Report No. 29669 Republic of Tunisia Country Assistance Evaluation July 13, 2004 Operations Evaluation Department Document of the World Bank Contents ........................................................................................................................................................... i Preface Summary .................................................................................................................................................... ... iu 1. Tunisia’s Socioeconomic Development: Progress Achieved and Challenges Ahead Background.......................................................................................................................................... 1 Poverty and Social Conditions ............................................................................................................ 3 Debt Burden and External Assistance ................................................................................................. 5 Meeting the Challenges of Globalization ............................................................................................ 6 2 . World Bank Assistance Program ..................................................................................................... 8 World Bank Assistance Strategies ................................................................................................... 8 Economic and Sector Work............................................................................................................ 10 Lending .......................................................................................................................................... 12 OED Findings on Closed Projects ......................................................................................... 13 Portfolio Pe$ormance Assessments ....................................................................................... 13 Efficiency o f World Bank Assistance ............................................................................................ 14 3 . The Development Impact of World Bank Assistance Macroeconomic Stabilization. Growth and Structural Reforms........................................................ 15 Financial Sector Reform ......................................................................................................... 15 Trade Liberalization ............................................................................................................... 17 Private Sector Development and the Enabling Environment ................................................. 18 Human Development and Progress toward MillenniumDevelopment Goals ..................................... 21 Poverty Alleviation and Rural Development ..................................................................................... 24 Outcome, Sustainability and Institutional Development ................................................................... 28 4 . Contributors’ Performance Tunisia’s Own Central Role ............................................................................................................. 30 The World Bank’s Performance ........................................................................................................ 31 Other Development Partners ............................................................................................................. 32 Exogenous Factors............................................................................................................................. 34 5 . Recommendations. ........................................................................................................................... 35 Boxes 1.1 Mise 6 niveau Program (Enterprise Restructuring and Upgrading) ................................................... 7 2.1 World Bank Strategies......................................................................................................................... 9 3.1. Tunisia’s Progress in Meeting the Millennium Development Goals ................................................. 22 Contents (cont.) Figures 2.1 Bank Commitments. Disbursements and Transfers. FY90-03 ............................................................ 8 3.1 Business Climate Indices for Tunisia. MNA and OECD.................................................................. 19 3.2 Education System Expansion at the Post Basic Level ...................................................................... 23 3.3 Net Primary Enrollment .................................................................................................................... 24 3.4 Illiteracy ............................................................................................................................................ 24 3.5 Infant Mortality ................................................................................................................................. 24 Tables 1.1 Tunisia’s Export Diversification. 1980-2001 ...................................................................................... 2 1.2 M a i n Macroeconomic Indicators ........................................................................................................ 3 1.3 Poverty and Inequality Trends in Tunisia, 1990-2000 ........................................................................ 