COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement Accompanying the document Proposal for a Decision of the European Parliament and of the Council providing further macro-financial assistance to the Republic of Tunisia
Date: 2016-02-12
Institutions: Directorate-General for Economic and Financial Affairs, European Commission
Subjects: International Monetary Fund, Tunisia, balance-of-payments deficit, economic reform, economic stabilisation, financial aid, medium-term credit, structural adjustment

EN 

   EN 

   EUROPEAN COMMISSION  Brussels, 12.2.2016  SWD(2016) 30 final   COMMISSION STAFF WORKING DOCUMENT Ex-ante evaluation statement  Accompanying the document  Proposal for a Decision of the European Parliament and of the Council  providing further macro-financial assistance to the Republic of Tunisia  {COM(2016) 67 final}  
 
 
Ex-ante evaluation statement 

Further EU Macro-financial assistance to the Republic of Tunisia 

TABLE OF CONTENTS 

1.

  Problem analysis and needs assessment ............................................................................. 2 

1.1 

1.2 

1.3 

1.4 

1.5 

1.6 

Introduction ................................................................................................................. 2 

Tunisia's macroeconomic situation .............................................................................. 3 

IMF and other donor support ....................................................................................... 5 

Progress under the ongoing MFA-I operation ............................................................. 7 

Tunisia's external financing needs ............................................................................... 7 

Structural reform challenges ........................................................................................ 9 

2.

  Objectives and Monitoring indicators of the macro-financial assistance ......................... 12 

2.1  Objectives .................................................................................................................. 12 

2.2 

 Monitoring indicators ............................................................................................... 12 

3.

  Delivery mechanisms and risk assessment ....................................................................... 13 

3.1  Delivery mechanisms ................................................................................................ 13 

3.2  Risk assessment ......................................................................................................... 13 

4.

  Added value of EU involvement ....................................................................................... 14 

5.

  Assessment of criteria applicable to macro-financial assistance ...................................... 15 

5.1 

5.2 

Exceptional Character and Limited Timeframe ........................................................ 15 

Political preconditions and EU-Tunisia relations ...................................................... 15 

5.3  Complementarity ....................................................................................................... 16 

5.4  Conditionality ............................................................................................................ 16 

5.5 

Financial Discipline ................................................................................................... 16 

6.

  Evaluation and cost-effectiveness ..................................................................................... 17 

6.1 

Evaluation .................................................................................................................. 17 

6.2  Achieving cost-effectiveness ..................................................................................... 17 

Annex: Assessment on Tunisian Political Reforms prepared by the European External Action 
Service 

2 

 
 
 
1.

PROBLEM ANALYSIS AND NEEDS ASSESSMENT 

1.1 

Introduction 

In parallel to a protracted and fragile political transition process since the 2011 revolution, the 
Tunisian  economy  has  suffered  from  continuous  domestic  unrest,  regional  instability 
(including  the  impact  of  the  Libyan  conflicts),  and  a  weak  international  environment 
(particularly  in  the  euro  area).  These  unfavourable  developments  substantially  weakened  its 
growth performance, as well as its fiscal and balance of payments positions. In 2015, largely 
as  a  result  of  the  negative  economic  impact  of  terrorist  attacks  (particularly  on  tourism,  the 
transport  sector  and  investment)  and  of  production  disruptions  due  to  social  unrest  growth 
projections have been revised markedly down, while the situation is negatively affecting  an 
already  vulnerable  balance  of  payments  and  fiscal  position,  creating  important  financing 
needs. 

At the same time, the country has continued taking significant steps towards the consolidation 
of  democratic  mechanisms,  including  the  approval  of  a  new  Constitution  in  January  2014, 
although the political transition has not been without difficulties and episodes of instability. 

Tunisia reached in mid-April 2013 an agreement with the International Monetary Fund (IMF) 
on a 24-month Stand-By Arrangement (SBA) in the amount of USD 1.75 billion, which was 
approved  by  the  IMF  Board  on  June  2013,  and  which  was  subsequently  extended  until 
December 2015. It also requested in August 2013 complementary Macro-Financial Assistance 
(MFA) from the EU. In response, the European Commission  proposed a MFA of  EUR 250 
million  in  December  2013  in  the  form  of  loans  (MFA-I),  which  the  co-legislators  raised  to 
EUR  300  million  and  approved  in  May  2014.  The  Memorandum  of  Understanding  (MoU) 
defining the policy conditions related to this loan entered into force in March 2015.  
Following  the  completion  of  the  6th  review  of  the  IMF  programme  last  September,  Tunisia 
requested a successor arrangement with the IMF, probably of a 4-year duration. The new IMF 
programme  is still under negotiation but expected to be sent for IMF Board approval in the 
spring of 2016. The MFA-I operation is on track, despite some delays in its implementation. 
The first tranche was disbursed on 7 May 2015 and, with Tunisia having met the conditions 
agreed with the EU in the MoU, the second tranche was disbursed on 1 December 2015. The 
third and last tranche is expected to be disbursed in the second quarter of 2016, provided that 
the MoU conditions are met.  

In  this  context,  the  Tunisian  Prime  Minister,  in  a  letter  sent  to  President  Juncker  in  August 
2015, and reiterated in December by a letter from the Minister of Development Cooperation 
and Investment, requested a second MFA operation from the EU in the amount of EUR 500 
million, which would accompany the successor IMF programme. In view of the strong impact 
the security situation is having  on Tunisia's economy and external financing needs during a 
period  of  consolidation  of  its  political  transition,  and  after  an  updated  assessment  of  the 
country’s  external  financing  needs  conducted  in  liaison  with  the  IMF,  the  European 
Commission is submitting to the European Parliament and the Council a proposal to grant a 
second  MFA  (MFA-II)  to  the  Republic  of  Tunisia  amounting  to  a  maximum  of  EUR  500 
million, in the form of medium-term loans. The proposed amount is also consistent with the 
expected  size  of  the  IMF  programme,  with  the  significant  risks  the  Tunisian  economy  is 
currently facing, and with the strong commitment of the EU to support Tunisia's political and 
economic transition. 

The  proposed  new  MFA  would  help  Tunisia  cover  part  of  its  residual  external  financing 
needs, estimated at about USD 2.9 billion for the period 2016-17, in the context of the new 
IMF  programme.  It  would  reduce  the  economy’s  short-term  balance  of  payments  and  fiscal 
vulnerabilities, while coordinating with the adjustment and reform programmes to be agreed 
with  the  IMF  and  the  World  Bank,  as  well  as  with  the  reforms  agreed  under  the  EU’s 
budgetary support operations, in particular the State Building Contracts Programme d’appui à 

3 

 
 
la relance (PAR). The proposed MFA-II is consistent with the orientations of the European 
Neighbourhood Policy (ENP) and with efforts of the international community, including the 
G-7 Deauville Partnership initiative, to assist Tunisia in these challenging times. 

1.2 

Tunisia's macroeconomic situation 

Following two years of stable, but low,  GDP growth, in the context of the IMF programme 
(2.3% in both 2013 and 2014), growth for 2015 has been revised down to 0.5% compared to a 
forecast of 3% at the beginning of the year. Tunisia's economy has suffered a strong setback 
largely as a consequence of the terrorist attacks of 2015, which have affected key economic 
sectors. The negative effect of the attacks on the tourism sector (which contributes about 7% 
of GDP and accounts for around 15% of the workforce) and the transport sector (contributing 
also  about  7%  of  GDP,  20%  of  which  depends  on  tourism  travel),  as  well  as  on  foreign 
investors'  sentiment,  coupled  with  disruptions  in  phosphate  production,  transport  and  other 
sectors  (due  to  work  stoppages  and  strikes),  have  contributed  to  this  downward  revision. 
Tunisian  authorities,  and  the  IMF,  expect  growth  to  pick  up  in  2016,  in  the  absence  of 
additional shocks, supported by a slow recovery of the tourism sector and a normalisation of 
domestic production. Nevertheless, this baseline scenario has strong risks to the downside. 

