COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement on EU macro-financial assistance to the Republic of Tunisia Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing macro-financial assistance to the Republic of Tunisia
Date: 2013-12-05
Institutions: European Commission
Subjects: Tunisia, balance of payments assistance, economic consequence, economic development, economic reform, international conflict, macroeconomics, structural adjustment













EUR-Lex - 52013SC0498 - EN











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52013SC0498

COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement on EU macro-financial assistance to the Republic of Tunisia Accompanying the document Proposal for a DECISION OF THE EUROPEAN PARLIAMENT AND OF THE COUNCIL providing macro-financial assistance to the Republic of Tunisia /* SWD/2013/0498 final */









1.  Problem
analysis and needs assessment 3
1.1.  Introduction. 3
1.2.  Tunisia's
macroeconomic situation. 3
1.3.  IMF and
other donor support 7
1.4.  Tunisia's external financing needs. 9
1.5.  Structural
reform challenges. 10
2. 
Objectives and related indicators of the macro-financial assistance. 12
2.1.  Objectives. 12
2.2.  Indicators. 13
3.  Delivery mechanisms and risk assessment 13
3.1.  Delivery
mechanisms. 13
3.2.  Risk
assessment 14
4.  Added value of EU involvement 15
5.  Genval criteria on macro-financial
assistance. 15
5.1.  Exceptional
Character and Limited Timeframe. 15
5.2.  Political
preconditions and EU-Tunisia relations. 16
5.3.  Complementarity. 16
5.4.  Conditionality. 17
5.5.  Financial
Discipline. 17
6.  Planning of future monitoring and
evaluation. 18
6.1.  Monitoring. 18
6.2.  Evaluation. 18
7. 
Achieving cost-effectiveness. 18
Annex I: EEAS
Assessment on Political Reforms in Tunisia
1.           Problem analysis and needs
assessment
1.1.        Introduction
The
Tunisian economy has been negatively affected by the domestic unrest that
followed the 2011 revolution, regional instability (notably the war in Libya), and a weak international environment, particularly in the euro area, with which Tunisia maintains close trade and financial links. The economy experienced a recession in
2011 and, despite the moderate economic recovery witnessed in 2012, when
tourism and foreign direct investment (FDI) rebounded and economic activity
picked up, the macroeconomic situation remains very vulnerable. In
particular, the fiscal and balance of payments situation has deteriorated quite
markedly, generating important financing needs.
At the same
time, following the ousting of President Ben Ali on 14 January 2011, the
country is taking significant steps towards the establishment of democratic
mechanisms, including the organisation of free elections and the creation of a
National Constituent Assembly. Although the political transition has not been
without difficulties and episodes of instability, the process is expected to
result in the approval of a new Constitution and the organisation of new
elections in the first half of 2014.
Against
this background, the Tunisian authorities reached in mid-April 2013 an
agreement with the International Monetary Fund (IMF) staff on a 24-month
Stand-By Arrangement (SBA) in the amount of USD 1.75 billion (400% of
quota), which was approved by the IMF Board in June. The aim of the SBA is to
support the government’s economic reform programme, reduce economic
vulnerabilities and foster sustainable and inclusive growth.
In
this context, the Tunisian government requested Macro-Financial Assistance
(MFA) from the EU in the amount of EUR 500 million on 28 August 2013,
with a portion in the form of a grant (see the request letter in Annex). The
European Commission submits to the European Parliament and the Council a
proposal to grant a MFA to the Republic of Tunisia amounting to a maximum of
EUR 250 million. The assistance would take the form of medium-term
loans, with no grant component being envisaged given that Tunisia does not meet the eligibility criteria for the use of grants in MFA operations. 
The
proposed EU MFA would help Tunisia cover part of its residual external
financing needs for the period 2014-15 in the context of the IMF programme,
estimated at USD 3.0 billion. It would reduce the economy’s short-term
balance of payments and fiscal vulnerabilities, while supporting the adjustment
and reform programmes agreed with the IMF and the World Bank, as well as the
reforms agreed under the EU’s budgetary support operations, in particular the State
Building Contract Programme d’Appui à la Relance (PAR), which is
financed in part by the EU’s Support for Partnership Reform and Inclusive
Growth (SPRING) programme.
The
proposed MFA is in line with the aims of the G8’s Deauville Partnership
initiative and the orientations of the new European Neighbourhood Policy (ENP).
It would signal to the other countries in the region that the EU is ready to
support countries like Tunisia, embarking on political reforms, in moments of
economic difficulties.
1.2.        Tunisia's macroeconomic situation and structural
reform challenges 
After
a severe recession in 2011, when the economy contracted by 1.9% due to the
domestic political unrest and the Libyan conflict, a moderate recovery started
in 2012 despite an adverse international and domestic environment, with real GDP
growth picking up to an estimated 3.6%, helped mainly by the rebound in
tourism and FDI inflows. Despite the promising pick-up in manufacturing
activity and increase in tourism shown by mid-2013, the ongoing political
stalemate, lower than expected growth in the EU (Tunisia’s main trading
partner) and emerging markets, and a bad harvest have slowed down economic
activity. The IMF recently revised its forecast for GDP growth in 2013 to 3%
from 4%. The growth forecast for 2014 has also been revised downwards from 4.5%
to 3.7%, with risks strongly tilted to the downside reflecting the domestic
political situation.
Unemployment
remains
a key concern with an unemployment rate of 15.9% at end-June 2013 compared with
13.5% before the revolution. Unemployment among young graduates is on average
20.9% for men and 43.5% for women. These figures have to be seen in the context
of a highly segmented labour market with overall low employment rates, in
particular for women, and a high share of informality.[1]
There
have been inflationary pressures since early 2012, with year-on-year
inflation accelerating from 4.1% at the end of 2011 to 6.4% by April 2013. This
was largely explained by increases in administered energy prices, as the
government made some first steps to reduce fuel subsidies and adjust
electricity tariffs, and by higher food prices. The latter in turn reflected
increased food demand from Libyan refugees and returning Tunisian migrant
workers, as well as disruptions in supply distribution chains. However,
inflation has dropped back to 5.7% (and core inflation to 4.4%) by September
and is expected to remain stable at around that level.
Monetary
policy
was accommodative during 2011 and the first months of 2012 in response to the
existence of a large output gap and relatively stable core inflation. However,
as inflation started to accelerate and external and fiscal balances further
deteriorated, the central bank (Central Bank of Tunisia – CBT) took some
tightening measures, increasing its benchmark policy rate by 50 bps since
August 2012 (to 4%). The IMF recently recommended that the CBT sends a strong
signal by raising rates to contain underlying inflationary tensions. The
creation of a monetary policy committee in January 2013 should facilitate the
forward-looking assessment of inflationary pressures. 