3 1.4 Selected Human Development Indicators in Tunisia and Comparator Countries ............................... 4 1.5 Tunisia-Net Receipts o f External Financial Resources, 1990-01(yearly averages) ............................ 5 2.1 Sectoral Distribution o f World Bank Commitments (FY90-03) ...................................................... 12 2.2 IBRD Proposed and Actual Lending, FY97-02 ................................................................................ 13 2.3 OED Evaluation Findings o f Recently Evaluated Projects by Value (Exit Since FY 90s) ............... 13 3.1 Tunisia and Comparators-Per Capita Income Indicators .................................................................. 15 3.2 Privatization by Sector in million Tunisian Dinar (1987-August 3 1, 2003) ..................................... 20 3.3 Northwest Mountainous Areas Development Project: Selected Results from the 2000 Survey ............................................................................................................................................... 27 Annexes A . Statistical Annexes ............................................................................................................................ 37 B. L i s t o f People M e t o n Mission in Tunisia (and World Bank and IMF Staff Interviewed) ............... 63 C . Guide to OED’s Country Evaluation Rating Methodology .............................................................. 65 D. Management Action Record ............................................................................................................. 69 Attachments 1. The Executive Summary o f the Islamic Development Bank’s Report ............................................. 71 2. Chairperson’s Summary Committee o n Development Effectiveness (CODE) ................................ 75 Bibliography .............................................................................................................................................. 77 Preface This Country Assistance Evaluation (CAE) on Tunisia i s the second cooperative effort with the Operations Evaluation Office (OEO) o f the Islamic Development Bank, following the joint OED-OEO assessment o f the Jordan Program. The two institutions carried out a joint assessment o f Tunisia’s economic and social development since 1990 and the challenges facing the country. There will be two separate reports; the assessments o f each institution’s assistance program were prepared in parallel. This report benefited from consultations and comments from OEO staff; and the two evaluations generally agree on their analysis. The Executive Summary o f the Islamic Development Bank’s report i s attached (Attachment 1). A joint OED-OEO mission visited Tunisia in September 2003. The visit was facilitated by arrangements made by the staff o f the Tunisian Ministry o f Economic Development and International Cooperation. Their cooperation and assistance i s gratefblly acknowledged. The report i s organized as follows: Chapter 1 assesses Tunisia’s socioeconomic development and the challenges ahead. This chapter i s common to the evaluation reports o f both the World Bank and the Islamic Development Bank. The subsequent chapters examine the effectiveness o f World Bank assistance in addressing these challenges. The last chapter makes recommendations. This Country Assistance Evaluation was written by Fareed M.A. Hassan (Task Manager) with contributions by Djelloul AI-Saci (IDB); Adil Ranaan, Isabelle Tsakok, and Elaine W. Ooi (Consultants). Gonzalo Salinas and Janice Joshi provided statistical analysis and administrative support. Ibrahim Elbadawi and Jorge Garcia-Garcia peer-reviewed the report. The assistance o f peer reviewers in providing detailed comments on an earlier draft i s gratefully acknowledged. Those, as well as other comments received during OED’s management review meeting, have been taken into account in the evaluation. Comments from the Regional Management o f the Bank have also been reflected in the report. The Regional response to the Management Action Record i s included as Annex D. Copies o f the draft report were sent to the Government for review, and no written comments were received. ... 111 Summary 1. This Country Assistance Evaluation was prepared in collaboration with the Islamic Development Bank. Tunisia’s socioeconomic development since 1990 and the challenges facing the country were assessedjointly; each institution’s assistance program was evaluated in parallel. 