas)

1 TND UNCTAD UNESCO WB

: : : :

Tunisian Dinar United Nations Conference on Trade and Development United Nations Organization for Education, Science and Culture World Bank

ACKNOWLEDGEMENTS A. The IDB Group's MCPS Mission team benefitted enormously from consultation with the Tunisia officials in many ministries, departments and autonomous state organizations who gave generously of their time and contributed to the dialog. A special thank goes to the officials in the Ministry of Development and International Cooperation for collaboration and cooperation with the IDB Group team. B. The Mission also wishes to express its thanks to the International Financial Institutions and Bilateral Aid Agencies based in Tunisia as well as the private sector, and NGOs with whom it consulted about the challenges facing Tunisia. C. The IDB Group exercise for the MCPS was done under the overall guidance of: Mohammad Jamal Alsaati - Country Programs Department Abderrahman Elmezouari Elglaoui - Rabat Regional Office Demba Ba – Agriculture and Rural Development Department Ahmed Hariri - North Africa Division - Country Programs Department Salah Mansour - West Africa Division - Country Programs Department D. The IDB Group Team for Tunisia MCPS included: Abdelfattah Oudghiri

RRA

Bassem Soua

ICIEC

Boualem Hammouni

ICD

Gurbuz Gonul

Infrastructure Department

Imed Drine

ERPD, Chief Economist's Complex

Mourad Bouzrouri

ITFC

Nabil Ghalleb

IFSD

Sami Nabi

IRTI

E. The Core Coordinating Team from the Country Programs Department RD-5 and Rabat Regional Office for the Tunisia MCPS included: Rami Abdelkafi, Said Mourabit, Khalid Hilal and Mohamed Alwosabi

Executive Summary 1. Two years on from the revolution, Tunisia is still going through a sensitive period politically and economically. At the political level, the challenge for Tunisia is to build a democratic regime that satisfies the aspiration of its people. At the economic level, although the year 2012 is marked by positive signs in terms of economic growth and slight decrease in the unemployment rate, Tunisia is still facing huge challenges in the short-term as well as the medium to long-terms. 2. Already, five successive governments have held the power after the revolution. The common challenge for these governments is to lead the country towards a period of political and economic stability. This would not be possible without assuring a balance between the urgent needs of population that have high expectations, and the design of a new development model based on inclusive economic growth. In the short term, two major problems have to be addressed to reduce social tensions, namely: regional disparities and youth unemployment. 3. The current Government, which presented its program to the Constituent Assembly in March 2013, endorsed the economic program of previous Governments with the focus on four priorities: (i) preparing an adequate climate for the organization of the forthcoming elections, (ii) ensuring security and fighting crimes and delinquency, (iii) pursuing the enhancement of the economy and employment creation, and improving the purchasing power by reducing inflation, (iv) continuing the reform process and corruption fighting. 4. The support of the international community is a key for Tunisia to manage the risks imposed by this transition period. Most of the donors and partner countries have expressed their intention to increase their financial, as well as technical, support to help Tunisia during its political and economic transition process. As one of the main partners, the IDB Group has increased its support to Tunisia by devoting more resources to job creation for the youth, in addition to its ordinary operations. 5. This Member Country Partnership Strategy (MCPS) for Tunisia covering the period 2013 – 2015 is based on the outcome of two missions to Tunisia; a preparation Mission in July 2012 followed by a technical mission in January 2013. Although the missions were held in a period of political turbulences, there was a consensus that the most important challenge for Tunisia is to cope with the urgent needs that emerged just after the revolution, while designing a new development model and undertaking structural adjustment of the economy for the years ahead. 6. This MCPS for Tunisia would serve two purposes. Firstly, it will consolidate the support of the IDB Group to Tunisia during the transition period. Secondly, it identifies the main areas on which will be based cooperation between Tunisia and the IDB Group in short to medium term. There is a common understanding that the main orientations of the Government would remain unchanged for the coming period. Reducing regional disparities and creating more jobs would be the commons objectives of all Tunisians. 7. This MCPS for Tunisia for the period 2013 – 2015 focuses on three pillars: i) Contributing to the reduction of regional disparities through infrastructure development, ii) Supporting regional integration in the Maghreb Region, and iii) promoting reverse linkages between Tunisia and member Countries. In general, the strategy addresses job creation, as a cross-cutting theme that should constitute the ultimate objective of all interventions.

I. Introduction 1. Two years on from the revolution, Tunisia is still going through a sensitive period politically and economically. At the political level, the challenge for Tunisia is to build a democratic regime that satisfies all political orientations. At the economic level, although the year 2012 is marked by positive signs in terms of economic growth and slight decrease in the unemployment rate, Tunisia is still facing huge challenges in the short-term as well as the medium to long-terms.

integration between Tunisia and other IDB member countries (MCs) and Islamic finance development. 5. Developed in a context of political and economic uncertainty, this Member Country Partnership Strategy (MCPS) for the period 2013 – 2015 aims to reconfirm the support of the IDB group to Tunisia during the transition period and to orient its interventions in toward the priority areas imposed by the postrevolution period. Moreover, it takes into account the request made by the Tunisian Government to bring all the efforts to meet the immediate needs of Tunisian population, especially youth employment and reduction of regional disparities within the country.

2. Recently, a new Government (the fifth after the revolution) has been assigned to lead the country towards legislative and presidential elections. In addition to the challenges inherited from the prerevolution period, several new risks have emerged during the actual transitional period marked by frequent strikes and social unrest. In a nutshell, the main challenge facing Tunisia in these circumstances is to assure a balance between the urgent needs of a population that overthrew a totalitarian regime and which have high expectations, and the design of a new development model based on inclusive economic growth.

6. Economic diagnosis of the situation in Tunisia shows that the Tunisian economy is facing considerable challenges. Firstly, the year 2011 has been particularly difficult for the country, owing to social unrests and the difficulties faced by some strategic sectors of the economy. Secondly, despite the reasonable levels of public debt achieved before the revolution, the Government may face a shortage in terms of available financial resources to provide the additional efforts imposed by the transitional period. Thirdly, the only way for Tunisia to reduce unemployment and to create more jobs is to achieve more economic growth, while adopting important reforms in the labor market. Finally, considerable efforts are required to develop a sound and attractive investment climate that will develop a Tunisian vibrate private sector.

3. Despite Tunisia’s reasonable levels of public finance, the support of the international community is key for Tunisia to manage the risks imposed by this transition period. Most of the donors and partner countries have expressed their intention to increase their financial, as well as technical, support to help Tunisia in its political and economic transition.

II. Country Context, Recent Economic Trends and Challenges

4. As a founding member, Tunisia has built a strong relationship with the IDB Group demonstrated by a financing envelope exceeding US$3.5 Billion. After the revolution, the willingness to strengthen and enlarge cooperation came from both sides. The visit of the Tunisian Prime Minister to the IDB headquarters in February 2012 was followed by several visits of IDB delegations to Tunisia, including two visits led by the President, IDB in March and September 2012. The different discussions undertaken have generated a consensus on the priority areas of cooperation between the two sides, including reducing regional disparities, infrastructure development, job creation, regional

A. Political-historical context 7. With a GDP per capita of around US$ 4,152 in 2012, Tunisia is an upper middle-income country with a population of 10.7 million people (2012 estimates), of which more than two thirds live in the urban areas. The land area of 163,610 sq. km is situated in a strategic location in the north of African Region with a large coast on the Mediterranean Sea. Less than 40% of the land surface is under the Saharan desert, and agricultural land represents about 61% of the total land, while the forest 1

area covers 6.1% of the total land area. The country is relatively poor in extractable natural resources and its mineral production is not diverse.

the GDP decreased by 1.8%, while in 2012 real GDP growth rate was estimated at 3.6%. Figure 1: GDP and Internal Demand (% change) (Source: INS 2012)

8. Since the mid-90s, Tunisia has accelerated the process of economic openness. In 1995, it signed an agreement with the European Union for the creation of a free trade zone over a period of twelve years starting in 1998. To help local firms coping with external competition, Tunisia adopted the “Programme de Mise à Niveau” to support the use of new technologies by public as well as private firms in all sectors of the economy.

14 12 10 8 6 4 2 0

0% -5% -10% -15%

GDP (Market Prices)

9. The Tunisian revolution, triggered on 17 December 2010, expressed the will of the Tunisian population to end a centralized presidential regime that governed the country for more than 23 years. More than two years after the revolution, Tunisia is still going through a sensitive transitional period. The main role of the National Constituent Assembly (NAC) elected on 23 October 2011 is to prepare a new Constitution that will define the political regime of Tunisia for the next decades. The actual challenge facing Tunisia is to reach a common consensus between the different political orientations that emerged after the revolution. The newly appointed government, comprising independents and three political parties, announced that its mandate will not exceed 9 months and that one of its tasks will be to ensure an adequate climate needed for the organization of forthcoming presidential and parliamentary elections expected by the end of 2013.

Internal Demand

2010

2009

2008

2007

2006

2005

2004

2003

2002

2001

2000

1999

1998

-20%

Net Exports (% of GDP) - RHS

11. According to the World Bank data on Tunisia (2013), the gross capital formation as percentage of GDP averaged 25% during the last two decades. This rate is comparable to that prevailing in upper-middle income countries like Turkey and Malaysia, but superior to that in OECD. However, private investment has been concentrated in low-value added and low jobs-intensive sectors such as real estate (figure 2), and are mainly located in the urban and coastal regions of the country. Figure 2: Distribution of the Gross Fixed Capital Formation in 2011 (Source: Central Bank of Tunisia)

B. Recent Economic Trends 10. Economic growth in Tunisia has been relatively moderate and averaged 4.8% over the last two decades. This is after a long period of volatility following the adoption of the Structural Adjustment Program in the second half of the 80s and the effect of drought during the period 1990-1995. The period 1995-2000 witnessed the best performance of the economy, with an average growth rate of 5.6%. GDP per capita growth reached a high rate of 3.1% in the 90s, compared to 2.2% in the 2000s. Internal demand continues to be the main driver of growth, while external position has deteriorated between 2005 and 2010 (figure 1). In 2011,

12. The structure of the economy is changing due to different growth rates across sectors. During the last decade, agriculture value-added has experienced the lowest growth rate on average of 1.95%, in comparison with 3.77% for manufacturing and 5.63% for services. Overall, the share of agriculture in total exports does not exceed 13% and investments in agriculture represent only 10% of total investment.