These  low  growth  rates  will,  in  any  case,  not  suffice  to  make  a  significant  dent  on 
unemployment,  which  remains  high  at  15%,  and  is  particularly  high  among  the  young  and 
graduates (over 30%) and among women (21.6%). Furthermore, employment in the informal 
economy still accounts for around 50% of workers aged between 15 and 24.  

Inflation  averaged  5.5%  in  2014  and  is  on  a  downward  trend,  in  view  of  declining 
international commodity prices, stable domestic food production, the weakening of domestic 
demand  and  a  prudent  monetary  policy.  Headline  inflation  is  expected  to  moderate  to  an 
average of 4.9% in 2015 and stay at around 4% over the next 5 years. 

After  tightening  monetary  policy  between  2012  and  mid-2014  in  response  to  inflationary 
pressures  and  the  deterioration  in  external  and  fiscal  balances,  the  central  bank  cut  its 
benchmark rate  by 50 basis points (to 4.25%) last October, to help reignite the faltering GDP 
growth amid slowing CPI inflation.  

Regarding  the  public  finances,  Tunisia  achieved  a  certain  degree  of  fiscal  consolidation  in 
2014, reaching a fiscal deficit (central government balance excluding grants) of 4.1% of GDP 
compared to 6.2% of GDP in 2013, significantly over-performing the original fiscal target of 
6.7%  of  GDP  agreed  under  the  IMF  programme.  This  was,  however,  mainly  due  to  two 
factors: (i) the underspending of the capital expenditure budget; and (ii) the postponement of 
the  recapitalisation  of  the  public  sector  banks  to  2015.  This  second  factor  largely  explains 
why the structural fiscal balance (which excludes banking recapitalisation costs) declined by 
much less (from 5.1% of GDP in 2013 to 4.2% of GDP in 2014). The latest assumptions from 
the  IMF,  calculated  on  the  basis  of  the  supplementary  budget  adopted  in  July  2015,  point 
towards  a  fiscal  deficit  in  2015  of  5.8%  of  GDP.  This  deterioration  largely  reflects,  as 
mentioned,  the  postponement  of  the  banking  recapitalisation  costs  from  2014,  which  is 
expected to  amount  to  1%  of  GDP.  Excluding  this  factor, the  deterioration  was  much  more 
limited (the structural fiscal balance is forecasted to increase by only 0.5% of GDP to 4.7% of 
GDP).  

The  increase  in  the  structural  deficit  has  been  driven  by  expenditure  measures  taken  in  the 
aftermath  of  the  terrorist  attacks,  despite  the  lower  than  expected  oil  prices.  As  a  result  of 
lower oil prices and a weaker economic activity, revenues are expected to decline by 1.4% of 
GDP.  Expenditures  are  now  expected  to  increase  by  0.3%  of  GDP,  despite  the  estimated 
savings  of  1.6%  of  GDP  generated  by  lower  social  compensation  costs  for  energy  price 
subsidies.  These  savings  were  used  by  the  government  to:  address  social  tensions  by 
increasing the wage bill (by 0.6% of GDP); to increase security spending (0.2% of GDP); and 

4 

 
to  finance  an  Economic  Relaunch  Programme  (0.5%  of  GDP)  to  support  sectors  negatively 
affected by the terrorist attacks. 

Table 1: Tunisia– Selected Macroeconomic Indicators, 2013-2017 

National Accounts 
  Real GDP growth 
  Consumer price index, period average 
  Unemployment rate (in per cent) 

Population (million) 
  GDP per capita (USD) 

Consolidated government operations 
  Revenue and grants 
  Total expenditure and net lending 
  Overall fiscal balance excluding grants 
      Overall fiscal balance including grants 
      Structural fiscal balance (1) 
  General government gross debt 
External sector 
  Current account balance  
  Gross international reserves, end of period (USD bn) 
   - In months of next year’s imports of goods/services 
Foreign direct investment, net (USD bn) 

2013 

2014 

2015 
Proj. 

2016 
Proj. 

2017 
Proj. 

(Annual percentage change, unless otherwise 
indicated) 

2.3 
5.8 
15.3 
10.9 
4.317 

2.3 
4.9 
15.3 
11.1 
4.415 

0.5 
4.9 
15.0 
11.2 
4.075 

2.5 
4.0 
14.0 
11.2 
4.106 

4.0 
3.9 
13.0 
11.3 
4.201 

(In per cent of GDP, unless otherwise indicated) 

23.7 
29.8 
-6.2 
-6.0 
-5.1 
44.3 

24.5 
28.1 
-4.1 
-3.7 
-4.2 
50.1 

22.9 
28.4 
-5.8 
-5.4 
-4.7 
54.0 

-8.3 
7.7 
3.4 
1.1 
54.2 

-8.9 
7.7 
4.0 
2.2 
56.2 

-8.8 
7.5 
4.1 
2.6 
61.6 

23.4 
27.5 
-4.3 
-4.1 
-4.2 
53.1 

-7.9 
8.5 
4.5 
2.6 
67.7 

23.7 
27.4 
-3.9 
-3.7 
-3.4 
58.1 

-6.9 
9.1 
4.6 
2.6 
70.6 

  External debt 
Source: latest IMF staff estimates (November 2015)  
(1) Excludes banking recapitalisation costs, and one-off arrears paid for energy subsidies 

The 2016 budget law, submitted by the government to parliament in October and adopted by 
parliament in December, has as overarching policy objectives to strengthen national security, 
and combat fiscal fraud, smuggling and the parallel economy. The budget draft implies, based 
on  the  latest  IMF  estimates, a  reduction  of  1.5%  of  GDP  (to  4.3%  of  GDP)  in  the headline 
deficit  (as  measured  by  the  central  government  deficit  excluding  grants),  although  much  of 
this is explained by the recapitalisation costs incurred in 2015 (which were a one-off cost item 
that  will  not  be  repeated  in  2016).  Revenues  in  2016  are  projected  to  increase  by  0.6%  of 
GDP (largely on account of the introduction of a VAT), while total expenditures are expected 
to  remain  stable  as  a  percentage  of  GDP  (despite  a  0.6%  of  GDP  increase  in  wages  and 
salaries).  

The  structural  deficit,  which  as  noted  excludes  recapitalisation  costs,  declines  by  much  less 
(by 0.5% of GDP, to 4.2% of GDP). The reduction in the structural deficit is expected to be 
achieved largely through a lower expenditure on subsidies (due mostly to the assumptions of a 
lower international  oil  price,  tabled at  USD  55 per  barrel  on  average  for  2016, and  a  stable 
exchange  rate),  while  it  forecasts  the  hiring  of  around  15.000  additional  public  employees 
(mostly  for  the  defense  and  security  sectors),  which  will  increase  the  wage  bill.  Some  tax 
measures  have  also  been  included,  such  as  a  more  comprehensive  reform  of  the  regime 
forfataire  (an  area  of  focus  in  the  MFA-I  operation),  and  a  simplification  of  the  VAT 
structure,1  as  well  as    general  measures  in  the  area  of  tax  administration  aimed  at  curbing 

1The VAT in Tunisia is currently composed of three rates of 6%, 12% and 18%. The draft budget law 2016 will 
reduce them to two rates of 8% and 20%, and considerably reduce the products of the lower segment. 

5 

 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
                                                            
fiscal  fraud  and  the  parallel  economy.  Consistent  with  the  priority  objective  under  the 
Recovery and Transformation Programme to foster public investment projects in the amount 
of USD 8-10 billion over the next five years, the draft 2016 budget envisages an increase in 
capital expenditure of 15% compared to 2015.  

Meanwhile, the  debt  of  the  general  government has  continued  to  increase,  reaching  50%  of 
GDP  in  2014  and  is  forecast  to  peak  at  61%  of  GDP  by  the  end  of  2018  before  starting  to 
reverse the trend. Also, a substantial increase in public debt amortisations is scheduled to take 
place in the coming two years (from about USD 600 million in 2015 to more than USD 1.4 
billion in 2017, and almost USD 1.2 billion in 2018). 