Regarding
the public finances, the government adopted in May 2012 a supplementary
budget foreseeing a deficit of 6.6% of GDP for the year (3.5% of GDP in 2011)
to enable higher spending on development projects and job creation, although a
lower deficit of 5.4% of GDP was finally realised, broadly due to
higher-than-expected revenues and under-execution of the investment budget. The
IMF programme envisaged a modest fiscal adjustment for 2013, with the fiscal
deficit targeted to increase to 7.3% of GDP, broadly reflecting the cost of the
planned recapitalisation of banks and the repayment of arrears. However, recent
trends suggest that in the absence of new measures, there will be a
considerable fiscal slippage (the deficit is now projected to reach 8.4% of GDP
unless corrective measures are taken). The main reasons for the fiscal slippage
are lower tax revenues than expected, reflecting weaker than assumed
economic growth, and higher current expenditure (mainly energy subsidies
and the wage bill, partly due to a recruitment overshoot in the Ministry for
Security). In addition, the government has accumulated substantial payment
arrears. Although there is no proper stock inventory covering all public
entities, arrears seem to have risen by at least 26% since June. 
This fiscal
deterioration in 2013 is expected to be partially compensated, like last year,
by a lower execution rate of public investments (only 30% has been
executed to date, better than in 2012, but worse compared to 2010 when the
execution rate reached 65%). On current trends, public investment is expected
to reach only 5% of GDP in 2013, compared with pre-revolution levels of 7-8% of
GDP. In addition, a supplementary budget announced in late October proposes to
use some of the proceeds from the partial privatisation of Tunisia Telecom (USD
500 million) to compensate for the delay in the emission of Sukuk bonds (see
below) in partially financing the budget deficit.
Table
1: Tunisia– Selected macroeconomic indicators, 2010-2014
Sources:
IMF staff estimates 
The
draft Budget Law for 2014 has not yet been approved due to the political
impasse, but the IMF is calling for an additional adjustment of about 2
percentage points of GDP in order to reach the programmed deficit target of
6.4% of GDP, and is warning the authorities against postponing the necessary
measures to a complementary budget, which would only reduce the room for
manoeuvre given the political calendar in 2014. Corrective measures being
proposed by the IMF include: (i) adjusting energy tariffs (focusing on
industrial and commercial users) while developing a better targeted social
safety net; (ii) increasing control over the public wage bill (which
represents about 13% of GDP and 60% of revenues), including by freezing new
hires; (iii) increasing excises and strengthening tax administration;
(iv) improving the efficiency of public expenditures; and
(v) increasing the financial oversight over State Owned Enterprises
(SOEs). The recapitalisation needs for the financial sector should also be
properly budgeted in the law. 
The general government debt remained at 44% of
GDP in 2012, but it is projected to increase slightly to 45.3% of GDP by the
end of this year and to peak at 49.5% of GDP in 2014. Debt service remains at a
manageable 6% of total budget expenditures.
The
rebound in growth throughout 2012 amid subdued world demand (particularly from
the EU) and persistently high commodity prices contributed to a widening of the
current account deficit to 8.1% of GDP (from 7.3% of GDP in 2011). The
deficit has further increased in 2013, with the latest projections indicating a
worsening to around 8.3% of GDP compared with the 7.5% of GDP targeted under
the IMF programme. This is mainly explained by a drop in tourism revenues
combined with a weaker demand for Tunisian goods, only partially compensated by
lower than expected imports of capital goods and commodities (reflecting the
slowdown in economic activity). Whereas in 2012 the increase in FDI inflows
partially compensated for this effect, so far in 2013 FDI inflows have been
about 40% below those initially assumed in the IMF programme. Moreover,
disbursements of official assistance are well below what had been programmed.[2] As a
result of these shortfalls in financing and the higher than programmed current
account deficit, Tunisia faces a significant balance of payments gap (of around
USD 750 million) for 2013 (see below), although a potential loan from Qatar may contribute to reducing it. The IMF expects this shortfall to be covered by a
decline of USD 600 million in foreign reserves compared to the original
programme targets and by a further compression in public investment (which has
high import content).
Foreign
exchange reserves partially recovered to USD
8.6 billion (3.8 months of imports) in December 2012, compared to USD
7.5 billion (3.4 months of imports) at end-2011. However, in early 2013
they started declining rapidly, reflecting the worsening current account and
FDI trends and heightened political instability, and this was one of the main
reasons behind the authorities’ decision to request an IMF SBA. By end-October
2013, reserves stood at USD 6.9 billion, covering only 104 days of
imports. They are expected to finish 2013 at USD 7.5 billion, representing a
decrease of USD 1.1 billion in 2013, which compares to an originally
targeted increase of USD 400 million for the year.
The
IMF has recently argued for more exchange rate flexibility in order to
maintain external buffers and reduce liquidity injections. The modification,
earlier in 2012, of the CBT’s mode of foreign exchange intervention, and the
setting of a reference rate quoted in the interbank market instead of a fixed
currency basket, gave new flexibility to the exchange rate. The dinar has
depreciated, in nominal effective terms, by around 12% since the revolution,
and by around 6% since the beginning of 2013. This has partially adjusted the
estimated moderate over-valuation of the currency to about 5%.
External
debt
increased from 48% of GDP in 2011 to an estimated 51% of GDP in 2013. In view
of the prolonged political uncertainty and the longer-than-expected transition
period, Tunisia’s sovereign ratings were downgraded in October 2013 by Fitch
(from BB+ to BB-), following the downgrading by Standard & Poor’s (from BB-
to B) in August 2013 and by Moody’s (from Baa3 to Ba1) in May 2013.
While financial
market indicators have recently showed some signs of stabilisation, Tunisia’s financial situation remains vulnerable, notably with regard to the banking sector. The
2011 crisis had a negative impact on a number of key banks, notably the public
ones, which were more exposed to the hard-hit tourism sector. Non-performing
loans were estimated at 17-18% at end-2012, and although capital adequacy
ratios appear relatively sound (12.3%), they could prove inadequate because
average bank provisioning (about 57%) is low. This led the CBT to provide
substantial liquidity to the commercial banks during 2012 to help them cover
their refinancing needs, although a gradual unwinding of liquidity injections
has already been initiated. Under the programme agreed with the
IMF, the authorities intend to proceed with the recapitalisation and
rehabilitation of the banks affected by the crisis.
1.3.        IMF
and other donor support
On 7 June 2013,
the IMF Board approved an USD 1.75 billion (400% of the
Tunisian quota), two-year SBA. The
authorities started considering the possibility of seeking financial support
from the IMF already in mid-2012. The initial intention was to obtain a
precautionary SBA with the Fund that would reassure stakeholders about the
prospects of the economy, while minimising the political impact of the decision
to have a programme with the Fund. However, the deterioration of the
macroeconomic situation in 2013 (reflected in the increase in the budget
deficit and the alarming downward trend of international reserves) and concerns
about a possible shortfall in external financing urged the authorities to agree
on a normal arrangement entailing the use of the Fund’s resources. This opened
the way also to a possible MFA from the EU.