2

a fierce competition from Asian countries 1 . Tunisian SMEs benefit from only 15% of banks credits, in comparison with 25% in Morocco and 20% in the MENA Region.

13. The performance of manufacturing and nonmanufacturing industries has been low during the period 2000 -10, with growth rates of 3.72% and 2.96% respectively. The share of mechanical and electrical industries in manufacturing value-added increased from 18.7% in 2000 to 30.8% in 2010, while the share of clothing and textile decreased from 31% in 2000 to 23% in 2010.

17. Despite the important role of Foreign Direct Investments (FDIs), which represented on average 3.2% of GDP during the 2000s, these investments have been concentrated in the energy sector (60.8% in 2010) with relatively low job creation. In general, the expected spillover effects of these investments are not certain and additional reforms are needed to make the manufacturing and services sectors more attractive to foreign investors.

14. The increasing share of services has been driven by the telecommunications sector, which grew at an average rate of 15.66% between 2000 and 2010. Privatization, especially of the public phone company Tunisie Télécom in 2006, has contributed to increasing investment in this sector, which increased from TND 430 million in 1992-96 to more than TND 6.3 billion in 200711. Nevertheless, the services sector has not performed well in terms of exports as 80% of the services exported are in the tourism sector.

18. The government-sponsored financial sector reform programs, adopted in June 2010, aims to transform Tunisia into a banking services hub and a regional financial market, through a combination of: (i) Consolidation of financial fundamentals of the banking sector, (ii) Increasing banks’ presence in the economy and enhancing banking services, (iii) Restructuring of the public banking sector, (iv) Strengthening the presence of Tunisian banks abroad and promoting Tunisia as a regional financial center.

15. Tunisia’s exports have been driven by the offshore sector, which benefitted from a series of reforms started in early 70s. These reforms, along with the exposure to international trade, have improved the productivity of the offshore sector. However, productivity in the onshore sector has been relatively low. In 2008, the productivity gap between Tunisia and the European Union in sectors less exposed to international trade was estimated at 67%, in comparison to a gap of just 27% in sectors exposed to international trade. In general, the onshore sector has suffered from high government intervention in the economy.

19. However, according to the IMF, these financial sector reforms undertaken during the last decade were not sufficient to modernize and strengthen the banking sector. Despite greater financial depth, Tunisia underperformed with regards to access to private sector lending, which is mostly accessible for public and large corporates.

16. As is the case in several other countries, small firms play a crucial role in the Tunisian economy. Overall, small firms, employing less than 10 persons, dominate the Tunisian industry and represent 97% of firms in the country. The business environment for small firms is still unable to cope with fierce competition coming from China and the new adherents to the European Union. In addition to their low competitiveness, most of these enterprises lag far behind European firms in terms of technological progress. According to the UNCTADInformation Economy Report 2010, the share of Tunisian firms having a web site in 2009 did not exceed 30%, in comparison with 48% in Turkey and 50% in Jordan. The strategic textile sector has been particularly affected by

20. Despite the efforts undertaken by Tunisia, including the “Programme de Mise à Niveau”, to develop a vibrant private sector, the Tunisian private sector is still facing huge challenges. In 2008, The World Bank, the AfDB and OECD, highlighted that Tunisian private sector growth and competitiveness continue to be hampered by state control over major sectors, suggesting that further reforms to competition policy and practices are needed. Private enterprises continue to face a number of constraints including access to financing (high collateral requirements) and technology 1

For example, while the share of China in textile imports of Europe increased from 21.8% in 2007 to 25.5% in 2009, the share of Tunisia decreased from 2.6% to 2.3% during the same period.

3

23. Since independence, Tunisia has followed a strategy of universal education. Education has always been the most abundant resource of the country, thanks to continued investment (Table2). The country has already achieved the second MDG related to the achievement of universal primary education. According for UNESCO’s Education for All Report (2012), public spending on education as percentage of GDP averaged around 7% during the period 1999-2010 in Tunisia, compared to 4.5% in the Arab States.

(low technological capacity); rigidities in the Labour Code; high social charges on employee wages; high customs tariffs; and low infrastructure quality. The Global Competitiveness Report 2011-2012 shows that Tunisia ranked 40 out of 142 countries compared to 32 in 2010-2011. This decline is mainly due to low ranking of “Labor market efficiency” and “Financial market development”. 21. The doing business indicators (2013) shows that the main axes that the country needs to improve are “Getting Credit”, “Dealing with construction Permits”, “Registering Property” and “enforcing contracts” (Figure 3).

Table2: Human Development Index (Source: UNDP 2013)

Figure 3: Doing Business Indicators rank out of 180 economies (Doing Business Report 2013)

1980 1990 2000 2012

Malaysia Resolving…

Trading Across…

Enforcing Contracts

Protecting…

Paying Taxes

Registering…

Getting Credit

Dealing with…

Getting Electricity

Ease of Doing…

South Africa Starting a Business

140 120 100 80 60 40 20 0

Turkey

2012

2013

15 - 19

28.7 29.7 24.2 12.9 6.1 3.7 3.2 2.8 2.8 3.5 2.8 3.2 13.0

43.6 41.8 34.5 19.0 8.8 4.3 2.8 2.4 2.6 1.5 2.4 0.6 18.3

35.2 38.7 32.7 18.0 8.8 4.7 3.5 2.4 2.5 2.1 1.4 0.8 17.6

31.5 37.3 32.2 17.0 8.6 5.0 3.1 3.2 2.1 2.1 1.7 0.3 16.5

20 - 24 25 - 29 30 - 34 35 - 39

Table1: Knowledge Development in 2012

55 - 59

(Source: World Bank Knowledge for Development)

Malaysia

67

South Africa

69 80

0.561 0.6 0.639 0.694

2011

50 - 54

48

0.443 0.517 0.583 0.652

2010

45 - 49

60 - 64

Economic Incentive Regime

Innovation

6.1

5.67

6.91

5.22

6.61

5.21

5.49

6.89

4.87

3.58

Turkey

5.16

6.19

5.83

4.11

4.5

Tunisia

4.56

3.81

4.97

4.55

4.89

Education

0.459 0.553 0.642 0.712

Age

40 - 44

KEI

World

Table 3: Unemployment by Age Group -2010-2013 (Source: INS Enquête Nationale sur la Population et l'Emploi)

C. Social Context

Country

Arab States

24. While Tunisia is on track for achieving the MDGs 4 and 7 related to child mortality and environmental sustainability respectively, more efforts are needed for improving maternal health. Over the period 1999-2009, public spending on health as percentage of GDP

Tunisia

22. The World Bank indicators of knowledge development show that Tunisia is ranked 80 out of 146 countries. Although the Tunisia’s rank has improved since 2000, this relatively low performance is mainly due to its failure in the knowledge pillar of “economic incentives regime”, which deteriorated in “tariff and nontariff barriers” and “regulatory quality” (Table1).

Rank out of 146 countries

Tunisia

65 - 69

ICT

70 - above Total

averaged 6.4%, and, in 2009, life expectancy was estimated at 75 years, up from 54 in 1970 and 69 in 1990. Overall, Tunisia has made significant progress on 4

health. Infant mortality per 1000 births, for example, decreased from 39 in 1990 to 14 in 2010, in comparison with 31 in Algeria and 30 in Morocco in the same year.

periods 2000-2005 and 2005-2010 shows that the main increase in total factor productivity took place during the period 2005-2010, as shown in Table 4.

25. Nevertheless, Tunisia’s economic growth has not fully used the available human capital. The economy is based on sectors intensive low skilled labor force. The highly educated population is severely affected by unemployment with a rate of 33.2% in 2012. Official data also show that unemployment affects mainly the youth (table 3).

Table 4: Decomposition of within sector and total output per worker (Source: IDB Group staff calculations based on the template provided by the World Bank and data from the INS 2013 and WDI 2013)

Total within sector output per worker Capital labor ratio Total factor productivity Inter-sectoral shift Total productivity

26. In 2012, 37.3% of the population between age 20 and 24 years and 32.2% of the population between age 25 and 29 years were jobless. A recent study conducted by the INS shows that the unemployment rate among the population with a higher-education diploma was estimated at 33.2% in 2012, and that females (47.5%) are more affected than males (20.6%).

2000-05

2005-10

2000-10

747.1

1378

2476

496.4 250.7 219.8 967

578.4 799.6 206.7 1584.7

1185.8 1290.3 435 2910.8

30. Tunisia’s economic growth has not been pro poor. Recently, the Institut National de la Statistique (INS) has reviewed its poverty estimations for 2010, showing a poverty rate of 15.5%, instead of 3.8% published before the revolution. These new results were based on a new estimate of the poverty line. This poverty has particularly affected the remote regions and exacerbated regional inequalities. Disparities are very large between the East and the West of the country (table 5). The largest segment of the poor in the country is concentrated in the Center-West and the North-West with poverty rates of 32.3% and 25.7% in 2010, respectively. While poverty decreased nationwide between 2000 and 2010, it increased from 7.1% to 32.3% in the Center-West.

27. The skill mismatch between the education system outcomes and the economy is straightforward. For example, in 2010, nearly 60% of new entrants to the labor market had a higher education degree, while only 16% of the employees had a high education level2. At the same time, Tunisian Government declared that some sectors, namely agriculture, industry, construction and public works and tourism, suffer from a lack of specialized labor force.

Table 5: Poverty by Region in 2010

28. Poor performance of the private sector has exacerbated the problem of unemployment. Until now, most of the jobs in the economy have been guaranteed by the public sector. In seek of stability and best remuneration, most of the workers prefer to transit by the informal sector with the hope to find a job in the public sector. According to the World Bank, between 2005 and 2009, informal employment has grown by 6.1%, from 50.5 to 53.5% of the total employment rate.