2. Tunisia has successhlly shifted fi-om resource-based exports dominated by o i l and gas to manufactures and services. The economy i s now driven mainly by textiles, electrical and mechanical and food processing exports, tourism and related activities, and production o f olives and cereals. Real GDP growth has been consistently rising: increasing fi-om 3 percent annually over 1985-90 to more than 5 percent annually over 1996-2002. Today with a per capita income o f US$2,000 Tunisians enjoy more than two-and-a-half times the real incomes that their parents had thirty years ago. Tunisia signed an association agreement with the European Union (EUAA) that provides for free trade in manufacturing by 2008. The EU has been Tunisia’s dominant trading partner; the region i s the source o f 67 percent o f capital flows into Tunisia; it accounts for a large share o f Tunisia’s tourism market; and is the region with the largest community o f expatriate Tunisians. As such the economy i s vulnerable to adverse developments in the EU. 3. Rapid growth made possible a remarkable improvement in social indicators, and a decline in the poverty rate from 40 percent in 1970 to 4 percent in 2000; the remaining poverty i s predominately rural. But if the vulnerable population just above the poverty line i s included, the percentage o f the poor would increase by another 6 percentage points to over 10 percent. Addressing vulnerability and rural poverty remains a priority, as does reconciling Bank and Government estimates o f the breakdown o f poverty between rural and urban areas. Tunisia’s social indicators are better on average than the Middle East and North Akita (MENA) region or other lower middle-income countries; it also leads the MENA region in gender equity. Challenges relate to sustaining higher growth, achieving closer integration with the EU, and improving efficiency o f social services, in the face o f Tunisia’s vulnerability to extemal shocks, i t s level o f indebtedness and the more competitive environment i t will likely confront in the future. 4. The Bank’s strategy since 1990, rooted in wide-ranging and influential analytic and advisory activities, was to support macroeconomic stabilization, pro-market structural reforms to foster growth and social programs as well as human development. The strategy was relevant to the Government’s priorities outlined in a series o f national development plans. An increased focus o n the social sectors was aligned with the MillenniumDevelopment Goals (MDGs) and the country’s emphasis o n human resource development. The Bank lending program i s large both in per capita terms and as a share o f the MENA portfolio. Annual average lending commitments for fiscal years 1990- 2003 were US$200 million (or US$20 per capita per year), representing over one-quarter o f the MENA regional portfolio. Annual average net disbursements were only US$27 million, and net transfers were negative for most o f the period. Policy-based lending, in conjunction with various donor programs, accounted for 40 percent o f total lending and addressed trade, financial, and private sector development. Investment loans supported iv mainly rural and hum an development projects. The Bank served as a significant catalyst for mobilizing resources, leveraging nearly US$ 1 for every IBRD dollar. 5. With timely and effective support from the Bank and other donors, Tunisia averted a balance o f payment crisis in the late-1980s and, since then, has maintained a solid record o f macroeconomic stability and remarkable socioeconomic progress. The main attributes o f Tunisia’s success were ownership and broad political consensus, a well-developed humanresource base, and a stable macroeconomic environment. The Bank’s programs successfully promoted policy reforms. Substantial financial sector reforms were achieved as well as the removal o f disincentives for investment and the privatization of public enterprises. Tariffs have been reduced and the economy i s now more open to the outside world. Manufactured exports have grown steadily, increasing their share to 80 percent. The overall soundness o f the banking system has improved, as indicated by progress in prudential ratios. Privatization in the banking sector has also advanced. Bank assistance also contributed to significant progress in the rural and social sectors. The Bank’s major contribution in the rural sector was in putting Tunisian agriculture o n the path o f liberalization, supporting reform measures that contributed to increasing farm incomes in remote areas, and improving resource management sustainability. With Bank support, Tunisia made impressive progress in almost all areas covered by the MDGs, already meeting some targets-and the country i s likely to meet others by 2015. For example, by the mid-1990s almost all children attended school, meeting the MDGs o f universal primary education. Overall, the outcome o f the Bank’s assistance program i s rated satisfactory based on i t s substantial relevance and efficacy. Institutional capacity was strengthened further with the Bank’s support, and institutional development impact i s rated substantial. 6. Despite significant development progress and the satisfactory outcome o f the Bank’s assistance program, shortfalls in some areas, combined with the more competitive environment that Tunisia will likely face in the future, pose risks to sustaining i t s remarkable development performance. Both the low rate o f private investment and the inefficiency o f overall investment are indicators that past growth may be difficult to sustain without deeper reform. One area where progress remained below Bank expectations was promoting private sector development; the government s t i l l plays a significant role in economic activity. In the financial sector, public banks remain large in terms o f assets, and non-performing loans impose a heavy burden o n the sector and pose risks to stability. In trade policy, tariff rates remain above competitors levels and more needs to be done to ensure that discrimination against non-EU trade i