The main
objectives of the IMF programme are: i) to maintain macroeconomic
stability, partly through the implementation of structural reforms and the
selective recapitalisation of banks; ii) to support inclusive growth;
iii) to reduce external vulnerabilities; and iv) to strengthen
investor and donor confidence. 
The SBA will run
for 24 months from June 2013, with Fund resources available in nine instalments
(approximately USD 650 million in 2013, USD 800 million in 2014 and
USD 286 million in 2015). Quantitative performance criteria focus on
fiscal, monetary and external objectives. They are complemented by indicative
targets to monitor domestic arrears and preserve social spending. Structural
benchmarks will focus on improving the efficiency of public expenditures (i.e.:
reforming the price subsidy system), broadening the tax base and improving tax
administration, strengthening the monetary policy framework, reducing banking
system fragilities, and strengthening social safety nets.
The first review
(measuring progress to June 2013) was supposed to take place in August 2013.
However, given that the government, under pressure to resign and be replaced by
a care-taker government until the next elections, felt unable to commit to
forward-looking economic reforms, the IMF decided to carry out only a staff
visit in September and to, postpone the first review until November. The first
review is now expected to be merged with the second review and presented for
Board approval in December, and this under the assumption that a new government
will be able to commit to the reforms. The staff visit concluded that in
addition to a worse than expected macroeconomic situation (including a
significant overshooting of the fiscal targets), progress in the reforms
established as structural benchmarks was lagging, and expected a number of
waivers to be requested by authorities when the reviews take place.
The World
Bank has made available USD 500 million in the form of a Development
Policy Loan (DPL) in 2011 (as part of PAR I), a further USD 500 million in
2012 (as part of PAR II), and an additional USD 500 million also in the
form of a DPL for 2013. However, in this last case the disbursement of half of
the funds has been postponed to 2014.
The African
Development Bank (AfDB), which has supported Tunisia with a number of
policy based loans in the past (including its contributions to the PAR) and was
expected to continue providing funding, has recently expressed reserves on
account of excessive exposure to North Africa risk, and will not be signing a
DPL worth USD 500 million that had been originally envisaged for 2013.
The EBRD
Board agreed in October 2013 to grant Tunisia full country of operations
status. It expects to sign up to EUR 85 million in loans in 2013, and at least
EUR 40 million in 2014.
Since 2011, the US
has provided over USD 350 million in economic support to Tunisia: USD 100
million in budget support; USD 30 million in guarantees (for a bond issuance of
USD 458 million in 2012); and USD 220 million through credit lines, projects
and technical assistance.
In 2012, Japan provided guarantees for the issuance of USD 303 million in Samurai bonds, and
for a second issuance of USD 197 million in 2013.
Turkey
approved a loan worth USD 200 million in June 2013 to fund priority
projects in the infrastructure sector. In parallel, the Turkish Export Credit
Line has extended a USD 200 million loan to Tunisia, partly aimed at
funding the acquisition of Turkish equipment. Both loans carry concessional
rates of 1.5%.
The EU has
provided significant assistance other than the MFA under consideration.
Overall support by the ENPI (European Neighbourhood & Partnership
Instrument) has substantially increased since the revolution from around EUR
75 million to EUR 150 million in 2011, and will reach EUR
445 million over the period 2011-2013. Tunisia has been the first
beneficiary of financial support from the SPRING Programme. An initial EUR
20 million allocation was made available in 2011, EUR 80 million in
2012, and EUR 55 million in 2013, bringing the total SPRING support to EUR
155 million for the period 2011-2013.
The bulk of the
EU's assistance has been channelled in the form of budgetary support as part of
the multi-donor aid packages known as Programme d’appui à la relance
(PAR), which aimed at supporting reforms in the areas of employment creation,
regional development, social action programmes, good governance and economic
recovery. The successive PAR packages are considered a successful example of
multi-donor coordination with a properly designed conditionality structure in
response to the Arab Spring. PAR I (implemented in 2011) amounted to
almost EUR 1.4 billion and, along with EUR 100 million from the EU,
included contributions from the World Bank (USD 500 million), the AfDB
(USD 500 million) and the Agence Française du Développement (AFD,
EUR 100 million). It had a shared matrix of conditionalities for disbursement. PAR
II (implemented in 2012) followed a similar structure, albeit with a lower
volume of funds (EUR 1.1 billion); EUR 65 million from the EU, USD
500 million from the World Bank and a further USD 500 million from
the AfDB. A PAR III is currently under preparation for 2013 and 2014.
The EU is planning to contribute EUR 65 million (plus possible additional
funds under SPRING) and the World Bank USD 250 million. Additional
commitments from the World Bank, AFD and AfDB may be forthcoming in 2014.
The EIB
remains the largest external donor in Tunisia, where it has provided loans
worth EUR 4.9 billion since 1979, around half a billion of which since 2011. In
2013, they expect to sign up to EUR 170 million in loans.
1.4.        Tunisia's external financing needs
The revised
projections that were produced following last September’s IMF staff mission to
Tunis point towards significant balance of payments needs for the 2014-2015
period, with the overall external financing gap estimated at USD
4.4 billion (USD 3.1 billion in 2014 and USD 1.3 billion in
2015; see Table 2).
This financing
gap is broadly attributed to two factors; a persistently large current
account deficit and the need to build up foreign exchange reserves.
The IMF foresees that the current account deficit will gradually narrow,
reflecting a sustained increase in exports driven by improved competitiveness
and the recovery of global demand, but will remain sizeable (declining to 5.3%
of GDP by 2015).
Despite its
downward trend, the current account deficit is not expected to be covered by
the surplus in the capital and financial account. Net FDI is expected to drop
by about 50% in 2013 (less than USD 0.9 billion) compared to the previous
year, before slowly picking up to USD 1 billion in 2014 and USD
1.4 billion in 2015, still 42% and 19% respectively below its 2012 levels
(but in line with 2009-2010 levels). 
Regarding
official reserves, they are targeted to increase to USD 8.9 billion in
2014 and USD 9.9 billion in 2015, which will nevertheless only allow Tunisia to reach an import cover ratio of 3.8 months in 2015 (compared to 4.4 months in
2010). 
The IMF’s SBA
and the World Bank’s planned DPL would cover 31% of the projected external
financing gap for 2014-15, which would still leave a residual external
financing gap of USD 3.0 billion for the period.
