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Current account deficit enters a spin, but foreign currency assets up to 108 days

Meeting on December 25, 2013, the Executive Board of the Central Bank of Tunisia has taken three important measures mainly monetary.

First a technical adjustment of the intervention rate of the BCT on the money market by increasing the key interest rate of the Central Bank by 50 basis points , from 4 % to 4.5% , and tighten the corridor of these rates by adopting symmetrical margins of 25 basis points for deposit and loan facilities.

The BCT also decided to reduce the rate of statutory reserve of banks in the Central Bank from 2% to 1%.

Similarly, it took note of the increase in the minimum rate of return on savings at 3.25 % and the adoption of the exchange swap instrument among the tools of intervention of the Central Bank to regulate the money market. It also took note of the circular to credit institutions to be released on strengthening requirements for covering credit risks by provisions.

These decisions were taken in view of the money market situation and the need for its regulation, and given the requirements of monitoring financial stability on the one hand and the continued efforts of adequate financing of economic activity, on the other.

Concerning the activity of the main economic sectors, the Board noted a deceleration in industrial production where the increase in the general index of production was limited, in August 2013, to 0.3% yoy against 4.2% a year earlier, following in particular a contraction in non- manufacturing production. However, the Board stressed the positive developments in exports in textile, clothing, leather and footwear, and mechanical and electrical industries, in addition to the resumption of imports of raw materials and semi-finished products. Moreover and on services, the Board noted a decline in tourism indicators in November 2013 parallel to the air transport activity.

Regarding inflation, it stressed the stability of the evolution of the general index of consumer prices for the third consecutive month at 5.8% yoy in November 2013, bringing the average inflation rate to 6.1% during the first eleven months of 2013, against 5.5% during the same period last year. Concerning inflation, (i.e. excluding controlled and fresh commodity prices), this rate posted a relative decline in its growth rate to reach 6.7% yoy in November 2013 against 6.9 % in October.

In this respect, the Commission considers that the current price levels are one of the main factors of tension in financial balances, since some indicators point to the risk of further inflationary pressures in the coming months.

On the external sector, the Board l expressed its concern about the continuing pressures on the balance of current payments, which brought the current deficit to 7.1% of GDP deficit in the first eleven months of the year against 7.6% a year earlier, and this in relation to the continuing trade deficit at a high level, averaging 958 MTD per month, despite a 1.5% decline recorded over the same period of 2012.

However, the impact of the deficit on foreign exchange reserves have been mitigated by the mobilization of external resources combined with improved flow of foreign direct investment over the period by 12.5% , bringing the net foreign currency assets to nearly 11,736 MTD or the equivalent of 108 days of import to December 24, 2013, against 11,324 MTD and 103 days at the end of last September.

In terms of the evolution of monetary indicators, the Board noted the increased liquidity needs of banks during the month of December 2013. Consequently, and in order to ease tensions in the money market , the Central Bank has made refinancing operations on this market which reached a total volume of 4,793 MTD on average per day against 4,537 MTD last November. Concurrently with the evolution of bank liquidity, the average interest rate on the money market rate reached 4.74% since early December against 4.75% the previous month.

When reviewing recent activity indicators of the banking sector in the first eleven months of the year, the Board noted that the outstanding deposits resumed their growth pace recorded during the same period 2012 (6.3% against 6%). However, the slowdown in the pace of lending to the economy continued compared to the same period of the previous year (6% against 8.1%).

Regarding the development of the exchange rate, and parallel to the emergence of signs of easing of the political situation at the national level and better conduct of operations on the interbank foreign exchange market, the dinar posted an increase in its value since the beginning of the current month, by 0.5 % and 1.2% vis-à-vis the euro and the dollar, respectively. This relative improvement cannot, however, obscure the continuing pressures on the domestic exchange market.

In light of these developments, the Board concluded that further developments since several months, both in terms of balance of payments or at the level of inflation or exchange rate, have increased pressure on production sectors and both internal and external financial balances, which requires the adoption of necessary urgent measures in order to limit their effects on the one hand, and accelerate the pace of structural reforms, economic, financial and institutional which are indispensable, on the other.

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