(Source: National Survey on Living Conditions of the Population 2010)

Tunis District North-East North-West Centre- East Centre- West South-East South-West Total

Poverty rate 9,1 10,3 25,7 8,0 32,3 17,9 21,5 15.5

Number of Poor 223930 152290 313380 197995 455274 173256 128086 1644053

Number of Poor Families 56195 35915 75438 44213 98522 36159 26807 378840

31. As is the case for most of the country in the MENA Region, Tunisia Social Safety Net has been mainly based on food and energy subsidies. These subsidies are regressive and benefit the richest segments of the population (IMF Country Report No. 12/255, September 2012). According to the World Bank (2012), in Tunisia, as well as in Egypt and Lebanon, the level of Social Safety Nets spending net of subsidies is far below that of their respective development peers. Furthermore, although

29. The decomposition of the output per worker shows that its increase has resulted mainly from the increase in the capital labor ratio and in total factor productivity. This confirms the fact that the contribution of the increase in employment in Tunisia has played a minor role in growth. Dividing the whole period into two 2

According to “Towards a new growth model for Tunisia”, a joint study of the Ministry of Regional Development and Planning and the African Development Bank (2012).

5

food and energy subsidies have contained the inflationary pressures, especially during the post revolution period, they have had a significant impact on the public budget. According to the IMF estimates, these subsidies doubled to 4% of GDP in 2011, from 2% in 2010.

export market and iii) the reduction of tourists scared by the social turbulences. Figure 4: Evolution of FDIs, Workers’ remittances and current account (Source: CBT and INS)

32. According to a study released by the National Institute of Statistics (INS) in collaboration with Centre de Recherche et des Etudes Sociales CRES (Pour un système des subventions plus efficace en Tunisie2013), in 2010, Tunisian Households have received DTN 888 million as food price subsidies, but only DNT 107 million had benefitted poor households. In general, 9.2% of price subsidies target the poorest households, while 60.5% goes to middle class and 7.5 % to the rich population. However, despite its inefficiency this subsidy system plays an important role as a social safety net for the poorest people. The share of subsidies is about 20.6 % of the total value of food consumption of the poor population, while it does not exceed 11.8% of the middle class and 5.1% for rich population.

35. The widening of the current account deficit, which reached 7.9% of GDP in 2012, and the decline in FDI inflows have reduced the level of international reserves to almost 97 days of imports in March 2012 (figure 4). This trend was mainly caused by the widening of the trade deficit, the reduction of worker remittances and FDI inflows. However, relative to the first quarter of 2011, FDI inflows have increased in the first quarter of 2012. Overall, trade deficit is widening due to the larger increase of the value of imports relative to that of exports (see figure 5).

33. The same study showed that reducing or eliminating food price subsidies would lead to an increase of the poverty rate by 3.6% which means that 400,000 people from the middle class would drop down to the poverty. Nevertheless, there is a need to reform this system in order to reduce fiscal imbalances and to provide resources for other safety net instruments. To achieve these goals, the expected measures should start by the subsidies most accepted for reform (diesel in Tunisia) and take into account food habits of poor population.

Figure 5: Evolution of Terms of Trade (Source: CBT)

36. The Central Bank of Tunisia loosened its monetary policy by injecting substantial liquidity in the money market, reduced its reference interest rate and lowered its reserve requirement ratio. This enabled the banking system to increase its credit to the economy at a rate of 13.5% in 2011, which is lower than the 19.3% rate of 2010 but sufficiently strong to avoid an additional devastating credit crunch.

D. Key Challenges Facing the Tunisian Economy in the Short to Medium Term 34. The short to medium term outlook for Tunisia is affected by the significant impacts resulted from turbulence of 2011, which has been particularly difficult with a negative GDP growth of -1.8%. The strategic sectors of the Tunisian economy slowed-down in 2011, apart from the agriculture and fishing which registered a good harvest. Factors contributed to this recession include: i) the social upheaval and strikes, ii) the recession in Europe, which is the principal Tunisian

37. The deterioration of foreign international reserves and the positive inflationary differential relative to trade partners has naturally led to the nominal depreciation of the Tunisian Dinar vis-à-vis the Euro and the American dollar, which represent the most important currencies for Tunisian international 6

transactions. The government increased its expenditure in order to stabilize the social upheavals, address the social demands and offset the inflationary effect of the expansionary monetary policy inducing a decrease in the purchasing power of the middle and lower-income classes of the society. In particular, the government increased the amount of its social transfers (in the form of financial support to impoverished families, maintaining subsidizing food and energy despite the increase of the international prices), increased the wage in the public sector, recruited new 20 000 employees and adopted special youth unemployment programs.

and to boost economic growth. Nevertheless, since 2010, the fiscal situation has deteriorated. Current public debt increased from 40.4% to 46.1% of GDP in 2012 while the fiscal deficit increased from 1.1% to 6.6% in 2012. The share of subsidies and wages to total government expenditures represents around 50%. 40. The concretization of the public investment plan depends on the effective mobilization of external resources. In order to finance a part of its fiscal deficit the authorities planned to mobilize external resources, use unallocated budget resources (generated from past privatization revenues), and incomes from the sale of confiscated assets. The government is targeting US$3.2 billion of external resources among which half was expected to be disbursed by the end of 2012. According to the IMF Article IV consultation, only US$0.73 billion have been disbursed by September 2012.

38. In addition to current public expenditure, the government has established a public investment plan in order to improve the infrastructure quality and realize a number of projects in the disadvantaged regions. Therefore, the authorities are targeting a growth rate of 3.5 percent and a fiscal deficit of 5.9% in 2013. The rate of the Public debt to GDP has increased to 46.1% in 2012 (see figure 6)3.

41. One of the major challenges facing Tunisia in the short and medium terms is to restore the confidence of its population, especially the young, mainly through helping them enter the job market. The economic recession, the return of thousands of workers from Libya and the wait-and-see behavior of the private sector have contributed to the increase of the unemployment rate from 13% in 2010 to 18.9% in 2011 and 16.7% in 2012. This rate is even larger among the holders of graduate degrees (almost 33.1% in 2011 and 33.2% in 2012). Although, unemployment has decreased on average to 16.7% in 2012 the situation is not improving in many disadvantaged regions like the Governorate of Tataouine where the unemployment rate approximates 51.7% in 2012.

Figure 6: Evolution of the Public debt to GDP ratio (*provisional) (Source: INS and IDB Group staff calculation) Internal Public Debt to GDP

50% 45% 40% 35% 30% 25% 20% 15%

2009

2010

2011*

Rate of outstanding internal public debt /GDP Rate of outstanding external public debt / GDP

39. During the last decade, Tunisia has adopted a sustainable fiscal policy which allowed a better management of public debt. As a result of prudent macroeconomic policies, Tunisia has ensured balanced financing of the economy. The State budget deficit has been contained at around 3 percent of GDP, while public debt has been reduced to less than 40 percent of GDP. This situation provided to government a wide room to adopt an expansionist fiscal policy to enhance demand

42. The only way for Tunisia to reduce unemployment is to increase its economic growth and its jobs creations. Based on data from the National Institute of Statics (Institut National de la Statistique), our estimations showed an elasticity of employment to economic growth in Tunisia of 0.47, which means that Tunisia needs at least an average annual real GDP growth rate of 3.9% to absorb the new entrants to the labor market between 2011-20174. However, reducing unemployment by 30% during the same period in Tunisia

3

4

The Constituent Assembly adopted a complementary budget law in May 2012, which aims to reduce regional inequalities and creating 70,000 new jobs, including 25,000 jobs in the public sector.

The different scenarios here were tested with the help of the Template provided by Ralph Chami et al. (2012), Département Moyen-Orient et Asie central, Fonds Monétaire International.

7

will require an average annual real GDP growth rate of 6.1%. In the same time, any additional reforms aiming to increase the jobs contents of growth would have an impact on unemployment. Figure 7 below, shows the impact of growth on unemployment in Tunisia.

supply side are the following: i) the available skills are not matching the present needs of the economy, ii) working in the public sector continue to be preferred to the private sector for a large number of the unemployed, iii) the reservation wage (or wage expectation) is higher among the unemployed people with postgraduate diploma, iv) Weakness of the entrepreneurial culture and lack of soft skills. The main deficiencies on the supply side are: i) concentration of the private investment in low-added value and low-generating employment opportunities like real estate, ii) the business environment mainly corruption, bureaucracy, tax regulation, lack of infrastructure in the rural regions and informal sector are not providing the right incentives for the private sector to diversify its investment regionally and by sector.

Figure 7: Unemployment Projections (Source: IDB Group staff calculation) 20%

15%

10%

5%

baseline: 4.1% growth

6.1% growth

reform & 6.1% growth 0% 2011

2012

2013

2014

2015

2016

2017

45. The current situation of high unemployment, social injustice and unrest in many regions calls for a more active and integrated approach from government to tackle this problem. In order to enhance the efficiency of the authorities’ different policies, an intersectorial ministerial commission could be mandated to pilot their implementation. It is particularly important to articulate the following programs and policies: i) the government’s training and vocational program, ii) creation of public micro-enterprises 6 in the disadvantaged regions with the pooling of young people in clusters after succeeding their vocational program, iv) accelerating the emergence of the Islamic micro-finance sector7 iii) the enhancement of the public local agencies’ role in accompanying new entrepreneurs, iv) the setting of financial incentives for the private sector to invest in the disadvantaged regions through hiring trainees and encouraging business-angels, v) Accelerating the solidarity actions between the different regions and encouraging the civil society to participate in poverty alleviate efforts and supporting business organizations to hire young persons in the regions, vi) Developing a PPP affordable-housing national program to offer houses at low-cost for low-income people, and vii) communicating

43. Economic diagnosis shows that, in addition to the small size of the Tunisian firms, the formal requirements of employing workers make it unprofitable for them to recruit on in many cases to invest at all5. First, the high payroll taxes (with a rate of around 30 percent for firms serving the domestic market) do not encourage employment. Secondly, labor market rigidity, particularly regarding open ended contracts, raises the costs and risks of employing workers. Moreover, the current wage determination system adversely impacts employment levels and tends to reduce wages in the private sector. Finally, several constraints impede the willingness and the capacity of the Tunisian firms to innovate. These include: weak protection of investor returns, barriers to entry and competition, and impediments to employing workers at a sufficient scale. 44. The authorities are trying to implement urgent and short-term programs aiming to target unemployed people, especially for the diploma holders in the disadvantaged regions. This short to medium term policy for reducing the unemployment problem should be designed in coherence with the structural adjustment strategy that the job market needs on the demand as well as on the supply side. The main deficiencies on the

6

These public enterprises could be progressively acquired by the entrepreneurs or a special private micro-finance fund after a period of 2 to 3 years. 7 For example through the creation of a public-private special bank having the mandate to concentrate its actions initially in the disadvantaged regions.