s eliminated within the overall framework o f the EUM. Another area where the government’s program needs to be enhanced and the Bank needs to direct i t s attention more than in the past i s the overall efficiency and fiscal sustainability o f social expenditures, as expenditures on social services remain high. Education expansion at the post-basic level and a decline in basic education enrollment due to demographic changes will necessitate efficiency improvements. In the rural sector, addressing issues, such as land tenure, rural finance, non-farm rural development and research and extension, will be important, as these are areas where past Bank assistance programs were less successful. Finally, past positive development outcomes have fostered a large middle class that will press for more participation in the development process. In the past Tunisia has managed well i t s V economic and regional political uncertainties by maintaining social and macroeconomic stability, gradually diversifying i t s export base, and forging closer relations with the EU. Given i t s past record, sustainability o f the achievements i s rated likely. 7. This evaluation recommends that the Bank should continue to support improving the environment for private sector development and enhancing competitiveness as the country seeks to integrate more into the global economy and will confront an increasingly competitive climate in the next few years. Adopting a results-based approach with agreed and monitorable output and outcome indicators embedded in an improved monitoring and evaluation framework would help to anchor the Bank’s assistance program in the future. Specifically, the Bank should (i) help the country pursue trade openness with the EU and the rest o f the world, ( ii) help improve the business environment through regulatory and judiciary reforms, includingmeasures to reduce the flow and stock o f non-performing loans, and ( iii) promote enterprise and financial sector privatization. Future Bank programs should also (iv) help strengthen rural institutions to support efficient output and input markets (for example, land and rural finance) while maintaining social and political stability through better targeted safety nets, AAer 21 years without a rural sector-wide review, the Bank should undertake one to inform i t s fbture programs. Finally, the Bank should also fill the gaps in core diagnostic economic and sector work (ESW) by completing a public expenditure review (PER), a Country Financial Accountability Assessment (CFAA) and a Country Procurement Assessment Review (CPAR). In particular, a PER could help build capacity to prioritize public spending and provide the basis for measures to efficiently address education expansion. Gregory K. Ingram Director-General Operations Evaluation 1 1. Tunisia’s Socioeconomic Development: Progress Achieved and Challenges Ahead 1.1 This Country Assistance Evaluation (CAE) looks at the effectiveness o f World Bank assistance since 1990 from three perspectives: an analysis o f the Bank’s assistance program, development impact, and the contribution o f the Bank and i t s development partners to development outcomes. Annex C describes the methodology. The evaluation builds on background studies, draws on internal World Bank reports, and interviews with Government officials, Bank staff, donors, and civil society. Annex B contains a l i s t o f the people interviewed. The CAE was prepared in collaboration with the Islamic Development Bank. Background 1.2 Tunisia gained i t s independence from France in 1956. As a republic with a strong central authority vested in the President, it has since experienced political stability at a time when its neighborhood has been experiencing significant turmoil. As a moderate Arab country in North Africa, it has managed not to be absorbed within the vortex o f the more complex Middle Eastern politics, while maintaining a good link with i t s Arab neighbors, often serving as an interlocutor, or a political haven. The United States has announced the opening in 2004 o f a regional office in Tunis o f the US-Middle East Partnership Initiative. As with i t s neighbors inNorth Africa, much o f Tunisia’s land is arid, or semi-arid, with as little as 3 percent o f arable land irrigated, while rain-fed agriculture is subject to severe annual fluctuations in rainfall. In 2002, the population o f 9.8 million had a per capita o f US$2,000 (Annex A, table 1). 1.3 After independence, the political leadership opted initially for a dirigiste economic system, with mainly public ownership o f manufacturing industries, banks and other financial institutions. At independence, the country’s most important raw materials were petroleum, natural gas and phosphates. However, o i l and gas productionhas been decreasing as reserves have been depleted, and the quality o f phosphate deposits is poor. As an alternative source o f income, attention has been given to the development o f manufacturing, tourism and other services. At the same time, the country invested heavily in human resource development and paid particular attention to welfare and education. This proved an important contributor to Tunisia’s economic performance in subsequent decades. 