For 2014,
the year when the financing needs are larger (USD 3.1 billion, before IMF
and World Bank contributions), the main external financing sources are
estimated to be the issuance by the government of USD 500 million of Sukuk
bonds with a guarantee from the Islamic Development Bank, USD 300 million
in US-guaranteed international bonds, and USD 300 million in
Japanese-guaranteed Samurai bonds. EU budget support grants under the PAR are
expected to amount to the equivalent of USD 86 million. The proposed MFA
would contribute the equivalent of USD 221 million (EUR 170 million) this
year in two tranches. An important assumption in the IMF programme for both
2014 and 2015 is that since domestic banks will have to be recapitalised in
2014 at an estimated cost of 2% of GDP, which will be done through
non-negotiable bonds, this will crowd out other domestic financing of the
government, obliging it to finance much of its deficit abroad.
For 2015,
although the financing needs are expected to be lower, they would still reach a
sizeable USD 1.3 billion in a crucial year for the consolidation of many
of the initiated reforms. The sources for the coverage of the gap in 2015
remain to be fully identified but are expected to include additional bilateral
donor support as well as bond issuance. No new pledges have been made by the
GCC countries, but this could change depending on the composition of the new
government (discussions with Qatar are on-going for project grants worth USD
79 million). The proposed MFA would contribute USD 104 million (EUR
80 million) in 2015.
Thus, the
proposed EU MFA would contribute to cover some 10.8% of the residual
financing gap for the full 2014-2015 period.
Table 2: Tunisia’s External Financing Gap and Potential Financing Sources
 (USD million)
 (USD million) || 2013 || 2014 || 2015 || Total 2014-15 
   ||   ||   ||   ||   
 1. Current account balance* || -3,537 || -2,933 || -2,588 || -5,522 
 2. Capital and financial account** || 941 || 1,252 || 2,294 || 3,547 
 3. Overall balance (1+2) || -2,596 || -1,681 || -294 || -1,975 
 4. Reserves (“-” indicates increase) || 1,152 || -1,418 || -960 || -2,378 
 5. Overall External Financing Gap (3+4) || -1,444 || -3,099 || -1,254 || -4,353 
 6. Exceptional Financing by IMF and WB ||   ||   ||   ||   
     Net IMF Disbursements || 659 || 800 || 286 || 1,086 
     Disbursements of World Bank’s DPL || 250 || 250 || 0 || 250 
 7. Residual Financing Gap (5+6) || -545 || -2,049 || -968 || -3,017 
   ||   ||   ||   ||   
 Financing of the gap ||   ||   ||   ||   
     EU MFA (proposed) ||   || 221 || 104 || 325 
 EU budget support grants || 91 || 130 || 65 || 195 
 Sukuk bonds (with IsDB guarantee) ||   || 500 ||   || 500 
 US-backed international bonds ||   || 300 ||   || 300 
 Samurai bonds (Japanese guaranteed) || 197 || 300 ||   || 300 
 Turkey bilateral || 200 ||   ||   ||   
 Arab Monetary Fund || 76 || 76 ||   || 76 
 Unidentified || 93 || 121 ||   || 121 
 Total || 657 || 1,648 || 169 || 1,817 
   ||   ||   ||   ||   
 Total MFA as % of the residual gap for 2014-15 ||   ||   || 10.8 
       ||   ||   ||   ||   
* Excludes official grants
provided in the form of policy-based budgetary support.
** Excludes official policy-based loans as well as
planned issuance of international bonds. Figure for 2014 does not include
potential additional USD 500 million DPL from the World Bank.
1.5.        Structural
reform challenges
Tunisia
faces significant structural reform challenges. Despite a long period of
economic growth and relatively prudent macroeconomic policies, which helped it
record one of the highest per capita GDP growth rates among the Middle East and
North Africa (MENA) oil importers, Tunisia continues to suffer from an
excessive reliance on the development of an export-oriented, low-value added
industry located near the coastline, to the detriment of other industries and
the development of the interior. Also, a weak and inefficient banking sector
and the pervasive use of capital controls and directed lending continue to
constrain financial development and the allocation of saving to the most
productive investments. Moreover, rigid labour markets and skill mismatches
have contributed to high unemployment, particularly among the youth (averaging
30% in 2010), and participation rates (particularly among women) are very low,
as it is the case in most countries in the region. Finally, transparency and
economic governance are perceived as weak and the growth model has resulted in
an unfair distribution of economic gains among the population.
Key reforms to
meet these challenges include; reforming the costly and inefficient price
subsidy system while strengthening the social safety net; reforming the
taxation system and strengthen tax administration in order to increase tax
collection, move to a more progressive tax system and better align the
treatment of offshore and onshore industries; reforming the labour market;
rehabilitating banks; and improving the trade and investment regime. Weaknesses
in public finance management must also be addressed. However, many of these
reforms generate strong resistance from vested interests, and will require time
and effort to garner wide political and social support.
A key factor
constraining the development of the Tunisian economy is the dichotomy
between the onshore and offshore sectors, which has exacerbated regional
disparities. The offshore sector is concentrated on the coastline and has
benefitted from fiscal and regulatory incentives, whereas the onshore sector is
in the (mostly less developed) interior, isolated from the rest of the economy
and subjected to excessive tax and labour regulation. The zero-tax regime for
offshore companies has attracted mostly assembly-type investments in low added
value industries, with limited transfer of know-how and has resulted in a
mismatch between high demand for low-quality labour and the supply of an
educated workforce (producing high unemployment rates among graduates). Another
factor constraining growth is the lack of transparency, cronyism and complex
regulatory procedures, which lead to rent-seeking and anticompetitive
behaviour, discouraging entrepreneurship and private investment. In order to
address these problems, the authorities are committed to reforming the
investment code and corporate tax system (thus enhancing the convergence
between both sectors) and improving competition legislation.
As regards the price
subsidy system, it is highly costly and regressive. Generalised subsidies
should be replaced by cash transfer programmes targeted to the vulnerable parts
of the population. Price subsidies on basic food, oil products, electricity and
transport account for about 5% of GDP. The cost of energy subsidies alone
tripled between 2008 and 2012 (from 0.9% of GDP on average before 2010 to 2.8%
of GDP in 2012). However, the benefits of these energy subsidies accrue mostly
to high-income households, which are estimated to benefit almost 40 times more
than do the lower-income households. The authorities have already started
addressing the issue, raising prices of electricity and gas by about 7-8% in
March 2013, complementing a 7% increase implemented in September 2012, which is
expected to generate savings of about 0.5% of GDP in 2013, and intend to
introduce an automatic fuel pricing formula. In parallel, and as part of the
IMF SBA benchmarks, the authorities are working with the World Bank to develop
a household compensation strategy to pave the way for a more sustainable safety
net system.