5

“Towards a new economic model for Tunisia – Identifying Tunisia’s binding constraints to broad-based growth’, A joint Study by the African Development Bank, the Government of Tunisia and the Government of the United States, 2013.

8

this integrated approach through different medias in order to restore confidence, calm the social unrest and back as soon as possible the communication with successful stories.

support their economic activity. In September 2012, the rating agency Standard & Poor (S&P) reviewed the banking sector of Tunisia (BB / Stable / B) in terms of updating its methodology BICRA (Banking Industry Country Risk Assessment). S&P has ranked Tunisia in Group '8 ', with countries such as Lebanon, Egypt, Georgia, Nigeria and Kazakhstan.

46. The years after the revolution have witnessed an increasing trend in inflation which reached 5.8% in February 2013. The solution to these inflationary pressures seems to be beyond the efforts of the Central Bank of Tunisia to control them through its monetary policy and the manipulation of the interest rates. In fact, in addition to the difficulties encountered at the production level, several factors have contributed to this inflation including: (i) the international food and energy prices, (ii) the increasing demand from the Libyan market coupled with smuggling and illegal practices, (iii) the depreciation of the Tunisian Dinar and (iv) the impact of salaries increase adopted by the Government to ease social tensions.

(ii) Enhancing the Doing Business and investment climate 49. Tunisia is placed in the top 27 per cent of all countries ranked according to The Global Competitiveness Index in 2009–10. The Doing Business Report 2012 ranks Tunisia in the 58th position out of 155 countries. These rankings reflect only the reasonably good business environment in the 'offshore' sector, and do not capture the reality of most domestic investors in the 'onshore' sector. As mentioned above, the Economic Freedom Index classifies Tunisia as ‘mostly unfree’ economy. Because of the despotic rent seeking characteristics of the Tunisian government under the previous regime, the doing business reforms were offset, to a great extent, by discretion in the application of laws and regulations, inefficient procurement processes, rigged privatization, declassification of public land and asset and improper use of public banks.

47. Coping with these challenges will not be possible, without strengthening the role of the Tunisian private sector. The new government introduced important reforms related to the governance aspects, and is willing to remove all the constraints facing private sector development. As a necessary step, the actual investment code, established in 1993, is being revised to include more investment incentives. Overall, an integrated approach to implement the right incentives and structures is needed to produce the desired private sector response. Among others, this approach should include the following priority actions:

50. The Tunisian’s recovery is still fragile and the transitional period is characterized by multiple interactions between the political, social and economic spheres. Many emerging signs such as the finalization of the constitution and the announcing of a clear calendar for the organization of the next Presidential and/or Parliamentary elections (depending on the political regime that will be decided) will restore the private sector and foreign investors’ confidence in the economy. The restoration of this confidence and the calming of the political tension will help the authorities to realize their public investment plan which in turn is expected to reduce social tensions in the disadvantaged regions (Center-West and South-West of the country where unemployment and poverty are largely concentrated and where the revolution has initially started). Table 6 below gives forecasts for the Tunisian economy for the period 2013 – 2017.

(i) Reform of the Banking sector 48. The Financial Sector Assessment Program (FSAP) conducted by the World Bank and IMF in early 2012 recommends structural reforms to improve the operation and stability of the financial sector, as well as to strengthen its resilience to economic shocks. The FSAP confirmed that with the weak domestic economy, the banking sector-already compromised by poor risk provisioning, a high rate of non-performing loans (NPLs) and weak governance practices during the previous regime-faces deteriorating profitability, solvency and quality of loans. Lack of liquidity in 2011 became a new source of vulnerability for the banking sector and a material threat for firms relying on external funding to 9

Table 6: Country Economic Outlook (% unless otherwise indicated) (Source: IMF, April 2012)

2013

2014

2015

2016

2017

Real GDP growth

3.5

4.1

5.3

5.5

6.0

Unemployment rate (av)

16

13.5

12.9

12.3

12

25.9

26.2

26.5

26.7

27.0

50.5

50.7

49.9

48.7

46.4

-6.9

-6.2

-5.5

-4.8

-4.2

Total investment (% of GDP) General government gross debt (% of GDP) Current-account balance (% of GDP)

reducing unemployment, particularly that of graduates, and reducing inequalities. 54. The following Government elected in October 2011 adopted a new strategy called Development Strategy of the New Tunisia. While the broad objectives have been almost the same as for the previous government, this new strategy was based on five main pillars: (i) implement a new set of social and economic reforms, (ii) modernizing infrastructure, (iii) ensuring regional balances and global development, (iv) enhancing human and social development, (v) ensuring sustainable development and natural resources management.

III.Tunisia's Vision, Development Strategy and Priorities 51. Just few months before the Revolution, Tunisia started its 12th five year National Development Plan covering the period 2010 - 2014. The implementation of the previous Plan was considered by the government as a success despite the important number of unmet objectives. The impact of the global financial crisis has been considered as the main reason for these unmet objectives.

55. The actual Government which presented its program to the Constituent Assembly in March 2013, endorsed the economic program of previous Government and focuses on four priorities: (i) preparing an adequate climate for the organization of the forthcoming elections, (ii) ensuring security and fighting crimes and delinquency, (iii) pursuing the enhancement of the economy and employment creation, and improving the purchasing power by reducing inflation, (iv) continuing the reform process and corruption fighting.

52. The 12th Plan strategy is based on seven main axis: (i) Development of the economic structure, (ii) Enhancing competitiveness and increasing productivity, (iii) Enhancing economic integration, (iv) Preserving financial balances, (v) Investing in human capital, (vi) Achieving environmental sustainability, and (vii) Consolidating regional development. The plan sets an important number of ambitious objectives. Economic growth rate is expected to be 5.5% over the period 20102014, while unemployment rate should decrease to 11.6% by 2014.

56. In the short run, 2013 budget was based on the following hypothesis: (i) A moderate rate of growth estimated at 4.5 percent in 2013, (ii) The price of oil barrel estimated at US$110, and (iii) An exchange rate of US $= DNT 1.580. 57. As mentioned earlier, the implementation of this strategy will be contingent on the political and economic stability. Moreover, the situation in Europe will continue to impact the economy through different channels, including tourism, FDIs and worker remittances. Overall, the support of the international community to Tunisia will play a key role in the years ahead.

53. After the downfall of the previous Regime, transition Governments which succeeded since January 2011, have established a new social and economic strategy. The first strategy adopted after the revolution identified six main development issues including: (i) human development and social and regional inclusion, (ii) governance, social accountability, and citizen involvement, (iii) employability, job creation, and upgrading of the Economy, (iv) global integration, (v) financing of the Economy, and (vi) the Environment and Natural Resources Management. To address these issues, the social and economic strategy of development covering the period from 2012 to 2016 has focused on doubling the main economic indicators: income,

IV. Donors Support to the Country 58. The main donors in Tunisia are the World Bank , European Union, European Investment Bank, African Development Bank (AfDB), Agence Francaise de Développement (AFD), Japan (JICA), German Cooperation Agency (GTZ) and the Islamic Development Bank. 10

59. The World Bank Group’s Interim Strategy Note for Tunisia (2013-2014), is dedicated to help the Government to meet its short and medium-term employment creation objective. To achieve this objective, the World Bank selected three pillars to support priorities as defined by the Interim Government Program: (i) Laying the foundation for renewed sustainable growth and job creation; (ii) Promoting social and economic inclusion; and (iii) Strengthening governance. The World Bank approved on 27 November 2012 a financing package of US$ 500 million, as budget support, to accelerate Tunisia’s economic recovery and pave way for more inclusive growth.

61. The AfDB adopted an Interim Country Strategy Paper for Tunisia for the period 2012-2013, which focused on two pillars: (1) Growth and economic transition, (2) Inclusion and reduction of regional disparities. For each pillar, the AFDB considers funding studies, technical assistance and equipment projects. These projects include roads, integrated Agricultural Development Projects, Railways, Power stations and environment. It is to be noted that Interim Country Strategy Paper does not specify the global amount of the AFDB interventions over this period. The projected loan program which remains ``subject to review depending on the evolution of needs and relevance to the objectives of the Revolution, estimates an amount of UA 375 million for 2012, and UA 323 million for 2013.

60. The specific objectives of EU-Tunisia cooperation in short to medium term were set out in a Country Strategy Paper for Tunisia for the period 2007-2013. Under the European Neighborhood and Partnership (ENP) Instrument each country has a National Indicative Program (NIP) which sets out each country’s allocation, and guides the identification and design of programmes by setting out the overall objectives and expected results of operations. Tunisia’s new NIP for 2010 – 2013 proposes an indicative budget of €240 million, which will be distributed to finance projects and programmes in the Social sector (Employment, €55 million), the Economic sector (Modernization of Enterprises, €80 million and Support to integration II, €90 million) and the Governance sector (Support to Justice, €15 million). The National Indicative Program for the period 2011-2013 which indicates an initial budget of €240 million was increased by €150 million to reach a total amount of €390 million. The main areas identified by the NIP include: Employment Support, Reform of Justice, Support to Integration and Support to Private Enterprises.