Turning  to  the  balance  of  payments,  the  current  account  deficit  further  widened  in  2014, 
reaching 8.9% of GDP compared to 8.3% of GDP in 2013, and is expected to remain at an 
unsustainable large level in 2015, despite the decline in oil prices, weaker domestic economic 
activity  and  improved  export  performance.  While  in  the  first  seven  months  of  2015,  falling 
energy imports and rising food exports cut Tunisia’s current trade deficit by 10% compared to 
the  same  period  of  2014,  the  negative  effects  on  tourism  of  the  Sousse  terrorist  attack  are 
expected  to  put  additional  pressure  on  the  current  account  deficit,  pushing  the  deficit  back 
towards  8.8%  of  GDP.  Tunisia  is  commonly  considered  an  energy  importer,  but  it  also 
produces and exports substantial amounts of crude oil, the value of which has of course been 
significantly affected by the decline in oil prices. Tunisia's oil exports  represented about 5% 
of GDP and 13% of total exports, while its oil imports stand at about 9% of GDP and 18% of 
total imports. The net effect of the fall in the oil price has therefore been positive, but much 
less so than in other net oil importers such as Morocco. 

Private  capital  inflows  in  Tunisia  have  also  weakened  since  2011,  contributing  to  the 
vulnerabilities  of  the  balance  of  payments.  Net  foreign  direct  investments,  which  averaged 
almost 5% of GDP during 2005-2010, have declined to just over 2% of GDP in the last two 
years. 

In this context of wide current account deficit and weaker capital inflows, Tunisia has had to 
increasingly rely on official financial inflows. In 2015, Tunisia also managed to cover part of 
its external financing gap through the  issuance in January 2015 of a 10-year, USD 1 billion 
Eurobond  at  5.75%,  which  was  oversubscribed  by  international  investors  despite  not 
including a sovereign guarantee by a foreign donor.  

Official foreign exchange reserves ended 2014 at USD 7.7 billion, or the equivalent of barely 
3  months of  imports, which compares  to  an initial  target of USD 9.0 billion  under  the IMF 
programme. The USD 1 billion international bond issued in January 2015 raised the reserve 
level but, by the end of October, reserves had dropped back to about USD 6.5 billion, or just 
under  4  months  of  imports,  as  tourism  income  fell  in  the  wake  of  the  terrorist  attacks.  The 
reserve level at the end of 2015 is now expected to be USD 7.5 billion. This is well below the 
USD 8.2 billion the IMF had foreseen for the end of the year in the context of the 6th review 
of the programme (completed in September 2015) and compares to a USD 10.1 billion reserve 
target under the original programme. 

External debt increased from 48% of GDP in 2011 to an estimated 56.2% of GDP in 2014, 
and it is expected to peak at 72.3% of GDP in 2018 before starting to reverse this trend. 
Tunisia’s sovereign ratings have been downgraded several times since 2011, the last time in 
2014 (from Ba2 to Ba3 by Moody’s and from BB to BB- by Standard & Poor’s.  

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 Stand-by Arrangement (SBA). Last May, the IMF and Tunisia agreed to extend the 
programme  implementation  period  from  June  2015  until  December  2015,  to  better  align  it 
with  the  reform  calendar  of  the  new  government  and  to  provide  more  breathing  space  to 

6 

 
Tunisia  at  a  challenging  economic  and  political  juncture.  The  staff  mission  for  the  6th  SBA 
review  took  place  in  May  2015,  with  a  follow-up  mission  in  July  after  the  Sousse  terrorist 
attacks. The approval of the review by the IMF Board took place on 30 September, at which 
time  the  IMF  released  another  USD  303  million  tranche  of  the  SBA  to  Tunisia.  So  far, 
Tunisia has drawn USD 1.5 billion under the IMF’s SBA. 
The completion of the 6th review by the IMF Board confirmed that the programme remains on 
track, and commended Tunisia's efforts and resilience despite the adverse economic shocks. It 
also noted, however, that the programme performance remained mixed, as the reform agenda 
has continued to lag the progress achieved in the quantitative performance criteria.  
The 7th and final review will however not take place, since Tunisia has requested a successor 
arrangement to the IMF, for which discussion have started in December. A new programme is 
expected  to  be  sent  to  the  IMF  Board  in  March  2016.  It  is  likely  to  be  a  4-year  Extended 
Funding Facility and to be larger than the current SBA, although the final amount remains to 
be determined.  

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; see below) and a further USD 500 million in 2012 (as 
part  of  PAR  II).  In  2013,  it  approved  a  Governance,  Opportunities  and  Jobs  Development 
Policy  Loan  Program  (GOJ-1  DPL)  of  USD  500  million  (which  it  disbursed  between  2013 
and  2014),  as  part  of  a  programmatic  series  of  three  single-tranche  multi-sector  operations 
totalling USD 1.25 billion. In 2014, the World Bank approved and disbursed the second loan 
of this series (GOJ-2 DPL),  amounting  to  USD 250 million. The third  and last  GOJ-3 DPL 
was approved in October 2015, amounting to USD 500 million.  

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), approved in November 
2015  a  budget  support  loan  of  EUR  183  million,  targeting  mainly  the  education  and 
agricultural sectors.   

Tunisia joined the EBRD in December 2011 and was granted full country of operations status 
in October 2013. Since the start of its activities, the bank has provided Tunisia with over EUR 
212  million  in  16  projects  to  date,  mainly  focused  on  restructuring  and  strengthening  the 
financial  sector  and  financing  private  enterprises,  supporting  energy  efficiency  and 
developing  a  sustainable  energy  sector,  as  well  as  facilitating  non-sovereign  financing  for 
infrastructure development. 

In 2014, the US provided guarantees for the issuance of a USD 500 million bond, after having 
guaranteed  a  similar  amount  in  2012  (USD  458  million).  In  September  2015,  the  US 
announced its support to a guarantee for a bond issuance of a similar amount if requested by 
Tunisia. 

Japan provided a guarantee in 2014 for the issuance of USD 464 million in Samurai bonds (as 
it  did  in  2013  in  the  amount  of  USD  197  million  and  in  2012  in  the  amount  of  USD  303 
million). No similar support for 2015 has been announced by Japan, but Japan is expected to 
contribute to closing the financing gap in the context of a new IMF programme in the coming 
years. 

Additional  official  assistance  in  2015  has  been  provided  by  Algeria  (USD  100  million  in 
budget support loans, USD 100 million as deposits at the central bank to help build reserve 
levels, and USD 50 million in grants). The total amount of USD 250 million would follow an 
identical  operation  from  Algeria  in  2014.  The  Arab  Monetary  Fund  has  also  provided 
financial assistance in 2015 (USD 42 million). 

The EU has provided significant assistance to Tunisia in recent years, in addition to the MFA-
I.  Financial  assistance  provided  under  the  ENI  (European  Neighbourhood  Instrument),  and 
earlier  under  the  ENPI,  amounted  to  EUR  801  million  for  the  period  2011-2015  (to  date), 

7 

 
which includes EUR 277 million under the SPRING and Umbrella funds (EUR 155 million 
and EUR 122 million, respectively). These funds were complemented by financing from other 
EU  instruments  such  as  the  Instrument  for  Stability  (IfS),  the  European  Instrument  for 
Democracy  and Human  Rights  (EIDHR),  the Neighbourhood Investment Facility (NIF) and 
thematic programmes under the Development and Cooperation Instrument (DCI).  

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  first  three  PARs 
were  undertaken  jointly  with  other  IFIs,  but  the  ongoing  PAR-4  (and  the  future  PAR-5,  in 
preparation) are EU stand-alone operations. For the period 2014-2020, the indicative bilateral 
allocation for Tunisia ranges between EUR 725-886 million. 

The  EIB  remains  the  largest  external  donor  in  Tunisia,  where  it  has  provided  loans  worth 
EUR 5.6 billion since 1979, EUR 1.3 billion of which since 2011. In 2015, the EIB has signed 
EUR 200 million in loans. 