In
the area of tax reform, in addition to the above-mentioned measures
aimed at better harmonising the tax treatment of the offshore and onshore
sectors, the authorities intend to strengthen the tax administration. This
includes unifying the control and tax collection functions within a
strengthened Large Taxpayer Unit, rationalising tax benefits/incentives in a
revenue-neutral way and addressing the complexity of the indirect tax system
(particularly excises). Authorities are also considering possible increases in
excises and the VAT.
Another area
where structural reforms will be needed is public finance management
(PFM). PFM reform should concentrate on modernising the PFM system, increasing
transparency and accountability and strengthening external and internal audit
capacity. Also, the management of the investment budget suffers from very slow
and sometimes arbitrary procedures to identify, select, and formulate projects.
An updated Public Expenditure and Financial Accountability (PEFA) assessment is
expected to be carried out in 2014 (the last one dates from 2010).
In the financial
sector, a key challenge (addressed by the IMF programme) is to reduce
vulnerabilities in the public banks. The country’s three public banks represent
40% of total banking system assets, and they are hampered by weak lending
practices, governance issues and an excessive exposure to a tourism sector that
has been severely impacted since the revolution. The financing needs to
recapitalise these public banks alone represent around 2.6% of GDP in the next
two years. The CBT is addressing the shortcomings in banking supervision (by
increasing onsite and credit risk inspections) and in data quality and
provision (through a new data reporting system and the modernisation of the
Public Credit Registry). It is also working to create a proper bank resolution
mechanism. Finally, it is a tightening collateral requirement for banks'
refinancing at the central bank, so as to reduce banks' dependence on CBT
refinancing.
On labour
market reform, the authorities signed a social contract in January 2013
with employers and trade unions, which should serve as a common social roadmap.
The organisation of a permanent council for a tripartite social dialogue was
agreed, as well as the establishment of an unemployment benefit fund. This
should pave the way for the on-going discussions on the reform of the labour
code, which are aimed at promoting greater flexibility and reduce the asymmetry
of skills prevailing in the market. The successive donor-supported Programmes
d’appui à la relance (PAR; see following section) have supported the
implementation of employment programmes and strengthened coordination among
labour-market intermediaries. 
While Tunisia already has a relatively open trade regime,[3] it
could benefit from further trade liberalisation. The preparatory process
(“scoping exercise”) for the launch of Deep and Comprehensive Free Trade
Agreement (DCFTA) negotiations with the EU started in 2011,
although discussions were interrupted in 2012 reflecting insufficient consensus
within the governing coalition.
Many of the
above-mentioned reforms are part of the policy programmes supported by the IMF,
the World Bank and the EU through its budget support operations. The
conditionality of the proposed MFA would complement and reinforce that of these
operations.
2.           Objectives and related
indicators of the macro-financial assistance
2.1.        Objectives
The objectives
of the proposed MFA operation are to: 
·      Contribute to covering the external financing needs of Tunisia in the context of a significant deterioration of the country's external accounts
brought about by the on-going political and economic transition and
developments in the region. 
·      Alleviate Tunisia's budgetary financing needs.
·      Support the fiscal consolidation effort and external stabilisation
in the context of the IMF programme.
·      Facilitate and encourage efforts of the authorities of Tunisia to implement measures identified under the EU-Tunisia ENP Action Plan, while
reinforcing the EU's economic policy dialogue with the authorities.
·      Support structural reform efforts aimed at improving the overall
macroeconomic management, strenghening economic governance and transparency,
and improving conditions for sustainable growth.
2.2.        Indicators
The fulfilment
of the objectives of the assistance will be assessed by the Commission,
including in the context of the ex-post evaluation (see below), on the basis of
the following indicators: 
·      Progress with macroeconomic and financial stabilisation, notably by
assessing the degree of adherence to the IMF-supported programme. 
·      Progress with the implementation of structural reforms, notably the
specific policy actions identified as conditions for disbursement of the
assistance, which will be included in a Memorandum of Understanding to be
negotiated between the Commission and the Tunisian authorities. Conditions will
include structural measures relevant for ensuring macroeconomic stability, e.g.
measures in the field of public finance management reforms, fiscal reforms, as
well as measures to support competitiveness and investment.
3.           Delivery
mechanisms and risk assessment
3.1.        Delivery
mechanisms
The proposed new
MFA would amount to EUR 250 million. Regarding the form of the assistance, the
Commission proposes to disburse the full amount in the form of a medium-term
loan.
The proposal,
which is consistent with the methodology for determining the use of grants and
loans in EU MFA endorsed by the Economic and Financial Committee in January
2011,[4] is
based on the following considerations: 
Firstly, Tunisia is a middle-income country with a relatively high per capita income level. Tunisia’s per capita Gross National Income (GNI) of USD 4,150 is above the average level of the
Southern partners covered by the ENP, representing the fifth highest per capita income in the region following Israel, Lebanon, Algeria and Jordan.[5]
Secondly, Tunisia’s public debt ratio remains at a manageable level (44% of GDP at the end of
2012). While the ratio is expected to rise by almost 5 percentage points by
2015, it is projected to decline from 2015 onwards. Public external debt, for
its part, is expected to peak at 34% of GDP in 2015, while total external debt
should also peak in 2015 at about 55% of GDP. 
Thirdly, Tunisia is not eligible for concessional financing from either the IDA
or the IMF's Poverty Reduction and Growth Trust.
MFA is an untied
and undesignated macroeconomic support instrument, which helps the beneficiary
country meet its external financing needs, and may contribute to alleviating
budgetary financing needs. The funds would be paid to the Central Bank of Tunisia. Subject to provisions to be agreed in the Memorandum of Understanding, including a
confirmation of residual budgetary financing needs, the funds may be
transferred to the Ministry of Finance of Tunisia as the final beneficiary. 
3.2.        Risk
assessment
There are
fiduciary, policy and political risks related to the proposed MFA operation. 
There is a risk
that the macro-financial assistance, which is not dedicated to specific
expenses (contrary to project financing, for example), could be used in a
fraudulent way. In general terms, this risk is related to factors such as the
quality of management systems in the central bank and the ministry of finance,
administrative procedures, control and oversight functions, the security of IT
systems and the appropriatedness of internal and external audit capabilities. 
To mitigate the
risks of fraudulent use several measures will be taken. First, the Memorandum
of Understanding and the Loan Agreement will comprise a set of provisions on
inspection, fraud prevention, audits, and recovery of funds in case of fraud or
corruption. Also, the assistance will be paid to a dedicated account at the
Central Bank of Tunisia. Moreover, before the agreement on the Memorandum of
Understanding is reached, the Commission services will conduct, with the
support of external consultants, an Operational Assessment, in order to assess
the reliability of financial circuits and administrative procedures that are
relevant to this type of assistance and will
determine whether the framework for sound financial management of
macro-financial assistance is sufficiently effective in Tunisia. In the
light of this assessment, specific mechanisms applying to the management of the
funds by the beneficiaries may be introduced in agreement with the national
authorities. The Commission is also using budget support assistance to help the
Tunisian authorities improve their public finance management systems and these
efforts are strongly supported by other other donors. Against this background,
special conditionalities on improving public finance management will
potentially be required. Finally, the assistance will be liable to
verification, control and auditing procedures under the responsibility of the
Commission, including the European Antifraud Office (OLAF), and the European
Court of Auditors. 