62. The EIB has been Tunisia’s main external source of funds. Currently, Tunisia falls under the EIB’S Facility for Euro-Mediterranean Investment and Partnership (FEMIP) which brings together the whole range of services provided by the European Investment Bank (EIB) in the Mediterranean partner countries. EIB’s first operations in Tunisia reach all the way back to 1978 and to date, loans totaling more than EUR 3.6 billion have been granted to the Country. EIB financing in Tunisia has mostly been geared towards the infrastructure sector, and specifically just three areas, Energy, Transport and Credit Lines to SMEs respectively. With financing of around EUR 1 billion, Transport projects have been the highest beneficiary of the EIB making up 27% of all operations in Tunisia. Similarly, the EIB has provided almost EUR 860 million worth of lines of credit to local financial institutions, making up 24% of all EIB operations in Tunisia.

11

63. The French Development Agency has been active in Tunisia since 1992. Its efforts have been focused on giving to Tunisia in its process of economic integration. This support is provided through two main axes: (i) firms rehabilitation and enhancement of economic competitiveness and (ii) improving the living conditions of populations in order to mitigate the social impact of adjustment measures. A total amount of Euro 166.6 million was allocated to the first axis, while the amount allocated to the second axis totaled Euro 531 million. Overall, the AFD interventions concern three main sectors: (i) the productive sector, (ii) basic infrastructure and (iii) sustainable development.

Depots et Consignations (CDC), for an initial closing of USD 50 million. 67. IDB approval trend has been quite flat averaging around ID 30 million annually until 1428. Since then, the Table 7: Main Donors Support to Tunisia Partnership Donor Pillars Document (i) Laying the foundation for renewed sustainable Interim Strategy growth and job creation; World Bank Note for Tunisia (ii) Promoting social and Group (2013-2014) economic inclusion; and (iii) Strengthening governance.

64. On 20 April 2013, the IMF announced that it has reached a provisional agreement on a US$1.75 billion loan package for Tunisia. This loan would support the Government’s reform program aiming to promote private investment, job creation and to reduce economic and social disparities.

Country Strategy Paper for Tunisia for the period 2007-2013

European Union

African Development Bank

65. Table 7 gives a summary of areas of interventions of the most active donors in Tunisia.

V. IDB Group Partnership Strategy

European Investment Bank

A. IDB Past Interventions in Tunisia 66. IDB Group financing approvals for Tunisia on a cumulative basis has reached US$ 3.55 billion, including project financing operations of US$ 1,509 million. The IDB Group entities ITFC, ICIEC, and ICD have also made a significant contribution to Tunisia. Cumulative operations for the Islamic Trade Finance Corporation stand at US$ 1,286 million. ICIEC has also managed to insure exports and imports business worth US$ 755 million. ICD total approvals have reached USD 17 million to support Tunisian family businesses and the corporation. Additionally, an SME fund was established in partnership with state owned agency Caisse des

Interim Country Strategy Paper for Tunisia for the period 2012-2013 EIB’S Facility for EuroMediterranean Investment and Partnership (FEMIP)

French Development Agency

-

IMF

A provisional Agreement announced in May 2013

8

The Millennium Challenge Corporation (MCC) is a U.S. Government corporation whose mission is to provide assistance that will support economic growth and poverty reduction in carefully selected countries that demonstrate a commitment to just and democratic governance, economic freedom, and investments in their own citizens. MCC intends to assist the Government of Tunisia (GOT) in designing a Threshold Program based on the findings of the recently completed Constraints Analysis (CA). The CA was conducted jointly in 2012 by the GOT, the African Development Bank (AfDB), and a U.S. Government team consisting of MCC, the Department of State, and the Agency for International Development.

USAID (MCC)

8

Threshold Program

National Indicative Program (NIP) for the period 2011-2013 includes the following areas: Employment Support, Reform of Justice, Support to Integration, and Support to Private Enterprises. (1) Growth and economic transition (2) Inclusion and reduction of regional disparities. The FEMIP includes a whole range of services provided by the EIB in the Mediterranean partner countries. Since 1992, the support of AFD is provided through two main axes: (i) firms rehabilitation and enhancement of economic competitiveness (ii) Improving the living conditions of populations in order to mitigate the social impact of adjustment measures. Support to the Government’s reform program aiming to promote private investment, job creation and to reduce economic and social disparities. Support government’s reform program in governance and labor market

approval trend has been quite erratic, with no approvals at all in 1428 followed by peak annual approvals worth ID 196 million and ID 183 million for 1429 and 1431 12

respectively. After the revolution, both the IDB Group and the Government of Tunisia have expressed their willingness to strengthen their cooperation. With special attention to the gradual introduction of Islamic Financing. In addition, Tunisia was the first country to benefit from the US$ 250 Million facility approved by the IDB to support youth employment in the affected member countries.

period, the post-revolution transitional period has amplified some of them and created new ones. At the political level, the country is governed by the fifth government after the revolution and the vulnerability of the situation to political pressures still constitute a real concern. 71. This MCPS for Tunisia is based on the outcome of two missions to Tunisia; a preparation Mission in July 2012 followed by a technical mission in January 2013. Although the missions were held in a period of political turbulences, there was a consensus that the most important challenge for Tunisia is to cope with the urgent needs that emerged just after the revolution, while designing a new development model and undertaking structural adjustment of the economy for the years ahead. Based on national consultations, the Government of Tunisia is trying to develop regional strategies, which take into account the specificity of each region. There is also a consensus that unemployment would continue to be the main challenge facing the economy in the few coming years. The Government is aware that reducing the structural unemployment problem requires structural adjustment of the economy, an adoption of new development model, reforms of the business environment and the educational system.

68. The overall IDB project financing interventions have totaled 72 operations for US$ 1,509.4 million, out of which 50 projects are completed. The operations were concentrated in the energy sector, which made up 48% of total approved operations. The rest of the sectors included 16 projects in agriculture worth over US$ 157 million (11%), 9 projects in industry and mining worth US$ 187.3 million (13%), 14 water and sanitation projects worth US$ 149.2 million (10%), in addition to 2 projects in the health sector worth US$ 30.2 million (figure 8). Figure 8: IDB financing by sector 2%

Agriculture

3%

11%

11% 6%

Education Energy

13%

Health

2% 4%

72. This MCPS for Tunisia, covering the period 2013 2015 focuses on three pillars: i) Contributing to the reduction of regional disparities through infrastructure development, ii) Supporting regional integration in the Maghreb Region, and iii) promoting reverse linkages between Tunisia and member Countries. In general, the strategy addresses job creation, as a cross-cutting theme that should constitute the ultimate objective of all interventions.

Finance

48%

Ind. & Minning

69. The IDB financing was extended mainly under nonconcessional modes of financing constituting more than 88% of the portfolio. The dominant mode of financing has been Istisnaa with a total financing of $653.2 (48%) followed by Installment Sale with $366.7 (27%) and the remaining mode of financing were Leasing (11%), Loan (8%), Profit Sharing (3%), and Equity Financing, Grant and Line of Financing (3%).

73. In the immediate term, the IDB Group will adopt a quick-win action plan focusing on specific operations to be implemented during the coming months. However, since the main priorities of the country would remain unchanged during the coming years, the IDB Group will continue its support to Tunisia guided by the same pillars identified in this MCPS.

B. Strategic Framework of the Member Country Partnership Strategy (MCPS) 70. As mentioned above, after the revolution Tunisia has started a new phase of its history. While Tunisia inherited several challenges from the pre-revolution 13

Government is actually working on the creation of a database which will help in assessing the situation and identifying the needy populations. This project is part of the reforms initiated after the revolution for the establishment of a social protection system to rehabilitate and correct the information system of the Ministry of Social Affairs and conduct a full review of aid recipients and direct monetary targeting methods. This database will also allow the government to achieve a better targeting of direct and indirect social transfers allocated to poverty reduction.

C. Pillar I: Contributing to the Reduction of Regional Disparities through Infrastructure Development a- Regional Disparities as one of the major constraints to Development in Tunisia 74. As mentioned above, past economic growth has not been pro-poor and has aggravated regional inequalities between the East and the West of the country. Although Tunisia has experienced significant poverty reduction and improving social indicators, considerable socioeconomic disparities persist in the Centre-West (poverty rate of 32.3%) and the South -West (21.5%), in comparison with the national average estimated at 15.5 % in 2010.

78. The Government development plans aim at laying down the foundations for a balanced and equitable regional development, based on the competitive advantages and specificities of each region, for the sake of reduction of poverty and employment creation. This strategy will be operationalized through well-thoughtout distribution and injection of public investments, on the basis of objective criteria, taking into account the prevailing levels of poverty and unemployment, and level of access to adequate collective basic infrastructure. Under this strategy, regional developments programs will be devised, tailored to the requirements of each region, in order to strengthen the regional economy, value better natural resources, with the aim of development of local productive activities for a sustainable socioeconomic dynamic. More emphasis will be put on the improvement of the living conditions of population, especially in the underprivileged and the rural areas, through generalization of basic infrastructure including electricity grid, water supply systems, sewerage infrastructure, rural roads and roads, social amenities including health and education infrastructure.

75. Coastal areas have been reportedly receiving 65% of public investment over the last decade. The benefits of this growth have not spilled over to the rural hinterlands and inner regions and did not lead to improved public services and opportunities in disadvantaged areas. Consequently, the Mid-West and the South-West are the poorest regions in terms of public services (health and education) and access to basic infrastructure. Unemployment is particularly acute in the hinterland, exceeding 26% in the Kasserine, Sidi Bouzid and Gafsa regions. 76. The next major challenge for Tunisia's Government will be to reduce regional inequalities, and also to maintain the level of public investment that will sustain the quality of basic infrastructure and develop health and education infrastructure, especially in disadvantaged areas. Improvement in access to basic infrastructure services in a sustainable, reliable and affordable way is a prerequisite to achieve enhancements in developing human capital, social protection and access to local social services in disadvantaged areas. b- Government Disparities

Efforts

to

Reduce

79. The Special Program for Social Housing is one of the ambitious actions launched by the GoT to reduce regional disparities and to eliminate primitive dwellings. The Program aims at constructing 30 000 housing covering the whole country, through the elimination/rehabilitation of primitive dwellings and the construction of new decent housing. Beyond its social impact, the Government is expecting that this Program will trigger some dynamism in the economy and create jobs for the unemployed labor force. While the GoT has provided the land, technical studies and the financing of

Regional

77. One of the major issues faced by the Government of Tunisia while focusing on social problems and regional disparities is lack of data and accurate information about the situation in remote areas. The 14

to enable uninterrupted availability of sustainable energy and transport infrastructure while the economy is making progress towards full recovery. The Group’s proposed financing to continue expansion of power generation based on sustainable energy resources and associated expansion of the grid infrastructure is particularly fundamental to drive economic growth.

some dwellings with an amount of US$ 3.75 Million, the rest of the estimated cost of US$ 400 million would be collected from other sources. The Saudi Fund will contribute to construction of 3871 dwellings with an amount of US$ 150 million, while the Government of Qatar will provide an amount of US$ 30 million as loans and grants.