1.4 

Progress under the ongoing MFA-I operation 

Following  the  ratification  of  the  legal  documents  by  the  Tunisian  Parliament  on  4  March 
2015, the Commission was able to proceed with the implementation of the EUR 300 million 
of  assistance  under  MFA-I.  MFA-I  is  being  disbursed  in  three  equal  tranches  of  EUR  100 
million  each.  The  disbursement  of  the  first  tranche  took  place  on  7  May  2015,  and  was 
conditional on good progress under the IMF's SBA. The disbursement of the second tranche 
was  delayed  by  a  few  months  reflecting  insufficient  compliance  with  some  of  the  policy 
conditions defined in the MoU, notably those referring to the submission of the new central 
bank  law  to  parliament  and  the  adoption  of  a  statistics  code.  With  these  conditions  having 
been  satisfied  in  the  course  of  October  and  November  2015,  and  the  6th  review  of  the  IMF 
programme  having  been  successfully  completed  on  30  September  2015,  the  Commission 
decided  on  16  November  2015  to  disburse  the  second  tranche  of  the  assistance.  The  actual 
disbursement took place on 1 December. 

The third and last tranche of the MFA-I, also of EUR 100 million, is expected to be disbursed 
in the first quarter of 2016, provided that the policy conditions under the MoU are met. 

1.5 

Tunisia's external financing needs 

The revised projections that were produced in November by the IMF point towards significant 
balance  of  payments  needs  for  the  period  2016-2017,  with  the  total  external  financing  gap 
estimated at USD 5.1 billion (USD 2.7 billion in 2016 and USD 2.4 billion in 2017; see Table 
2). 

This  financing  gap  can  broadly  be  attributed  to  three  factors:  a  persistently  large  current 
account deficit, the need to build up foreign exchange reserves over the period 2016-17, and 
the large debt amortization requirements expected, especially for 2017. 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  to  remain 
sizeable (declining to 7.9% of GDP in 2016 and to 6.9% of GDP by 2017, even assuming a 
gradual recovery of tourism revenues). 

Despite its downward trend, the current account deficit is not expected to be covered by the 
surplus  in  the  capital  and  financial  account.  Having  dropped,  as  noted,  in  2015  (to  an 
estimated  USD  1  billion),  net  FDI  inflows  are  projected  to  recover  only  slowly  in  2016  (to 
USD  1.1  billion)  and  2017  (to  USD  1.2  billion),  reflecting  the  security  situation  and  the 
related perception  of high  political and  macroeconomic  risks.  This  will still be  significantly 
below its 2012 and pre-Arab spring levels as a percentage of GDP.  

8 

 
Regarding official reserves, and as mentioned earlier, these ended 2014 at USD 7.7 billion, or 
the  equivalent  of  barely  4  months  of  imports;  and  the  IMF  expects  them  to  end  2015  at 
USD 7.5 billion, well below the amounts originally programmed. The new IMF programme is 
expected to target a significant build-up of reserves. 

The third key factor contributing to the estimated external financing gap is, as noted, the large 
debt  amortisations  foreseen,  notably  for  2017.  While  during  the  period  2013-2016 Tunisia's 
debt amortisation payments averaged about USD 630 million per year, in 2017 they will jump 
to USD 1.4 billion, in part due to the repayments of the IMF 2013-2015 loan.  

Although  the  amounts  of  the  new  IMF  programme  are  yet  to  be  defined,  the  preliminary 
intention is to go for a 4-year Extended Arrangement starting in the second quarter of 2016 
and  of  a  similar  yearly  amount  as  the  current  SBA.  However,  IMF  repurchase  obligations 
stemming from the current SBA would be USD 35 million in 2016 and USD 322 million in 
2017.  Therefore,  net  IMF  financing  could  amount  to  about  USD  865  million  in  2016  and 
USD  478  million  in  2017,  contributing  to  cover  about  24%  of  the  total  projected  external 
financing gap for the period 2016-2017. 

According  to  preliminary  information,  the  World  Bank  is  expected  to  disburse  to  Tunisia  a 
USD  500  million  DPL  in  2016,  and  a  further  USD  500  million  DPL  in  2017.  In  total,  the 
budget  support  amounts  provided  by  the  World  Bank  would  represent  around  20%  of  the 
projected external financing gap for 2016 and 2017. 

After deducting net IMF disbursements and disbursements of World Bank policy-based loans, 
this  would  leave  a  residual  external  financing  gap  of  about  USD  2.9  billion  for  the  period 
2016-2017. Thus, the proposed new MFA operation of EUR 500 million would cover 19.2% 
of  the  estimated  residual  financing  gap.  In  addition,  the  third  tranche  of  the  ongoing  MFA 
operation  (EUR  100  million),  which  is  expected  to  be  disbursed  during  the  first  quarter  of 
2016,  would  represent  about  3.8%  of  the  gap.  In  total,  the  EU's  combined  MFA  I  and  II 
operations would, therefore, cover 23% of the expected residual financing gap for the period 
2016-2017. 

In the absence of other pledges of official assistance, the Commission and the IMF assume, as 
shown in the table below, that Tunisia may have to access the international markets without 
any donor guarantees in order to cover part of the residual external financing gap, whether in 
the  form  of  normal  international  bonds  or  of  Sukuk  bonds.  This  is  particularly  for  2017, 
where identified pledges of official assistance fall significantly short of the estimated residual 
financing  gap.  Tapping  the  international  markets  without  guarantees  may,  however,  prove 
difficult depending on the market conditions. On the other hand, it is likely that the USA and 
Japan, as in previous years, will provide additional support in the form of bond guarantees if 
necessary. The table below assumes that the USD 500 million in bond guarantees pledged by 
the USA in mid-2015 will be utilised in 2016. In addition, another USD 250 million budget 
support contribution from the African Development Bank has been included in the financing 
assumptions for 2016. 

9 

 
Table 2: Tunisia’s External Financing Gap and Potential Financing Sources 
 (USD million)  

* Excludes official grants and loans provided in the form of policy-based budgetary support. 
** An exchange rate of EUR 1.10 / USD 1 has been used to convert EU assistance into USD. 
Sources: latest IMF staff estimates (November 2015) and Commission staff calculations 

1.6 

Structural reform challenges 

Tunisia continues to face significant structural reform challenges. While the country enjoyed 
during 2000-2010 a period of relatively high per-capita economic growth (one of the highest 
among the oil importers in the Middle East and North Africa (MENA) region), it continues to 
suffer  from  a  number  of  structural  deficiencies.  First,  it  has  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. Second, it has a weak and 
inefficient  banking  sector  and  the  pervasive  use  of  capital  controls  and  directed  lending 
continues  to  constrain  financial  development  and  the  allocation  of  saving  to  the  most 
productive investments. Third, rigid labour markets and skill mismatches have contributed to 
high  unemployment,  particularly  among  the  youth,  while  participation  rates  (particularly 
among  women)  are  very  low,  as  it  is  the  case  in  most  countries  in  the  region.  Fourth, 
transparency  and  economic  governance  are  perceived  as  weak  and  the  growth  model  has 
resulted in an unfair distribution of economic gains among the population. Finally, this model 
has  also  resulted  in  an  unbalanced  pattern  of  regional  economic  development,  with  the 
northern  and  coastal  regions,  including  the  metropolitan  area  of  Tunis  relatively  high  per 
capita  income  contrasting  with  the  poverty  and  underdevelopment  and  high  unemployment 
rates seen in the interior and southern regions, which helps explain why part of the 2010 Arab 
spring revolts originated here. 