Another
key risk to the operation stems from the regional security, economic and
political uncertainties, notably in Libya, which have direct implications for
the Tunisian economy. On the domestic front, significant uncertainties remain
regarding the political transition process. The main risk is political
instability and social unrest, which may lead to delays in the implementation
of the economic and political reform process. A derailment of the adjustment
process could put the objectives of the IMF-supported programme in jeopardy,
endanger macroeconomic stability and prevent the effective disbursement of the
MFA.
Finally,
there are risks stemming from a possible weakening of the European and global
economic environment (taking into account Tunisia’s high dependence on the EU
market) and an increase in international energy and food prices, which would
have an important effect on Tunisia’s fiscal consolidation efforts if the
necessary reforms have not been put in place.
Having made a
thorough assessment of the risks, the Commission services consider that there
are sufficiently strong grounds to proceed with the MFA to Tunisia. 
The Commission
services will maintain close contacts with the authorities during the
implementation of the macro-financial assistance in order to address quickly
any concerns that may arise. 
4.           Added
value of EU involvement
The Community
financial support to Tunisia reflects the country's strategic importance to the
EU in the context of the European Neighbourhood Policy. The instrument of
macro-financial assistance is a policy-based instrument directed to alleviate
short- and medium-term external financial needs. As a part of the overall EU
package of assistance, it would contribute to support the European Union's
objectives of economic stability and economic development in Tunisia. By helping the authorities' efforts to establish a stable macroeconomic framework,
the proposed assistance would help improve the effectiveness of other EU
financial assistance to the country, including budgetary support operations.
By helping the
country overcome the economic difficulties caused by the political transition
and the regional crisis, the proposed MFA will contribute to promote
macroeconomic stability and political progress in the country. By complementing
the resources made available by the international financial institutions,
bilateral donors and other EU financial institutions, it contributes to the
overall effectiveness of the package of financial support agreed by the
international donor community in the aftermath of the crisis. 
In addition to
the financial impact of the MFA, the proposed programme will strengthen the
government's reform commitment and its aspiration towards closer relations with
the EU. This result will be achieved, inter alia, through appropriate
conditionality for the disbursement of the assistance. In a larger context, the
programme will signal to the other countries in the region that the EU is ready
to support countries like Tunisia, embarking on a clear path towards political
reforms, in moments of economic difficulties.
5.           Established
practice of macro-financial assistance
The MFA proposal
is consistent with the EU's commitment to support Tunisia's economic and
political transition. It is also consistent with the wording of two MFA
decisions on the Kyrgyz Republic and Hashemite Kingdom of Jordan[6]. In
particular, the Commission's proposal is consistent with the following
principles: exceptional character, political preconditions, complementarity,
conditionality and financial discipline.  
5.1.        Exceptional Character and Limited Timeframe 
The proposed MFA
operation will be exceptional and limited in time and will run in parallel to
the IMF's Stand-By Arrangement (SBA). Against this background and given the
expected time of approval of the programme, the assistance is expected to be
implemented in 2014-2015.
The disbursement of the first tranche could take place in the middle of 2014
provided that the IMF programs remains on track. The second and third tranches,
conditional on a number of policy measures, agreed with the EU, could be
disbursed in the fourth quarter of 2014 and first half of 2015, respectively.
While in the short term the country faces substantial balance of payments
financing needs, the macroeconomic and structural adjustment programme agreed
with the IMF and supported by the proposed MFA is expected to produce a gradual
strengthening of the balance of payments and fiscal positions. 
5.2.        Political preconditions and
EU-Tunisia relations 
MFA is reserved to geographically
close third countries that respect democracy and human rights and with which
the EU maintains close political and economic links.
Political
preconditions: Countries that are covered by the ENP are eligible
for MFA. A pre-condition for granting MFA should be that the eligible country
respects effective democratic mechanisms, including a multi-party parliamentary
system and the rule of law, and guarantees respect for human rights. Following
the revolution and the ousting of President Ben Ali on 14 January 2011, Tunisia’s first free and democratic elections took place on 23 October 2011. A National
Constituent Assembly has been in place since then. The political transition is
proving difficult and the situation remains tense, following the murder of two
prominent left-wing opposition politicians in the last year, which has delayed
the finalisation of the Constitution, the setting up of independent electoral
commission and the revision of the electoral law. However, a national dialogue
is on-going to try to find a compromise on the different issues at stake, which
should pave the way for the resumption of the work of the National Constituent
Assembly and the organisation of elections in the first half of 2014.
EU-Tunisia
relations:
The EU seeks to develop a close relationship to Tunisia and to support Tunisia’s economic and political reforms. In 1995, Tunisia became the first country in the Southern Mediterranean to sign an Association Agreement with the EU. This agreement
continues to be the legal basis for bilateral cooperation. Bilateral relations
have been further reinforced under the EU’s ENP, including through the adoption
of five-year ENP Action Plans establishing strategic objectives for this
cooperation, the latest of which covers 2013-2017. Tunisia is also a member of
the Union for the Mediterranean. Economic ties with the EU are important. Tunisia conducts the largest share of its trade with the EU. In 2012, the EU was the source
of 59.3% of Tunisia’s imports and the destination of 68.1% of its exports. Tunisia has also a high dependence on the EU in terms of FDI and other financial flows,
remittances and tourism inflows. Tunisia finalized the dismantling of tariffs
for industrial products in 2008, thus becoming the first Mediterranean country
to conclude a free trade agreement with the EU. The EU has offered Tunisia to negotiate a Deep and Comprehensive Free Trade Agreement with the goal to allowing the
full access of Tunisia to the EU’s single market, although negotiations have
not yet started.
Since the Arab Spring process
began, the EU has declared on various occasions its commitment to support Tunisia in its economic and political reform process. The EU has doubled its financial
support in the form of grants, making of it the largest recipient of funding
under the SPRING Programme so far.
In sum, while Tunisia’s road to full democracy is not without difficulties and significant political,
security, economic and social uncertainties remain, the country has taken
significant steps towards political reform. In this context, the political
preconditions for Macro-Financial Assistance may be considered to be sufficient
but should be closely monitored before taking a final decision. A more
detailed assessment of the compliance with this criterion, provided by the
European External Action Service (EEAS), is reproduced in the Annex of this
Staff Working Document. Compliance with these criteria will continue to be
monitored by the Commission in liaison with EEAS throughout the life of the MFA
operation.