83. IDB Group will also pursue opportunities to provide financing and advisory services to catalyze support for sustainable energy projects, where possible financing schemes (including, restricted mudaraba investment facility) will be further explored for the development of renewable energy and energy efficiency projects by the private sector enterprises. The Bank will also explore with the Ministry of Equipment possible modalities of financing support for development toll roads along the main arteries.

c- IDB Group Strategy to Help the Country Reduce Regional Disparities 80. Improvement in access to basic infrastructure services in a sustainable, reliable and affordable manner is a prerequisite to achieve enhancements in developing human capital, social protection and access to local social services in disadvantaged areas. The IDB Group plans to facilitate the Government of Tunisia’s efforts to reduce regional disparities, which is one of the major constraints to socio-economic development of the country, with particular focus on pressing infrastructural needs. The Group purports to extend it support into three areas:

iii. Promote greater involvement of private sector in infrastructure development 84. Greater contribution of the private sector is essential in the infrastructure development of the country. In this regard, the IDB Group welcomes the recent reform process initiated by the Government to provide an adequate climate for an efficient partnership between the public and private sectors.

i. Ensure poor communities better access to basic infrastructure services 81. The quality and coverage of infrastructure services such as electricity, water, sanitation, and transport have a major impact on living standards and socioeconomic growth in Tunisia. IDB Group’s support intends to address the challenge of “lack of access” due to either the failure to make such services available in the regions or neighborhoods where the poor live or availability of such services beyond the affordability of poor households. Improved access of underserved rural and urban populations to such infrastructure will help alleviating poverty, improving living conditions of disadvantaged populations, and creating new job opportunities. Particular focus shall be given to improvement of water and sanitation facilities in urban areas and development of energy (electricity and natural gas) network infrastructure for better network connectivity of the rural communities.

85. The Group will assist the Government in creation of enabling environment for public-private partnership investments, where greater involvement of private sector, particularly in energy generation infrastructure development, will help reducing public sector investment needs and freeing up public resources for larger allocations to social and human development sectors. 86. The IDB is prepared to extend technical assistance to the Government, particularly through the Technical Assistance Facility of the Arab Financing Facility for Infrastructure (AFFI-TAF) in the following areas: −

ii. Improve availability, quality and sustainability of infrastructure services to fuel economic growth

−

82. IDB Group will continue supporting the advancement of large scale infrastructure development 15

Providing institutional support for setting up a PPP unit within the Presidency of the Government; Supporting the identification of the role and responsibilities of the other stakeholders involved in the PPP project cycle and facilitating

−

a policy dialogue between the PPP unit, line ministries and local governments; and Streamlining the identification of pilot projects suitable for procurement through PPPs.

Algeria, Tunisia and Morocco respectively, sufficient to cope with the labour market demand. At the same time, economic integration would increase investments in agriculture by 45% and in the other sectors by 20%, and it would increase foreign direct investments by 34% (AfDB 2012).

D. Pillar II: Supporting Regional Integration in the Maghreb Region

89. In the Maghreb Region, there are a plenty of opportunities which need to be unlocked. Tunisia and Morocco exhibit strong private sector development coupled with large financing needs, while Libya and Algeria feature a surplus of capital and represent a growing market for services and goods coming from within the region. Food security could also be enhanced if foodstuffs that are abundant in one part of the region could be easily shipped to other areas where there are shortages. Furthermore, developing an integrated energy market would also help unlock the region’s full potential by filling intra-regional gaps and needs, as well as linking the region to an integrated Mediterranean market for energy.

a- Regional Integration Status in Tunisia 87. Tunisia is a long-standing trade partner of the European Union and a signatory of numerous agreements with countries of the Middle East and North Africa and the Maghreb in particular, as well as with G8 partners. As mentioned above, Tunisia’s trade is still primarily conducted with the EU, though Tunisia had increased its trade ties with Libya prior to the conflict. However, in summary integration of Tunisia in the Maghreb region has been below expectations. In fact, with intra-regional trade accounting for less than 4% of total trade, the North Africa Region is the least economically integrated neighborhood in the World. For example, the share of FDIs in the region does not exceed 0.36% in total FDIs in the World. Historically, integration among Maghreb countries has been limited by intraregional politics combined with strong bilateral interests in integrating with Europe and, more recently, a drive towards Sub-Saharan Africa.

b- Government strategy to enhance regional integration 90. While maintaining its strong ties with the Eurozone, Tunisia tries to adopt a new development model based on the diversification of its economy. On one hand, Tunisia should reconsider its export supply structure to mitigate risks of vulnerability to international demand. On the other hand, it should enhance its integration in the global economy by exploring new markets and developing new partnerships. Integration into the global economy has become a strategic choice for Tunisia, whereby the country seeks to boost economic growth, job creation, ensure transfer of technology and take advantage of the international expertise, and channel in the required finance for the development.

88. It is widely admitted that regional integration could contribute to higher growth through: (1) the removal of trade barriers which would create a regional market of more than 75 million consumers, sufficiently large to exploit economies of scale and make the region more attractive for foreign investment, and (2) Regional integration that would reduce the so-called hub-andspoke effects between the EU and the Maghreb. Moreover, regional integration can help in developing a strong private sector that is connected with global markets, survives without state assistance and generates productive employment for young people. It is estimated that the Maghreb Region is missing 2% of its economic growth because of the non-integration of its countries. Deeper and wider integration, assuming that the Maghreb countries are deeply integrated and form a trading bloc with the EU would yield a substantial increase in growth, estimated at 6.2, 5.8 and 5.7 % for

91. After the revolution, Tunisia, head by its President, has provided several efforts to revitalize integration among Maghreb countries. Although practical steps are still awaited and remain contingent on political will, several areas of potential integration have been identified to cope with several common economic and social problems across the region. Areas of cooperation include: (i) Hard infrastructure: developing regional transport, energy and telecommunications networks and 16

94. Although the IDB Group will continue its efforts to enhance the integration of Tunisia in the Muslim World and to strengthen its cooperation with all other member countries, in the short term, these efforts would mainly be focused on integration between Tunisia and its two neighbors Libya and Algeria. Two flagship operations were identified in this context and will constitute the immediate Action Plan of IDB Group interventions within this Pillar: (i) the rehabilitation of Ras Jdir Cross-Border Custom post and (ii) the development of a Special Economic Zone between Tunisia and Libya. In the Medium Term, the IDB Group would continue its efforts to enhance the integration of Tunisia in the Maghreb Region and in the Muslim World as a whole. For example, the completion of these two operations would be replicated on the borders between Tunisia and Algeria.

setting in place the institutional arrangements for their management and maintenance, (ii) Soft infrastructure: removing intangible barriers to the free movement of goods, services, capital and labor, and creating the institutional frameworks necessary to integrate markets, for example dismantling trade barriers, harmonizing policies to promote intra-regional trade and investment, creating institutions to manage trans-boundary markets and improving the regional business environment, (iii) Regional public goods: establishing common arrangements for managing shared resources like water; financing joint investments in agricultural productivity and climate change adaptation; and managing the crossborder dimensions of major health issues, labor migration and other areas that benefit the region as a whole. 92. To foster the regional integration, and promote trade activities, the Government is taking necessary steps to reduce transactions costs, facilitate foreign trade via the reduction of custom duties, improvement of the regulatory framework, better integration into worldwide distribution networks, and encouragement to access to new markets. These measures will be baked with the development of port infrastructure, (construction of deep sea port), creation of new industrial estates along with logistical platforms.

95. The Border Post of Ras Jdir is the main one between Tunisia and Libya and it is expected that it will become a very busy border post in the years to come, critical for both countries. In its Report of June 2012 on Trade Facilitation between Tunisia and Libya, the World Bank emphasized the critical role of this Border Post, while some other infrastructure projects (roads in particular) under way between the two countries. The IDB has started the designing process of the project to rehabilitate the Ras Jdir custom post. This project aims at implementing an integrated area in the Ras Jdir customs post which will include touristic, commercial, health, and housing projects. The first one phase of the project will start with an evaluation study, to be conducted by the World Customs Organization. The study will consist on auditing the current customs systems and the existing infrastructure, and analyzing the procurement quotations of material and equipment established by Tunisian and Libyan parties and their adequacy with the real needs of the project.

c- IDB Group strategy to support regional integration between Tunisia and other Maghreb countries 93. Being convinced of the role that would play the Arab Maghreb Union in the development process of its member countries, the IDB Group has always supported all the efforts aiming at enhancing cooperation and coordination in the Region. Recently, the Conference organized by the IDB in Casablanca, Morocco, during 24 – 26 December 2012 on “non-tariff barriers to trade among Maghreb Countries” has identified several constraints to integration among Arab Maghreb countries, including: (i) High tariffs imposed by countries in the region compared with the rest of the other developing countries, (ii) weak infrastructure and services, (iii) heterogeneity of trade-related rules and regulations among countries.