10 

Total2016-171. Current account balance*-4.060-3.659-3.300-6.9592. Capital and financial account*1.5771.9761.4693.4453. Overall balance (1+2)-2.483-1.683-1.831-3.5144. Reserves (“-” indicates increase)200-1.000-600-1.6005. Overall External Financing Gap (3+4)-2.283-2.683-2.431-5.1146. Exceptional Financing by IMF and WB8021.2659782.243    Net IMF Disbursements3027654781.243    Disbursements of World Bank’s DPL5005005001.0007. Residual Financing Gap (5+6)-1.481-1.418-1.453-2.871Financing of the gap EU MFA-I2201100110 EU MFA-II0385165550EU budget support grants100100100200AfDB2002500250AMF42000US-guaranteed international bonds05000500Algeria250000Total identified sources8121.3452651.610Other financing sources (inc. Intl. Markets/ Sukuk)731.1881.26119,2%23,0%(USD million)201520162017Total MFA-II as % of the residual gap for 2016-2017Total MFA I and II as % of the residual gap for 2016-2017 
 
 
While Tunisia has adopted a number of encouraging reform measures in recent years, notably 
in the context of the programme agreed with the IMF and supported by the ongoing MFA-I, 
implementation  has  often  been  slower  than  programmed,  partly  reflecting  the  complex 
political  transition  and  security  problems  the  country  has  being  going  through.  As  in  2014, 
structural  reform  progress  in  2015  has  been  mixed.  While  the  parliamentary  elections 
complicated  reform  implementation  last  year,  in  2015  delays  in  the  formation  of  the  new 
government  and,  subsequently,  the  challenging  political  context  created  by  the  domestic 
security  threats  led  to  the  postponement  of  certain  reforms,  although  the  reform  agenda  has 
gathered some momentum in the last quarter of 2015. 

Ambitious reforms such as the new Investment Code have been marred by a protracted period 
of consultation of stakeholders that lasted about two years, with the code having been finally 
submitted  to  Parliament  in  2014  but  again  withdrawn  in  March  2015.  However,  the  latest 
revision of the Code prepared by the government, which has been praised for its quality and 
ambition  by  the  IMF  and  World  Bank,  was  adopted  by  a  restricted  Cabinet  meeting  on  22 
October and adopted by parliament in December 2015 (structural benchmark under the IMF 
programme).  

Similarly, following a two-year consultation process on Tax Reform (prepared with technical 
assistance of the IMF), some important measures have been incorporated in the 2016 budget 
law.  Among  these  are:  the  introduction  of  the  new  VAT;  the  reduction  of  exemptions;  the 
broadening  of  the  tax  base;  and  further  steps  towards  the  full  convergence  of  on-shore  and 
off-shore corporate tax rates.  

Progress on the recapitalisation of the three public banks, which has been a centrepiece of the 
IMF programme since 2013, gathered momentum in 2015, with the passing by parliament on 
6  August  of  the  necessary  recapitalisation  law.  Under  the  bill,  the  banks  STB  (Société 
tunisienne  de  banque,  50.5%  state-owned)  and  BH  (Banque  d'Habitat,  57%  state-owned) 
could receive public capital injections of up to TND 757m and TND 110m, respectively. No 
funds were foreseen for the third bank, BNA (Banque Nationale Agricole, 65% state-owned), 
because  it  was  expected  to  raise  the  required  funds  (TND  300  million)  through  own-asset 
sales.  

The recapitalisation process was structured in two phases. First, the capital increase was open 
to the existing shareholders, including the state, so that both were given the chance to avoid a 
dilution of their capital shares. In case the private sector stakeholders did not subscribe their 
share,  a  second  phase  allowed  external  private  sector  investors  to  subscribe  to  the  capital 
increase.  Since  this  was  not  a  privatisation  operation,  at  a  minimum  the  state  had  to  inject 
capital  to  maintain  its  capital  share,  thus  avoiding  a  dilution  of  its  share,  and  had  to  inject 
additional  capital if  the private  sector  did  not  subscribe  enough  to  reach  the  recapitalisation 
targets.  The  recapitalisation  process  for  the  STB  concluded  on  30  October,  with  the  State 
having  subscribed  the  majority  of  the  shares  at  a  final  cost  of  TND  678  million  (TND  79 
million less than the maximum amount authorised by parliament), which has led to its share 
participation increasing from 50.4% to 83.3%. The recapitalisation process for the BH finally 
did not take place as the bank is now expected to raise the required funds by selling assets.  

These three public banks have systemic importance, representing about 40% of banking assets 
and 30% of banking sector deposits. While the recapitalisation process will no doubt provide 
a  lifeline  to  these  banks,  it  remains  to  be  seen  how  the  new  demand  shock  in  the  tourism 
sector (to which the three public banks are heavily exposed) will affect their volume of non-
performing loans, and whether additional funds will be necessary to sustain the banks in the 
medium-term. 

There have been delays in the creation of an Asset Management Company (AMC), which was 
supposed  to  take  over  banks'  non-performing  loans,  particularly  from  the  tourist  sector. 
Although the AMC was already created by the 2014 revised budget law, an additional law and 

11 

 
operational decrees needed to make the AMC fully operational are still pending parliamentary 
approval. However, the idea of an AMC has been almost abandoned, given the AMC would 
have as  main task to  manage and work-out the bad loans to the tourist sector, which would 
lead to the closure or downsizing of quite a few hotels or resorts. With the tourist sector now 
immersed  in a serious  crisis because of the terrorist  attacks,  it is  politically harder  to create 
now  a  bank  that  will  increase  pressure  for restructuring,  much  as  this may  be  economically 
necessary. The central bank is working, with World Bank assistance, on possible alternatives. 

A new central bank law, prepared with technical advice from the IMF, has been submitted to 
parliament  in  November  (as  foreseen  under  the  MFA-I  second  tranche  conditions).  The 
proposed law contains provisions aimed at bringing it in line with the provisions of the new 
2014  Constitution,  including  amendments  to  strengthen  its  governance  and  establishing  its 
function  as  a  lender  of  last  resort.  A  revised  banking  law,  including  key  aspects  such  as  a 
banking resolution mechanism, new prudential regulations and improved governance and new 
bank bankruptcy provisions, which is a condition in the MoU for the disbursement of the 3rd 
tranche  of  the  EU's  ongoing  MFA-I,  is  also  pending  parliamentary  approval.  This  law  also 
includes  the  creation  of  a  deposit  guarantee  scheme,  which  is  also  part  of  MFA  I’s 
conditionality. 

There has been some progress with the reform of the regressive and inefficient price subsidy 
system but not as much as originally intended. Energy price increases (on electricity and gas, 
as  well  as  fuel  products)  were  implemented  in  2012,  2013,  and  2014,  but  the  decline  in 
international oil prices has in part reduced the need for further price increases (in fact, in some 
cases international fuel prices have fallen below domestic ones). A key reform in the current 
political and economic context that should be actively pursued by government, also urged by 
the  IMF,  is  the  introduction  of  an  automatic  price  adjustment  formula  for  electricity  prices 
(which remain on average about 20% below cost-recovery).    

The  social  safety  net  needed  to  compensate  poorer  households  for  the  impact  of  the  energy 
price subsidy reform is not yet in place, although, in the meantime, provisional measures have 
been taken to strengthen the performance of the existing cash-transfer programmes, mainly by 
increasing  the  monthly  allocations  and  the  number  of  beneficiaries.  As  foreseen  under  the 
MFA-I  policy  conditions  for  the  2nd  and  3rd  tranches,  the  government  is  working  on 
improving  the  targeting  of  the  existing  social  programmes,  including  by  conducting  a  large 
evaluation  of  the  current  programmes,  and  by  advancing  in  the  completion  of  a  unified 
registry  for  users.  A  more  comprehensive  and  better  targeted  cash  transfer  compensation 
scheme is supposed to be introduced once work on the development of a unified registry for 
users is completed. 

Other economic reforms, particularly related to the business climate, have been hampered by 
the delays in the legislative agenda, although the recent adoption in August 2015 of the law 
on  competition,  and  progress  made  on  the  bankruptcy  and  Public  Private  Partnership  (PPP) 
laws,  which  have  both  been  adopted  by  Cabinet  in  November  2015,  are  encouraging 
developments. 