5.3.        Complementarity
The proposed MFA
would complement the assistance provided by other multilateral and bilateral
donors in the context of the IMF-sponsored economic programme. The total
financing already identified to be provided by donors other than the EU would
amount to USD 1.4 billion for the period 2014-15, representing 31% of the
overall external financing gap, ensuring fair burden sharing between the EU and
other donors. The EU MFA would also complement the standard EU aid packages
mobilised under the ENPI and the SPRING Programme, and in particular the
conditionalities envisaged under the budget support PAR III package. Close
coordination will be ensured in the implementation of these two programmes.
Both programmes are complementary and mutually reinforcing. While the envisaged
MFA will provide short term balance of payments support the state building
contract will support the completion of the democratic transition process
through economic and political governance measures. By supporting the adoption
by the Tunisian authorities of an appropriate framework for macroeconomic
policy and structural reforms, the EU’s MFA would enhance the added value and
effectiveness of the EU's involvement through other financial instruments. 
5.4.        Conditionality
The
disbursements would be conditional on successful programme reviews under the
IMF programme and on the effective use by Tunisia of
these IMF funds. In addition, the European Commission and the Tunisian
authorities would agree on a specific set of structural reform measures, to be
defined in a Memorandum of Understanding. These reform measures will support
the authorities’ reform agenda and complement the programmes agreed with the
IMF, the World Bank and other donors, as well as the policy programmes
associated with the EU’s budgetary support operations.
The
European Commission will seek a broad consensus with the Tunisian authorities,
so as to ensure a smooth implementation of the agreed conditionality. These
policy conditions should address some of the fundamental weaknesses accumulated
over the years by the Tunisian economy. Possible areas of conditionality could
in principle include: public finance management; fiscal reforms to increase tax
collection and improve the progressivity of the tax system; reforms to
strengthen the social safety net; labour market reforms (to reduce unemployment
and raise participation rates, notably among women); financial sector reforms;
and measures to improve the regulatory framework for trade and investment.
5.5.        Financial Discipline
The planned assistance would be provided in the
form of a loan and should be financed through the borrowing operation that the
Commission will conduct on behalf of the EU. The budgetary costs of the
assistance will correspond to the provisioning, at a rate of 9%, of the amounts
disbursed in the guarantee fund for external lending of the EU, from budget
line 01 04 01 14 ("the provisioning of the Guarantee Fund"). Assuming that the first and second loan disbursements will be made
in 2014 for the amount of EUR 170 million (EUR 90 million and EUR 80 million,
respectively) and the third loan disbursement in 2015 for the amount of EUR 80
million and according to the rules governing the guarantee fund mechanism, the
provisioning will take place in the 2016-17 budgets.
To ascertain
that the beneficiary has in place a sound financial management in line with the
requirements of the Financial Regulation, the European Commission services will
undertake an Operational Assessment that should provide an updated report on
the reliability of the financial circuits and administrative controls at the
Ministry of Finance and the Central Bank of Tunisia, while considering the
results of the Public Finance and Financial Accountability (PEFA) assessment of
Tunisia conducted in 2010 with EU funding, and the regular reports on progress
with PFM reform produced by the EU Delegation in Tunis.
6.           Planning of future monitoring and evaluation
This assistance
is of exceptional and macroeconomic nature and its monitoring and evaluation
will be undertaken in line with the standard Commission procedures. 
6.1.        Monitoring
Monitoring will
involve the review of reports and data provided by the authorities and by
review missions to Tunisia by Commission staff. To monitor the fulfilment of
the objectives of the programme throughout the implementation period of the assistance,
the Commission will use two types of indicators: 
·      Adherence to the IMF-supported programme, including compliance with
macroeconomic performance criteria and structural reform benchmarks identified
under the SBA, as reported by the IMF in the context of the regular review of
the programme. 
·      Progress in the implementation of structural policy indicators,
which are to be agreed with the Tunisian authorities in a Memorandum of
Understanding. In this process, the Commission services will monitor key areas
of the public finance management system, as they will be identified in the
update of the Operational Assessment, so as to have the relevant information on
any changes in the control environment. Ahead of the disbursement of the second
and third instalments, the authorities will be asked to submit a compliance
statement in relation to the policy conditionalities. In addition, under the
Memorandum of Understanding monitoring system, the authorities will be required
to submit quarterly reports of certain economic and reform indicators. 
Although this
assistance is centrally managed, where appropriate, the EU Delegation in Tunisia will also be called to provide reporting. An annual report, as well as regular
information on developments in the management of the assistance, to the
European Parliament and to the Council are foreseen. 
6.2.        Evaluation
Ex-post
evaluations of macro-financial assistance operations are foreseen in the
Multi-Annual Evaluation Programme of the Commission's Directorate-General for
Economic and Financial Affairs. An ex-post evaluation of the proposed
macro-financial assistance to Tunisia will be launched within a period of two
years after the completion of the operation. A provision for the ex-post
evaluation is included in the proposed Decision for the assistance, and will
also be included in the Memorandum of Understanding. Budget appropriations from
the macroeconomic assistance budget line will be used for this evaluation. 
7.           Achieving
cost-effectiveness
The proposed
assistance would entail a high degree of cost effectiveness for several
reasons: 
·      First, since the assistance would be leveraged by that provided by
the international financial institutions, with which, as noted, it would be
closely coordinated, its ultimate impact could be very significant compared to
its cost. Moreover, in negotiating specific policy conditions, the Commission
will be able to draw on the expertise of those institutions, including the
International Monetary Fund and the World Bank, and to influence their conditionality
as well in ways that will take into account the EU's views. 
·      Second, providing a coordinated macroeconomic support to Tunisia on behalf of the EU countries, the MFA would be more cost efficient than the
provision of a similar total amount of financial support by EU Member States
individually. 
·      Third, all of the assistance would be provided in the form of loans,
the budgetary impact of which is more limited.
·      In addition, the Commission will aim at achieving synergies with
other EU policies and instruments used to support the implementation by the
beneficiary of the relevant measures (notably in the area of public finance
management). 
ANNEX
 EUROPEAN EXTERNAL ACTION SERVICE 
       || DIRECTORATE North Africa, Middle East, Arabian Peninsula, Iran and Iraq DIVISION Maghreb 
Brussels, 9 November 2013
assessment on
Tunisian political reforms
A
tense political situation
Following
the revolution and the ousting of Ben Ali on 14 January 2011, President
ad-interim Mr M'bazaa governed by decree. As from March, a transitional
government led by Mr. Caïb Essebsi managed to prepare Tunisia’s first democratic elections on 23 October 2011. Overall
participation in the elections was 54,1% of the registered voters. A National Constituent Assembly (ANC) has been in place since then.