96. The creation of a Special Economic Zone between Tunisia and Libya is among the priorities of the Government of Tunisia. The border region with Libya, which has been neglected by the previous development plans, is based on informal/illegal activities across the borders. A Special Economic Zone would restructure the development of the region and create more investment opportunities. 17

97. The Islamic Corporation for the Development of the Private Sector (ICD) is currently working on the project for developing this Special Economic Zone between Tunisia and Libya. The project aims to increase the opportunities of economic cooperation across the border between the two countries, while working at the same time on capacity development and transfer of knowledge from Tunisia to Libya in the development and management of modern economic zones, supported by gradual policy reforms and the creation of a business environment favorable to both parties.

high side. In addition, ICIEC can provide political risk coverage to Tunisian companies willing to invest in Africa or to expand their existent investments in Africa.

E. Pillar III: Reverse Linkages 100. Although in transition period, Tunisia could benefit from the IDB Group Reverse Linkages initiative, which has become an important element of the dialogue with its member countries. In fact, Tunisia has already been active through its Tunisian Agency of Technical Cooperation in providing some support to other African IDB member countries. At the same time, the post revolution period has amplified the need of the country to implement urgent but effective solutions to real problems, i.e. youth unemployment and has opened new opportunities for diversifying the modes of financing in the economy, i.e. through the implementation of the Islamic modes of financing.

98. In terms of trade, ITFC is currently negotiating new form of partnership with the government aiming to satisfy the financing needs of Tunisia in strategic commodities. A delegation from ITFC visited Tunisia in April 2013 and signed a MoU by which the Government of Tunisia will provide a guaranty to all trade operations that would be approved and financed by the ITFC. Moreover, the Deauville Partnership constitutes another opportunity where the IDB can provide a significant support to Tunisia, through improving the access to affordable trade finance and related insurance and guarantee products for SMEs, including Islamic finance; building the technical capacity of both SMEs and financial institutions in the management of trade finance at all transaction stages.

a- Opportunities I: What Tunisia has to offer to other IDB Member Countries? 101. As mentioned earlier, Tunisia has provided a support to some African IDB Member Countries. In particular, the participation of the Tunisian “Nadi Al Basar” in the IDB blindness campaign. This participation has been very useful and highly contributed to the success of this initiative. It is to be noted that Nadi Al Bassar is an educational, medical and social association established in Tunisia in 1980. The NGO undertakes activities on national and international levels in the field of ophthalmology and visual sciences. This NGO is, inter alia, a member of the Third World Network of Scientific Organizations, the Executive Committee of the International Agency of Prevention of Blindness, the consultative group to the World Health Organization Prevention of Blindness Program and the Pan Arab African Council of Ophthalmology. Nadi Al Bassar has been collaborating successfully with the IDB in the ophthalmic field since 2002. It conducted campaigns where tens of thousands of patients benefited from eye examination and more than 12,000 cataracts were operated in more than 12 countries. The Bank can capitalize on the experience of Nadi Al Bassar to build the capacity of the member country, particularly Sub Saharan African countries, in the ophthalmic field and to

99. The IDB Group has also identified several areas where the Islamic Corporation for the Insurance of Investment and Export Credit (ICIEC) can provide significant assistance to Tunisia, especially in terms of insuring exports, imports and foreign direct investment. With regard to exports, ICIEC can assist Tunisian exporters to export to Africa while being insured against political and commercial risks since it was clear that promoting exports to Africa is one of the priorities of the Ministry of Trade. With regard to imports, ICIEC can enable large state-owned and private-owned companies (subject to proper due diligence) to import capital equipment from anywhere in the world with better terms and conditions without being required to provide Letters of Credit or a guarantee from the Ministry of Finance . With regard to foreign direct investment, ICIEC is ready to provide political risk insurance to foreign investors willing to invest in Tunisia and whose perception about the political risk in Tunisia is on the 18

experience of the Tunisia bank of SMEs (Tunisian Solidarity Bank) and Theemar fund models in Libya.

assist them improving access to, and quality of, eye health care. 102. Moreover, the Government of Tunisia has expressed its readiness to continue its support to the African Member Countries in teaching Arab language. In this context, the IDB would support the operation undertaken by Tunisia in teaching Arab language in the North of Cameroun and in Chad.

b- Opportunities II: What can be offered to Tunisia from other IDB Member Countries? • In the field of Islamic Finance and Halal Industry 106. Recently, the Government of Tunisia moved gradually to authorize Islamic finance, partly to encourage the investment inflows on which their fastgrowing tourism and real estate industries depend. However, Islamic banking in Tunisia is still limited to three banks, Bank Albaraka Tunisie, Dubai's Noor Islamic Bank (an off-shore Bank) and Zitouna Bank which is the the first Tunisia’s full-fledged domestic Islamic bank. Zitouna Bank won a license in January 2009 to begin operations as a universal bank and started its operations in May 2010.

103. Lastly, through its three big companies; the Tunisian Company for Electricity and Gaz (STEG International), the National Company for Water Exploitation and Distribution (SONEDE international) and the National Office for Sanitation (ONAS International), Tunisia could provide technical assistance in different areas to African Member countries. 104. The Tunisian Technical Cooperation (ATCT) could be considered as the national coordinator in Tunisia for capacity-building programs and other technical assistance activities towards third countries that are cofinanced by either party under the RL approach. The proposed scheme is a tri-partite arrangement with a donor country (i.e. Tunisia), a beneficiary country (Burkina Faso/ Mauritania) and a facilitator (IDB Group). Responsibilities could be shared as follows: beneficiary: to formulate requests; to provide reliable counterpart; provide local administrative and logistical support, mobilize in-kind contributions and absorptive capability to retain transfer knowledge and skills. Donor: to participate in formulation and supervision of assistance programs; supply human and financial resources; maintain rosters of consultants, experts, skilled workers; coordinate and make available resource institutions and persons; and share in the cost of related activities. Facilitator: to help align supply and demand sides; firm up assistance program; develop financial and technical partnerships; provide guidance and supervision; mobilize financial resources; and manage the assistance programs/projects. Capacity Building of the African MCs particularly in the key areas selected under the RL activities could be undertaken in collaboration with ATCT. Moreover, the ATCT expressed it is willingness to initiate such a cooperation.

107. At regulatory level, the country started implementing reforms compulsory to facilitate the flourishing of Islamic finance. In fact, the Tunisian government has set up a number of working groups that have studied how to develop Islamic finance in the country. The groups -- involving representatives from the Central Bank, stock exchange and private sector institutions including Islamic financial institutions operating in the Country -- has looked at the country's legal framework. The group has been also studying the Islamic banking experience of countries where the industry is well-developed, including Malaysia and Bahrain, as well as Jordan and Oman, which are more recent entrants into the industry. 108. Through its Reverse Linkages initiative, the IDB has initiated a dialogue between Tunisia and Malaysia on the potential areas of cooperation in the field of Islamic Finance and Halal Industry. This dialogue started with the visit of the Malaysian Finance Minister II to Tunisia in May 2012. The visit was followed by a video conference organized by the IDB in February 2013, through which the concerned parties in Tunisia and Malaysia agreed on the following steps to enhance cooperation in these fields. The IDB Group would help the two countries to develop a clear road map including capacity development, projects identification and the elaboration

105. In terms of private sector development, ICD is currently working on an initiative to replicate the 19

feasibility studies for these projects.

At the supply side, this platform should help young people to design their careers and to provide them with the programs to do so. For example, changing students’ and parents’ views of vocational training by making skilloriented jobs more attractive has been a key of success in some countries such as Germany and South Korea (Mckinsey 2012). At the demand side, it should help employers to build the required skills through a close coordination with the providers.

109. It may be noted also that the Tunisian Government plans to issue the country's first Islamic bond (Sukuk) this year to mobilize resources basically to finance its infrastructure projects. The IDB has recently approved a Technical Assistance grant to assist the Ministry of Finance of Tunisia in this regard. On the other hand, the Ministry of Higher Education has also approved a number of Islamic Finance degrees to be offered by some national universities starting from the upcoming academic year. Furthermore, a number of events (workshops, conferences, etc.) have been organized by universities, associations, etc. to spread the awareness about Islamic Finance in the country. In this context, Tunisia has expressed its hope that the IDB would provide a support in capacity development, especially through on job trainings where Tunisian professionals can benefit from practical experience in other IBD Member countries, like Malaysia, Bahrain and Kuwait.

113. Within its E4E initiative, the IDB Group may continue its support to Tunisia an Education to Employment system. Overall, this support would focus on promoting youth employment and entrepreneurship. In the hard side, the IDB group would promote the development of venture capital and SMEs finance and the elaboration of an information platform. At the soft side, the support would include skills training, business incubation, mentoring and networking. While the designing a well-developed education to employment system may take a long time, the transfer of successful experiences from countries like Turkey would be very beneficial for Tunisia in this stage.

• In the field of Youth Employment 110. As mentioned above, reducing unemployment is at the heart of the new development plan of Tunisia in the years ahead. A “National Strategy for Employment” is being prepared by the Government. The strategy would ensure higher standard of living for the Tunisians through increasing employment opportunities, improving wages and increasing productivity. In general, the policies to be undertaken have to tackle the issues related to the supply side, as well as the demand side.

114. Tunisia could benefit from the experience of the Turkish Public Employment Agency (ISKUR). After the 2008 employment reform adopted by the Turkish Government, the vocational training courses provided by ISKUR are main active labor market program used by the Government to get the unemployed into jobs. Among its activities, the Turkish Agency provides job-guaranteed training, since it is approached by employers who express their requirements in terms of skills and qualifications.

111. In general, the diversity of mechanisms to put in place raises the question of coordination between the different stockholders. Indeed, evolving the local authorities, the private sector, the employee’s organizations, the civil society and the state supposes to clearly answer the question about who to do what and define a robust mechanism of coordination to implement a certain strategy. Therefore, it is imperative to develop a communication and coordination plan to maximize engagement of stakeholder groups. A mechanism to implement the employment strategy at the regional and sectoral level is also essential.