Another  area  where  structural  reforms  continue  to  be  needed  is  public  finance  management 
(PFM).  One  key  challenge  in  the  area  of  PFM  reform  is  to  increase  the  transparency, 
accountability and effectiveness of external and internal audit. Also, the management of the 
investment  budget  suffers  from  very  slow  and  sometimes  arbitrary  procedures  to  identify, 
select,  and  formulate  projects.  The  EU's  PAR-5  programme  (to  be  adopted  in  December 
2015)  is  specifically  targeting  the  improvement  of  the  budget  structure  by  supporting  the 
implementation  of the GBO (Gestion  budgetaire par objectives) programme. In  addition,  an 
updated  Public  Expenditure  and  Financial  Accountability  (PEFA)  assessment,  based  on  the 
World Bank’s methodology, is expected to be finished by the end of 2015 (the last one dates 
from 2010).  

12 

 
Progress  has  been  made  in  the  reform  of  the  statistical  system,  partly  reflecting  the  policy 
conditionality in the EU’s MFA-I and PAR-4 operations, which built on the comprehensive 
assessment  of  Tunisia’s  statistical  system  produced  by  Eurostat  in  2014.  A  new  code  of 
statistics  has  been  adopted  by  the  government,  and  represents  a  significant  step  towards 
improved  governance  of  the  national  statistics  system,  where  further  reform  is  nevertheless 
needed. 

While Tunisia already has a relatively open trade regime, it could benefit from further trade 
liberalisation.  Following  the  Sustainability  Impact  Assessment  (SIA)  carried  out  by  an 
independent contractor in 2013, the preparatory process (“scoping exercise”) for the launch of 
Deep and Comprehensive Free Trade Agreement (DCFTA) negotiations with the EU has now 
been  completed  and  formal  negotiations  were  finally  launched  in  October  2015.  MFA-I  is 
also  supporting  the  preparations  for  the  negotiations  of  an  Agreement  on  Conformity 
Assessment  and  Acceptance  (ACAA)  of  industrial  products,  including  by  reforming  of  the 
institutional framework for market surveillance in order to better align it with the legislative 
framework in the area adopted by the EU in 2008. 

The  conditionality  of  the  proposed  new  MFA  operation  would  continue  to  support  the 
country’s structural reform agenda, particularly the Strategic Development Plan for the period 
2016-2020 to be launched in February 2016, and in close coordination with the conditionality 
of the new programmes to be agreed with the IMF, the World Bank and other donors, as well 
as with the budgetary support operations financed by the ENI. 

2.

OBJECTIVES  AND  MONITORING 
ASSISTANCE 

2.1  Objectives 

INDICATORS  OF  THE  MACRO-FINANCIAL 

The objectives of the proposed MFA operation are to:  

i)  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  transition  and  developments  in  the  region,  which  has  been  exacerbated  by  the 
impact of the terrorist attacks. 

ii)  Alleviate Tunisia's budgetary financing needs. 

iii) Support the fiscal consolidation effort and external stabilisation in the context of the IMF 

programme. 

iv)  Support  structural  reform  efforts  aimed  at  improving  the  overall  macroeconomic 
management,  strenghening  economic  governance  and  transparency,  and  improving 
conditions for sustainable growth. 

v)  Facilitate  and  encourage  efforts  by  the  Tunisian  authorities  to  implement  measures 
identified  under  the  EU-Tunisia  Action  Plan,  supporting  regulatory  convergence  and 
economic integration with the EU and strengthen the EU's economic policy dialogue with 
the authorities. 

2.2  Monitoring 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:  

i)   Progress with macroeconomic and financial stabilisation, notably by assessing the degree 

of adherence to the IMF-supported programme.  

13 

 
 
 
 
 
 
ii)  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. 

3.

DELIVERY MECHANISMS AND RISK ASSESSMENT 

3.1 

Delivery mechanisms 

The MFA-II operation under consideration would amount to maximum of EUR 500 million. 
Given the proposed size of the operation, the European Commission is considering releasing 
the  assistance  in  three  instalments  of  EUR  200  million,  EUR  150  million  and  EUR  150 
million. The first instalment would be disbursed in the middle of 2016, the second in the last 
quarter of 2016 and the last in the first quarter of 2017.  

The  Commission  proposes  providing  the  full  amount  of  the  assistance  in  the  form  of  a 
medium-term loan. This is consistent with the methodology for determining the use of grants 
and  loans  in  EU  MFA,  as  endorsed  by  the  Economic  and  Financial  Committee  in  January 
2011, which takes into account the following criteria:  

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  4,210  is  the  sixth  highest  per 
capita  income  in  the  Southern  neighbourhood,  after  Israel,  Lebanon,  Libya,  Algeria  and 
Jordan.  

Secondly, while Tunisia’s public debt ratios have significantly increased in recent years, the 
public  debt  dynamics  are  judged  to  be  sustainable  and  debt  ratios  remain  at  a  significantly 
lower level than those of its regional peers. The public debt-over-GDP stood at 50% of GDP 
at the end of 2014 and is expected to peak at 61.2% in 2018 before reversing the trend. Total 
external  debt,  for  its  part,  stood  at  56%  at  the  end  of  2014  and  is  also  expected  to  peak  in 
2018, at 72.3% of GDP. 

Thirdly, Tunisia  is  not eligible for concessional financing from either  the IDA or  the  IMF's 
Poverty Reduction and Growth Trust.  

3.2 

Risk assessment 

There are fiduciary, credit, 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 of the Central Bank of Tunisia. Moreover, the 
Commission  services  have  conducted,  in  January  2014,  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 that determined 
that  the  framework  for  sound  financial  management  of  macro-financial  assistance  is 
sufficiently effective in Tunisia. 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 

14 

 
 
responsibility of the Commission, including the European Antifraud Office (OLAF), and the 
European Court of Auditors.  

A  second  risk  stems  from  the  possibility  that  the  Tunisia  will  fail  to  service  the  financial 
liabilities  towards  the  EU  stemming  from  the  proposed  MFA  loans  (default  or  credit  risk), 
which  could  be  caused  by  a  significant  additional  deterioration  of  the  balance  of  payments 
and fiscal position of the country or/and by unforeseen political events. This risk is mitigated 
however by the fact that the EU’s MFA would be part of an international package of official 
assistance led by the IMF that is supporting an adjustment and reform  programme  aimed at 
restoring fiscal and balance of payments sustainability through the implementation of a series 
of policy measures, included those listed in the MoU attached to the proposed MFA from the 
EU.  Moreover,  the  risks  for  the  EU  budget  are  covered  by  the  provisioning  of  the  EU’s 
Budget Guarantee Fund for External Actions. 

Another  key  risk  to  the  operation  stems  from  the  domestic  security  situation,  in  particular 
related  to  possible  terrorist  attacks,  which  could  further  destabilise  key  economic  sectors, 
weaken the authorities' political determination to implement the necessary economic reforms 
and fuel social unrest. 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  MFA-II.  There  are  also  considerable  risks  from  the  regional 
political situation conflict, notably the conflict in Libya, which is having a negative impact on 
Tunisia's economic and social situation, including through the flow of Libyan refugees. 

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 and balance of payments situation. 

Having made a thorough assessment of the risks, the Commission services consider that there 
are sufficient grounds and guarantees to proceed with the proposed 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 Union's 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  promoting  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 

15 

 
 
region  that  the  EU  is  ready  to  support  countries  like  Tunisia,  embarking  on  a  clear  path 
towards political reforms, in challenging economic circumstances. 

5.

ASSESSMENT OF CRITERIA APPLICABLE TO MACRO-FINANCIAL ASSISTANCE2 

5.1 

Exceptional Character and Limited Timeframe 

The  MFA-II  operation  would  be  exceptional,  aiming  to  support  the  restoration  of  a 
sustainable  external  finance  situation  of  Tunisia.  It  would  run  in  parallel  to  the  IMF 
arrangement succeeding the current SBA programme, which is expected to be in place by the 
spring  of  2016.  The  proposed  MFA-II  would  only  be  implemented  if  such  an  IMF 
arrangement is put in place, and only during a strict timeframe covering part of the new IMF 
programme  period. Against this background and given the expected time of approval of the 
programme, the assistance is expected to be implemented in 2016-2017. The disbursement of 
the first tranche  could take place  in  the middle  of 2016 provided that  the IMF program has 
been signed and 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  2016  and 
first half of 2017, 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  effective  democratic 
mechanisms  (including  a  multi-party  parliamentary  system)  and  the  rule  of  law  and  that 
guarantee human rights, and with which the EU maintains close political and economic links. 
Countries that are covered by the ENP are eligible for MFA. 

