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Tunisia : The World Bank approves a US 250 million loan for competiveness

The World Bank’s Board of Executive Directors approved an Integration and Competiveness Development Policy Loan (DPL) in the amount of US 250 million.

This Integration and Competiveness Loan supports the key strategic elements of Tunisia’s 11th National Development Plan (2007-11) which seeks to strengthen growth and ensure that this growth is translated into employment.

The overall objective of the new DPL is to support efforts to deepen Tunisia’s global integration and enhance the capacity of Tunisian firms to exploit the opportunities offered by greater integration. More specifically, the program would support mutually reinforcing the following development objectives:
The Integration and Competitiveness Development Policy Loan is a core element of the Bank’s Country Assistance Strategy (FY05-08) and the Country Assistance Strategy Progress Report (2007) that set out an indicative program for FY09-10. It constitutes a strong support of the first pillar of the CAS which seeks to “strengthen the business environment to support the development of a more competitive, internationally integrated private sector and improve competitiveness of the Tunisian economy”.

The new project is also expected to be a major component of the new World Bank/Tunisia Country Partnership Strategy currently under preparation.
Reducing trade transaction costs and deepening Tunisia’s global economic integration;

Further improving the business climate to enhance competitiveness of Tunisian firms, including services; and;
Strengthening the financial sector to increase its capacity to finance private investment.

The loan will also help Tunisia finance its budget deficit and maintain macroeconomic stability in the current international economic environment especially as the Government does not intend to seek financing from the international bond market in 2009.

The World Bank’s support

World Bank says that Tunisia faces today two interrelated challenges: to grow at a much faster rate than in the past to reduce high unemployment (14 %), and to accelerate the structural transformation of the economy to a knowledge-based, skill-intensive and technology-based economy.
In its 11th National Development Plan (2007- 2011), the Government clearly reaffirms its objective to deepen and widen the global integration of Tunisia by shifting away from just facilitating the economy’s adjustment to openness towards a more ambitious and deeper global integration agenda.
The proposed program is underpinned by the Global Integration Study

The study took stock of Tunisia’s integration policies since the early 1970s, examined the key remaining integration challenges that the country’s manufacturing sector is facing and proposed further reforms to enhance the competitive position of the country; and identified the specific policy reforms needed to realize the largely untapped potential in services.
Data on Tunisia’s main sectors
The services sector (59% of GDP) has been the engine of growth (7% annual growth on average in 2000-2007) thanks to dynamism of telecommunications, transport and commerce-while growth in tourism remained modest.

In the manufacturing sector (17 % of GDP), the mechanical and electrical sector witnessed a double digit growth in both investment and exports. In 2008, the sector accounted for 27 % of merchandise exports (against 13 % in 1995) and captured 31 % of Foreign Direct Investment flowing to the manufacturing sector (against 13.7 % in 1995).

The textile sector (33 % of exports), on the other hand, weathered well to the external shock of the multi-fibre agreement (MFA) dismantling, as many Western European firms having invested in Eastern Europe switched to countries like Tunisia due to rapid increase in wages following the Eastern European countries’ EU accession.

During the past decade, Tunisia’s growth averaged 5 percent with a capacity to resist external economic threats thanks to the establishment of structural reform and a prudential macroeconomic management.

Yet, this performance is insufficient to reduce unemployment, which stands at 14 percent. A growth rate even higher is deemed necessary to achieve the government’s employment objectives.

Nonetheless, Tunisia is entering a new phase in its integration process and despite the impressive results achieved so far, important challenges remain.

The 11th plan’s growth (2007-2011) considers global integration is one of the main reliances to boost growth
The 11th plan’s growth targets a growth of 6.1 percent. This would require a significant increase in investment and exports. Precisely, investment (including FDI) would need to increase significantly from 23 percent of GDP currently to 25.3 percent by 2011.

Second, trade needs to play an even greater role than in the past, as exports and imports should increase annually by 7 and 6 percent respectively.

 Since the early 1970s, Tunisia’s trade policy has rested on three pillars :

The first is promoting exports, through generous incentives to attract foreign direct investments (FDI) in the “offshore” sector, incentives to exporting firms, and trade agreements.
The second is protecting domestic industries and strictly regulating markets.

Since mid-nineties, national industries have been gradually deprotected .

The third pillar is more recent, and concerns trade facilitation.
Tunisia’s trade opening approach has been preferential (its opens up vis-à-vis preferential partners and maintains a high protection vis-à-vis non-preferential partners).

The country now faces a dilemma: maintaining the current large gap between preferential and the “most-favored nation” tariffs may fuel fraud and parallel market while reducing the gap may hurt production and jobs.

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