115. Table 8 gives the indicative financing that the IDB Group may provide to implement the above mentioned activities described in the different Pillars. Table 8: IDB Group indicative financing for 2013 – 2015 (Million US$)

112. Overall, Tunisia lakes a platform that sets a welldesigned system of education to employment process. 20

Entity

2013

2014

2015

IDB

150

150

150

ITFC

100

100

100

ICIEC

100

100

100

ICD

40

40

40

Total

390

390

specificities of this transition period and the challenges and risks imposed by the actual circumstances, this MCPS is based on three pillars: (i) Contributing to the Reduction of Regional Disparities through Infrastructure Development, (ii) Supporting Regional Integration in the Maghreb region, and (iii) Reverse Linkages. Despite the transition period, there is a common understanding that the efforts of the country in the coming years would serve two main objectives: reducing regional disparities and creating jobs.

390

VI. Conclusion 116. Tunisia is going through an unprecedented period of economic and social transformation. The post revolution period has added new challenges to the ones inherited from the previous period. The social explosion that has ended a long period of oppression and dictatorship has been followed by a period of uncertainty and anxiety. The year 2011 has been particularly difficult for the economy with a negative economic growth and several difficulties in all major sectors, which have been amplified by an unfavorable international context, in Europe in particular. Nevertheless, the signs of recovery recorded in 2012 have help Tunisia to gradually avoid a situation of economic collapse. 117. The main challenge facing Tunisia in the short term is to develop a new development model with an economy which more diversified and relying on a solid private sector. At the same time, economic and social stability is contingent on the ability of the Government to meet the high expectations of the population at the political, economic and social levels. The organization of the elections in their scheduled time will be decisive for the future of the country and to assure its stability. 118. The support of the international community to Tunisia is key for the Government to overcome the increasing pressures on its budget. Most of the donors and partner countries have expressed their intention to provide the necessary support to Tunisia in its transition towards democracy. At the aftermath of the revolution, the IDB Group, as one of the main stakeholders, has increased its support to Tunisia, with a special focus on youth employment and Islamic Finance development. Consultations between the two parties have reached an advanced stage and both of them have expressed their willingness to build a strategic partnership. 119. This MCPS for Tunisia covering the period 2013 – 2015 aims at reassuring the support of the IDB Group to Tunisia during the transition period. Furthermore, it has identified, in consultation with the Tunisian Government, the main areas of cooperation between Tunisia and the IDB Group. Taking into account the 21

I

Annex: IsDB Group Programmatic Results Matrix for Tunisia (2013-2015)

Pillar I: Contributing to the Reduction of Regional Disparities through Infrastructure Development

DSNT Objectives

Intended Activities/Tentative Milestones during the IES Period

Expected Outcomes (as contribution to DSNT objectives)

IsDB Group Program (and Partners)

AI.1- Financing Infrastructure Projects in the Remote Areas

I- Comprehensive economic development and regional balance - Improve access of disadvantaged rural and urban populations to basic infrastructure services - Advance sustainable development of energy and transport services II- Reducing Youth unemployment

Main Outputs:

Key Activities:

Deliverables:

- Better access to transport, water/sanitation and energy infrastructure and services by poor communities

- Support to development of basic water/sanitation and gas/power grid infrastructures connecting underserved communities in rural and urban areas

- Health system strengthening project - Gas/power network project

Expected Results - Reduced poverty and improved living conditions of disadvantaged populations; Creation of new job opportunities - Reduced regional disparities and - social tensions - Creating new job opportunities

I.2- Improve Availability, Quality and Sustainability of Infrastructure Services to Fuel Economic Growth I- Modernizing infrastructure II- Creating job opportunities

Main Outputs:

Key Activities:

Deliverables:

- Improved availability and quality of energy and transport services to keep up pace with future expectations of fast economic recovery

- Support to development of power generation infrastructure based on sustainable energy resources and related grid infrastructure

- Power plant project - Heightening of two Dams Project

Expected Results:

I

- Necessary infrastructure in place to fuel economic growth - Creating more job opportunities

- Explore possible modalities to support development of toll roads along main arteries

II

I.3- Promote Greater Involvement of Private Sector in Infrastructure Development

I- Adopting new structural reforms (Create enabling environment for PPP investments, in particular power generation) II- Creating a competitive and sound investment climate III- Creating job opportunities

Main Outputs:

Key Activities:

Deliverables:

- Greater involvement of private sector in infrastructure development leading to better infrastructure opportunities in rural areas

- Support to the reforms initiated by the Government to enhance investment climate and PPP sector

- Helping the Country in setting up of a PPP unit

Expected Results - Reduced public sector investment needs for infrastructure development and larger allocation of public sector funds to social and human development sectors - Creation of new job opportunities - Development of private sector

- Identification of the role and responsibilities of the other stakeholders involved in PPP projects - Identification of pilot PPP projects

II

III

Pillar II: Supporting Regional Integration in the Maghreb Region

DSNT Objectives

a. Enhancing the Integration of Tunisia in the Global Economy and Development of Partnership b. Reducing illegal activities on the border areas c. Reducing Youth Unemployment

Expected Outcomes (as contribution to DSNT objectives)

Intended Activities/Tentative Milestones during the IES Period

IsDB Group Program (and Partners)

Main Outputs:

Key Activities:

Deliverables:

- Increasing integration and partnership between Tunisia and other IDB Member Countries - Creating an enabling environment for private sector development in the border areas

- Rehabilitation of Ras Jdir Cross Border Custom Post - Joint Project Development of a special economic zone (to host trade, services, logistics and/or Industrial activities) between Tunisia and Libya between Tunis and Libya(ICD/PTF) - Trade Finance (ITFC) - Export Credit and/or Political Risk Insurance for cross border trade and investments between Tunisia and the rest of the World with a special focus on the African continent (ICIEC)

- Evaluation Report of Ras Jdir Cross Border Custom Post - Project Development Reports for a pilot trade/logistics/industrial zone in the border region. - For the development of Export Credit and Political Risk Insurance, coordination with COTUNACE (the Export Credit Insurance Agency), insurance brokers around the world, global and local banks, Trade and Investment Associations in Tunisia and around the globe.

Expected Results: - Facilitating trade and people movement between Tunisia and Libya and between Tunisia and Algeria - Increasing the role of the Private Sector investments in regional development (across the border) - Promoting cross investments - Enhancing Trade Competitiveness - Expanding services and commercial activities across the borders - Accelerating Urban Development of Border regions - Reducing Illegal Activities - Encouraging Foreign Direct Investment - Financing the Import of Strategic Commodities

III

IV Pillar III: Reverse Linkages

DSNT Objectives

Expected Outcomes (as contribution to DSNT objectives)

Intended Activities/Tentative Milestones during the IES Period

IsDB Group Program (and Partners)

IIII.1- Transfer of the Tunisian Experience to Other IDB Member Countries Main Outputs:

I- Diversifying the Economy

- Transfer of the Tunisian expertise to other IDB Member Countries - Create new investment opportunities for the Tunisian private sector - Develop cooperation between Tunisia and African IDB Member Countries

II- Exploring new Markets

Expected Results

III- Development of the Tunisian Private Sector

- Creating new investment opportunities for the Tunisian Private Sector - Enhancing cooperation between Tunisia and other African IDB Member Countries - Pursuing previous cooperation activities between Tunisia and African Member countries in the health and

Key Activities: Capacity building through the organization of training sessions and / or the sending of Tunisian experts (technical assistance missions) in different sectors: -- Health: Biology and Microbiology, Technical telemedicine cardiovascular diseases in children (volunteering with the Heart Association and Children). -- Education and training: Enhancing the teaching of the Arabic language for Cameroon and Chad, Development of vocational training applied to technical training, tourism and hospitality education and training in agricultural and fishing, according to the By Competence approach (CPA). -- Environment: Management of urban solid waste, waste water treatment. -- Irrigation: Water resources management, valuation of non-conventional water (brackish water and treated wastewater). -- Investment Promotion: Promotion of IDEs for Sierra Leone and Chad, Promotion (Supervision and funding) of SMEs.

IV

Deliverables: - Organizing a first technical contact between the concerned parties in Tunisia and interested Member Countries - Developing capacity building programs, in coordination with the Tunisian Agency for Technical Cooperation - Coordinate with African Member Countries to assess their needs in the field of health and education - Identification of needs of IDB African countries needs in the health sector - Enhancing knowledge transfer from Tunisia to the investment promotion agency of Sierra Leonean to help the development of foreign direct investment in Sierra Leone - Enhancing coordination with the Tunisian Investment Promotion Agency (FIPA) and the Investment Promotion Agency of Sierra Leone (SLIEPA).

V education sector - Increase of intrainvestments between IDB member countries

III.2- Transfer of other IDB Member Countries Expertise to Tunisia

I- Reducing Youth Unemployment II- Developing the Private Sector III- Investment Promotion knowledge transfer IV- Enhancing the Integration of Tunisia in the Global Economy and Development of Partnership V- Development of Islamic Finance and Micro Finance

Main Outputs:

Key Activities:

Deliverables

- Transfer the Malaysian model of Islamic Finance - Create new investment opportunities for the Tunisian private sector in Halal industry - Develop cooperation between Tunisian and Malaysian universities in the field of Islamic Finance - Support to Tunisia to enhance its employment strategy - Development of Vocational Training Programs

- Coordination between the concerned parties in Malaysia and Tunisia - Support to develop an action plan for cooperation in the field of Islamic finance and Halal Industry - Dissemination of the successful experience of Turkey in the field of Vocational Training - Coordination with the concerned countries to develop a cooperation strategy

- Organizing a first technical contact between the concerned parties in Tunisia and Malaysia - Contribute in financing the visit of Malaysian experts (Islamic Finance and Halal Industry) to Tunisia - Helping in identifying projects to be implemented in Tunisia in the field of Halal industry - Financing activities aiming at disseminating the tenets of Islamic Finance - Financing the exchange of experts between Tunisia and Malaysia - Financing the exchange of experts between Tunisia and Turkey in the field of Vocational Training

Expected Results - Development of Islamic Finance - Better integration of Tunisia in the Muslim World - New opportunities of investment for the Tunisian private sector - Reducing job market

V

VI distortions - Creating new job opportunities - Reducing mismatch between labor demand and supply

VI