Political  preconditions:  A  pre-condition  for  granting  MFA  is  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, a political transition ensued that culminated 
in  2014  with  the  approval  of  a  new  Constitution,  parliamentary  and  presidential  elections. 
Tunisia's successful progress in transitioning towards a democratic political system represents 
a  unique  case  in  the  region,  in  particular  when  compared  with  other  Arab  countries  that 
attempted  a  similar  path  following  the  2011  Arab  Spring.  In  this  context,  the  political 
preconditions for MFA are considered to be satisfied.3 

EU-Tunisia  relations:  The  EU  and  Tunisia  have  developed  a  close  political  and  economic 
relationship. In 1995, Tunisia became the first country in the Southern Mediterranean to sign 
an  Association  Agreement  with  the  EU,  which  entered  into  force  in  1998.  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  the 
period  2013-2017.  Tunisia is  also  a  member  of  the  Union  for  the  Mediterranean.  Economic 
ties  with  the  EU  are  very  important.  In  2014,  the  EU  was  the  source  of  about  65%  of 
Tunisia’s imports and the destination of about 73% of its exports, the highest shares observed 
in  the entire EU neighbourhood.  Tunisia has also a high  dependence on the EU in  terms of 
FDI  and  other  financial  flows,  remittances  and  tourism  inflows.  Tunisia  finalized  the 

2 Established Commission practice in line with the Joint Declaration by the European Parliament and the Council 
adopted together with Decision No 778/2013/EU of the European Parliament and of the Council of 12 August 
2013 providing further macro-financial assistance to Georgia, OJ L 218, 14.8.2013, p. 15.    
3A complete assessment of the satisfaction of the political precondition for MFA is provided by the European 
External Action Service, as it is standard practice, as an annex to this document. 

16 

 
 
                                                            
dismantling  of  tariffs  for  industrial  products  in  2008.  The  ambitious  relation  the  EU  and 
Tunisia are building is also symbolised by the agreement the two parties signed in 2014 on a 
"Privileged  Partnership"  and  by  the  launching  on  13  October  2014  of  the  negotiations  on  a 
Deep  and  Comprehensive  Free  Trade  Agreement,  which  should  eventually  allow  Tunisia  to 
fully access the EU’s single market. 

In  sum,  Tunisia  has  taken  very  important  steps  towards  establishing  a  fully-fledged 
democratic system. The country has also adopted a comprehensive economic stabilisation and 
reform  agenda,  supported  by  the  IMF,  the  EU  and  other  donors,  and  enshrined  also  in  the 
government's  Recovery  and  Transformation  Programme  for  2016-2020,  which  aims  at 
developing a sustainable, employment generating and equitable growth model. In this context, 
the EU is strongly committed to supporting Tunisia in its transition process. There is also a 
solid and intensifying framework of bilateral relations between the EU and Tunisia under the 
Association Agreement, the ENP and other recent initiatives, including the plan to conclude a 
DCFTA.  

5.3 

Complementarity 

The  proposed  MFA-II  would  complement  the  assistance  provided  by  other  multilateral  and 
bilateral  donors  in  the  context  of  the  new  IMF-supported  economic  programme.  The  total 
financing to be provided by donors other than the EU remains has yet to be fully identified 
but,  based  on  the  information  currently  available  and  assuming  an  IMF  of  a  structure  as 
described  in  the  previous  section,  multilateral  and  bilateral  donors  are  expected  to  cover  at 
least  62%  of  the  estimated  external  financing  gap  for  the  period  2016-17,  ensuring  a 
reasonable  burden-sharing.  The  EU’s  MFA-II  would  also  complement  the  standard  EU  aid 
packages  mobilised  under  the  ENI  and  the  Umbrella  programme,  and  in  particular  the 
conditionalities  envisaged  under  the  PAR-5  package.  By  supporting  the  adoption  by  the 
Tunisian  authorities  of  an  appropriate  framework  for  macroeconomic  policy  and  structural 
reforms,  the  EU’s  MFA-II  would  enhance  the  added  value  and  effectiveness  of  the  EU's 
involvement through other financial instruments. 

5.4 

Conditionality 

Disbursements  under  the  proposed  MFA-II  operation  would  be  conditional  on  successful 
programme reviews under the IMF programme and on the effective drawing by Tunisia of the 
funds  available  under  the  IMF  financial  arrangement.  In  addition,  the  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 would 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.  They  would  be  consistent  with  the  main  economic  reform  priorities  agreed 
between the EU and Tunisia in the context of the ENP Joint Action Plan and other strategic 
documents. They will also build upon the structural reforms implemented under MFA-I.  

The 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;  tax 
reforms;  reforms  to  strengthen  the  social  safety  net;  labour  market  reforms;  financial  sector 
reforms;  and  measures  to  improve  the  regulatory  framework  for  trade  and  investment, 
including measures that could prepare the ground for the future DCFTA agreement. 

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 

17 

 
amounts disbursed in the guarantee fund for external lending of the EU, from budget line 01 
03  06  ("the  provisioning  of  the  Guarantee  Fund").  Assuming  that  the  first  and  second  loan 
disbursements (amounting to EUR 250 million and EUR 150 million respectively) are made 
in 2016 and the third loan disbursement (amounting to EUR 150 million) in 2017, and in line 
with  the  rules  governing  the  guarantee  fund  mechanism,  the  provisioning  will  take  place  in 
the  2018-19  budgets.  This  somewhat  frontloaded  distribution  of  tranches  takes  into  account 
the pressing external financing needs of Tunisia, concentrated in 2016. 

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  undertook  in 
2013  (in  preparation  of  the  MFA-I  operation  for  Tunisia)  an  Operational  Assessment  that 
provided  a  broadly  satisfactory  assessment  of  the  reliability  of  the  financial  circuits  and 
administrative  controls  at  the  Ministry  of  Finance  and  the  Central  Bank  of  Tunisia.  This 
assessment remains valid, and developments in this area are closely monitored thought regular 
progress reports  on  PFM  reforms  produced  by  the  EU  Delegation in  Tunis.  In  addition,  the 
results  of  the  new  Public  Expenditure  and  Financial  Accountability  (PEFA)  assessment  of 
Tunisia (produced by the World Bank, the African Development Bank and the EU), which is 
expected  to be  completed  in  February  2016,  will  also  help  to  monitor  progress  and identify 
remaining challenges in the area of PFM in Tunisia. 

6.

EVALUATION AND COST-EFFECTIVENESS 

This  assistance  is  of  exceptional  and  macroeconomic  nature  and  its  evaluation  will  be 
undertaken in line with the standard Commission procedures.  

6.1 

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 
the 
included 
macroeconomic assistance budget line will be used for this evaluation.  

the  Memorandum  of  Understanding.  Budget  appropriations  from 

in 

6.2 

Achieving cost-effectiveness 

The proposed assistance would entail a high degree of cost effectiveness for several reasons:  

i)   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.  

ii)  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.  

iii)  All  of  the  assistance  would  be  provided  in  the  form  of  loans,  the  budgetary  impact  of 

which is more limited. 

iv)  Finally,  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).  

18 

 
 
 
 
 
ANNEX 

Head of Division 

EUROPEAN EXTERNAL ACTION SERVICE 

Middle East and North Africa 
MENA.4. Maghreb 

Brussels, 16 January 2016 
GL/lb  Ares(2015) 6531052 

ASSESSMENT ON TUNISIAN POLITICAL REFORMS 

Following  the  political  crisis  of  2013-2014  (the  period  of  the  first  MFA  programme's 
inception),  2014  finally  saw  the  adoption  of  the  new  progressive  Constitution.  On  its  basis, 
legislative and presidential elections were held in the end of 2014 and in February 2015 the 
new President and the new government took office. 