The EU Electoral Observation Mission said elections were overall organised in a
satisfactory manner. It praised the efforts of the national supervision
committee (ISIE) in the organisation of the elections given the timelines.
Electoral campaign was rather limited but the media, especially public owned
audio-visual sector, plaid a key role and ensured an equality of treatment
among candidates' lists.
Elections
were won by Ennahda (Islamists), followed by two centre-left parties:
Congrès pour la République (CPR) and Ettakatol. According to a tripartite
agreement among them ("Troïka"), Mr Marzouki (CPR leader) was elected
President of the Republic. Ennahda’s Secretary General, Mr Jebali was appointed
Prime Minister while Mr Ben Jafaar (leader of Ettakatol) was elected President
of the ANC. 
Since,
most of the initial opposition parties have been recomposed. Former PM Caïb
Essebsi founded a new major secular opposition party, Nidaa Tounes. Al
Joumhouri ("republican party"), democratic Alliance and Wafa were
created. Initially there were 8 independent MPs in the ANC, currently there are
31 (mostly defections from Popular petition, CPR, Ettakatol).
On
24/12/2011, the Ennahda-led transition government took up office with the task of
managing the country until the new Constitution is adopted and new elections
take place. Despite a large political consensus on the duration of the ANC -
one year - no limit has been formally fixed. This has been criticised by the
opposition and by several civil society organisations. 
Since
the summer of 2012 there have been growing political tensions, insecurity and
political violence, carried out in particular by extremist groups, including
the “Committees for the defence of the revolution” (CDR). Among other events:
the attack on the USA Embassy, the death of Nida Tounes’ representative in
Tataouine, recurring clashes between security forces and “salafist” militants,
violent attack by CDR against UGTT (main Trade Union organisation). 
As a
result of these events, the government and Ennahda in particular, were accused
of being unable to address or to mitigate this violence, and of being
politically responsible for it. Foreign partners requested action to reinforce
rule of law and security.  
Polarisation
between the "Troika" and the secular opposition coalesced around
Nidaa Tounes has increased. As a result the dominant position of Ennahda is
increasingly challenged. 
Tensions
culminated in the murder of left wing opponent Mr Belaid on 6 Feb. 2013 and the
consequent resignation of PM Jebali and his government. On 22 February, President Marzouki appointed a new Ennadha PM, Mr
Larayedh (Minister of Interior in the previous Government). Although
composed by the same Troika parties, several key ministries were attributed to
independent personalities, including the Interior.
Challenges
for in 2013: following  a
further  political assassination; that of Mr. Brahmi (left wing opposition MP)
on 25 July 2013, massive public protests against the government took place and
the ANC President decided to temporarily suspend   proceedings. This resulted
in further delays in the political process (finalisation of the constitution,
setting up of an independent elections commission, revision of the electoral
law, etc.), increasing political polarisation between secular and islamist
forces (also following events in Egypt during the summer) amidst a number of
worrying security incidents at the borders with Algeria and in the Chaambi
mountains, social unrest and high unemployment.
A
"national dialogue", initiated by a "Quartet" composed of
the UGTT, UTICA (representing businessmen), the Unions of lawyers (Ordre
national des avocats) and the Tunisian ligue for protection of human rights was
initiated in August and formally launched on 26 October 2013 to find a
compromise on the different issues at stake. A "road map" with very
tight deadlines until end November 2013 has been agreed: appointing a new Prime
Minister by 02/11 at the latest, appointing a new government of technocrats /
independents and adopting the new Constitution end of November with a view to
preparing new democratic elections in 2014.
New
serious security incidents have contributed to cast a shadow on this process:
about ten members of the national security forces and equivalent number of
supposed "terrorists" have been killed in different parts of Tunisia
(North West, Centre), followed by two attempted
terrorist attacks in Sousse and Monastir on 30 October.
To date
the different parties involved in this dialogue have not overcome their divergent
views on choosing a new head of government. In this context, it is difficult to
predict the final outcome of the political dialogue, although the adoption of
the new Constitution may still take place by the end of 2013 and next elections
could be organised in 2014.
EU-Tunisia relations
Relations
progressed more slowly than expected: however a political agreement on the Action
Plan was reached at the EU-Tunisia Association Council in November 2012 as
part of a “privileged partnership”.  The formal adoption of the Plan depends on
the finalisation of the matrix on 'priority actions', which could take place
within next months. 
The
decision by EU Member States to actually launch the negotiations on the Deep
and Comprehensive Free Trade Agreement (DCFTA) is conditional on a
positive conclusion of the on-going "scoping exercise", i.e.
assessment missions by DG Trade. Two missions took place in April and October
2012, and a third and final scoping meeting should be organised by end 2013. 
On the Agreements on accreditation and acceptance of industrial products
(ACAA), the
negotiations, are still expected to be initiated shortly.  
On the
Air Services Agreement (Open Sky) to liberalise air transport, concrete
negotiations started in late June 2013. A second round is also expected to take
place. 
Agricultural
negotiations were well advanced in November 2010. They
should in principle be resumed although Tunisian authorities have recently
showed some reluctance to move forward. 
Finally,
it is worth noting that a dialogue on a mobility
partnership (migration issues) between the EU and Tunisia was re-activated in the summer 2013. A new round of negotiations should take place
mid-November in Tunis.
In
sum, while a number of major political, security, economic and social
challenges remain, the EU is committed to support Tunisia in its transition
process. In this context, the political preconditions for Macro-Financial
Assistance may be considered to be sufficient but should be closely monitored before
taking a final decision.
[1] The World Bank estimates that around 38% of GDP comes from the
informal economy in Tunisia.
[2] This shortfall is largely due to the postponement of the issuance
of Sukuk bonds originally planned for 2013, the decision by the World Bank to
delay part of the DPL disbursements to 2014, and the decision by the African
Development Bank to freeze plans on a potential loan on account of its
excessive risk exposure to the MENA region.
[3] Tunisia’s average customs duty of 18% is in line when compared with other
countries in the region (around 20%). Tunisia is a member of both the Great
Arabic Free Trade Area (GAFTA) and the Agadir Agreement. It has signed a free trade agreement with Turkey and EFTA, which entered
into force in July 2005. Tunisia has also signed a bilateral agreement with Libya, which entered into force in 2002.
[4]“Criteria for Determining the Use of Grants in EU Macro-Financial
Assistance”, note of the European Commission to the EFC, January 2011.
[5] World Bank’s Atlas 2011 figures. GNI per capita is the gross
national income, converted to US dollars using the World Bank Atlas method,
divided by the midyear population.
[6] Decision No 1025/2013/EU of 22 October 2013 providing
macro-financial assistance to the Kyrgyz Republic; Draft Decision providing
macro-financial assistance to the Hashemite Kingdome of Jordan, adoption of
which is foreseen for December 2013.