Democratic transition continues despite daunting challenges 

Following the revolution and the ousting of President Ben Ali on 14 January 2011, a political 
transition  ensued  that  culminated  in  2014  with  the  approval  of  a  new  Constitution, 
parliamentary  and  presidential  elections.  Tunisia's  progress  in  transitioning  towards  a 
democratic  political  system,  despite  substantial  challenges,  represents  a  unique  case  in  the 
region, in particular when compared with other Arab countries that attempted a similar path 
following  the  2011  Arab  Spring.  Consequently,  the  political  preconditions  for  Macro-
Financial Assistance may be considered to be satisfied. 

The  year  2015  brought  to  the  forefront  all  the  serious  interconnected  challenges  that  the 
Tunisian democratic transition is facing:  a critical security situation, the need to pursue the 
democratic  transition  in  an  increasingly  challenging  environment  both  internally  and 
regionally (notably impact of the Libyan crisis) and a dire socio-economic situation.  

The social and political climate has deteriorated in the second part of the year, with a number 
of  strikes  and  difficult  negotiations  over  reforms  between  government  and  social  partners, 
including the social dialogue on salaries. Despite the attribution of the Nobel Peace Prize to 
the  Tunisian  National  Dialogue  Quartet  (the  Tunisian  General  Labour  Union  (UGTT),  the 
Tunisian  Confederation  of  Industry,  Trade  and  Handicrafts  (UTICA),  the  Tunisian  Human 
Rights League (LTDH), and the Tunisian Order of Lawyers) the general climate between the 
social  partners  is  tense;  moreover,  in  the  absence  of  a  strong  reform  agenda  on  the 
government side, much needed socio-economic reforms have not been adopted in 2015.  

It is hoped that by the beginning of 2016 the resolution of the on-going political crisis within 
the major political party, Nidaa Tounes (of which the President is the main founder) and that 
following  the  adoption  of  the  2016  budget,  the  announced  government  reshuffle  will 
contribute to strengthen government action so that much waited reforms could finally see the 
light. The long-awaited new 5 years development plan is now announced for.   

The  three  major  terrorist  attacks  in  2015  (Bardo  Museum  in  March,  Sousse  hotel  beach  in 
June  and  presidential  guard's  bus  in  Tunis  in  November)  have  exposed  the  difficulties  in 

19 

 
 
 
 
 
 
 
 
 
implementing security sector reform at the same time as tackling major security threats. They 
have aggravated current difficulties, by exposing the weaknesses of authorities in dealing with 
this critical situation, with the risk that short term (authoritarian) reflexes will prevail, at the 
expense of the long term interests of the transition. Following the terrorist attack, the already 
weak  economy  is  further  suffering  from  the  collapse  of  tourism  (7%  of  GDP,  15%  with 
tourism-related  activity),  affecting  the  growth  (expected  around  0%  for  2015)  and 
unemployment rates (the latter over 30% among youth). Civil society actors are increasingly 
concerned by the growing number of reported cases of torture and mistreatment in detention, 
and more generally by their diminishing influence in a public debate that reveals the absence 
of a strong democratic culture in society. 

If Tunisians today generally enjoy all major fundamental freedoms, the genuine consolidation 
of  democracy  continues  to  face  strong  resistance  from  parts  of  the  political  and  economic 
elites as well as institutional structures. The implementation of the new Constitution is taking 
longer than planned; nonetheless two organic laws creating the Constitutional Court and the 
High  Judicial  Council  were  adopted  by  Parliament  in  November.  A  number  of  reforms  are 
still needed to create the independent bodies foreseen by the new constitution, and ensure that 
the  justice  and  security  sectors  inherited  from  the  dictatorship  implement  in  practice  all 
constitutional  rights.  The  independence  of  the  judiciary,  access  to  justice  and  right  to  a  fair 
trial, prohibition of torture, fight against domestic violence, rights of migrants, are among the 
issues where urgent measures are needed.  

EU-Tunisia relations 

The  EU  and  Tunisia  have  developed  a  close  political  and  economic  relationship.  In  1995, 
Tunisia  became  the  first  country  in  the  Southern  Mediterranean  to  sign  an  Association 
Agreement  with  the  EU,  which  entered  into  force  in  1998.  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 
the  period  2013-2017.  Tunisia  is  also  a  member  of  the  Union  for  the  Mediterranean. 
Economic ties with the EU are very important. The ambitious relation the EU and Tunisia are 
building is also symbolised by the agreement the two parties signed in 2014 on a "Privileged 
Partnership"  and  by  the  launching  on  13  October  2015  of  the  negotiations  on  a  Deep  and 
Comprehensive Free Trade Agreement, which should eventually allow Tunisia to fully access 
the EU’s single market. 

During  2014-2015  the  EU-Tunisia  relations  progressed  to  a  varying  degree  on  a  number  of 
issues,  with  important  EU  mobilisation  in  the  second  half  of  2015,  following  the  Sousse 
attack. 

Negotiations  towards  the  EU-Tunisia  Deep  and  Comprehensive  Free  Trade  Area:  The 
Tunisian PM officially announced Tunisia's readiness to start DCFTA negotiations during his 
visit  to  Brussels  on  27  May  and  confirmed  in  July.  This  decision  comes  despite  the  strong 
divisions among the Tunisian political class, civil society and social partners. Commissioner 
Malmstrom  launched  the  negotiations  on  13th  October  2015  with  the  preliminary  technical 
round held already in October. The next round is expected in March 2016. 

Agriculture  and  olive  oil  quotas:  In  response  to  the  major  economic  losses  suffered  by  the 
Tunisian  tourism  sector  after  the  Sousse  attack,  and  due  to  the  importance  of  the  olive  oil 
industry  in  the  country’s  economy,  in  September  2015  the  Commission  has  put  forward  a 
proposal for a unilateral increase of annual quota by 35.000 T. It should be adopted by the EP 
and the Council in February, despite resistance of some Member States, themselves concerned 
by olive oil production. COM has already facilitated the management of the quota for olive oil 

20 

 
 
 
 
 
 
 
for the 2015 campaign by reorganising monthly quotas and the same measure will be applied 
for  the  2016  campaign.  (In  Tunisia,  olive  oil  production  provides  direct  and  indirect 
employment  to  more  than  one  million  people  and  represents  one-fifth  of  the  country’s  total 
agricultural employment). 

Following an official request by Tunisia in January 2015, and a number of negotiation rounds, 
the  EU  and  Tunisia  signed  the  agreement  on  Tunisia's  association  to  the  Horizon  2020 
Research  and  Innovation  programme  on  1  December  2015.  Pending  Tunisian  parliament's 
ratification, Tunisian researchers are eligible to participate in the H2020 calls for proposals as 
of 1 January 2016. 

Preparations  by  Tunisia  for  negotiations  of  an  Agreement  on  Conformity  Assessment  and 
Acceptance  of  Industrial  Products  (ACAA)  in  the  fields  of  construction  materials  and 
electrical products are very advanced but not completed.  

The negotiations on the Air Services Euro-Mediterranean Agreement to liberalise air transport 
have not progressed in 2015, mainly due to the Tunisian economic concerns. 

The Mobility Partnership between the EU, ten Member States (Belgium, Denmark, Germany, 
Spain,  France,  Italy,  Poland,  Portugal,  Sweden  and  the  United  Kingdom)  and  Tunisia  was 
signed on 3 March 2014 through the signature of a Joint Declaration. The implementation of 
the Declaration includes negotiations and an agreement on visa facilitation and readmission.  
Tunisia might be ready to start this process in the first semester of 2016. The readmission of 
third country nationals is the major irritant. 

In  sum,  while major  political,  security,  economic  and  social  challenges  intensify,  Tunisia 
has made substantial progress towards establishing a fully-fledged democracy based on the 
rule of law and respect for human rights. The EU is fully committed to support Tunisia in 
this  challenging  transition  process.  In  this  context,  the  political  preconditions  for  Macro-
Financial Assistance may be considered to be satisfied, although they will have to be closely 
monitored during the life of the proposed Macro-Financial Assistance operation. 

21