1.4 The oil boom o f the 1970s. The multi-fold increase in the price o f crude generated high export revenues that financed significantly higher levels o f investment (30 percent o f GDP), particularly in manufacturing. As a result, real GDP growth averaged 7.4 percent annually throughout the 1970s. High o i l revenues allowed the economy to perform well under the dirigiste system. Directive policies controlling investment and prices were broadly applied, in the context o f protected trade and generous subsidies to enterprises. The priority given to human resource development continued. 1.5 Thefirst hayof the 1980s: decline and apprehension. Problems with economic performance started to emerge in the early 1980s as o i l prices and production levels declined, while high investment levels and public expenditures were maintained. Although 2 Tunisia’s Sixth Five-Year Plan (1982-86) proposed stringent policies, unaffordable investment levels and lax policies continued, leading to a deterioration in the macroeconomic situation. By 1984, inflation had risen to 10 percent, the current account deficit had grown to alrnost 11percent o f GDP, external debt to 46 percent o f GDP, and the debt service ratio to 2 1 percent. By 1985, a balance o f payment crisis appeared imminent. 1.6 The turning point in the mid-1 980s. Faced with growing macroeconomic imbalances, the Government pursued a program o f stabilization and adjustment supported by the World Bank and IIvlF. The reform program proceeded at a gradual but steady pace, consolidating past progress, although the state continued to keep a prominent position in the economy. The fiscal deficit and inflation fell, and GDP grew at 4 percent per annum during 1987-1994. The fiscal and current account deficits have hovered around 4 percent o f GDP since the mid-1990s. 1.7 A newphase o f development by the mid-1990s. Given Tunisia’s limited domestic markets, the Government decided to increase its integration in the world economy to accelerate higher growth. Tunisia became the first country in the region to sign an association agreement with the EU (EUAA) in 1995. The agreement includes provisions for a phased establishment o f a free trade zone for manufacturers over a 12 year period (1996-2008). Also, Tunisia signed bilateral trade agreements with Morocco, Jordan, Libya, Iraq and Syria. The economy i s now more open to the outside world, and imports and exports constitute about 90 percent o f GDP, up from 70 percent in the mid-1980s. This ratio compares favorably to other Middle East and North f i c a (MENA) countries at similar income level (Annex A, table 2k). 1.8 From oil dominated and volatile to more stable and diversi5ed economy. Since the mid-1980s, Tunisia’s exports have been successfully diversified away from resource- based exports dominated by o i l and gas to manufactures (Table 1.1). Export o f manufactures has grown at around 10 percent a year in real terms since 1987, increasing the share o f manufactures in exports to over 80 percent. Tunisia’s Table 1.1: Tunisia’s Export Diversification, 1980-2001 economy i s now driven mainly by 1980 1987 2001 textiles, electrical and mechanical Oil products 52.5 23.5 9.2 Non-oil 47.5 76.4 90.8 equipments, and food processing (in 35.7 60.3 80.7 the manufacturing sector), tourism Chemicals 13.2 18.1 10.0 and related activities (in the services Machinery and Transport Equipments 2.4 6.1 15.4 Food 7.2 12.7 7.9 sector)y and production Of ‘lives Source: UN Comtrade Database; data refer to percentage ratio. and cereals (in the agricultural sector). Tunisia’s major exports are now textiles and leather (making up 50 percent o f exports). Today, Tunisians enjoy more than two-and-a-half times the real incomes that their parents had thirty years ago. The service sector, which accounts for nearly 60 percent o f GDP, has been providing the largest contribution. The industrial sector is the second largest, with about 28 percent o f GDP, and has been fairly dynamic. There are large fluctuations in agriculture’s contribution to growth linked to weather conditions. Nevertheless, agriculture remains a major sector inthe economy, employing about one fourth of the labor force and accounting for h o s t 12 percent o f GDP in 2001. 3 1.9 Tunisia has sustained a very good economic and social performance since the late 1980s by maintaining a stable macroeconomic framework, placing strong emphasis on social achievement, and implementing-although gradually-structural reforms. Table 1.2 reflects progress in macroeconomic performance, while Tables 1.3 and 1.4 show progress in poverty reduction and social development. Table 1.2: M a i n Macroeconomic Indicators 1ndiratnr.v 1986-90 1991-95 1996- 00 2001 2002 Est. 2003 GDP growth (%, real GDP at market price) 2.9 3.9 5.6 4.9 1.7 5.5 Inflation (%, C P I Index) 7.1 5.8 3.4 2.7 2.3 2.1 REER Index (1990=100) 107.9 102.6 104.2 100.9 99.7 -_ Budget Deficit (“A GDP) 3.8 3.7 3.7 3.8 3.5 3.1 Current Account Deficit (“A GDP) 3.9 5.8 3.1 4.7 3.5 3.1 Foreign Direct Investment (% GDP) 0.8 1.6 2.6 2.2 3.8 2.1 Total Public Debt (% GDP) 62.0 60.7 59.4 60.2 64.3 60.2 Gross Foreign Reserves (months o f imports c.i.0 1.9 1.8 2.9 2.5 2.9 2.9 REER refers to real effective exchange rate. Source: Calculations based on data from the World Bank March 31,2001 Social and Structural Review and IMF reports. Poverty and Social Conditions 1.10 R e m a r ~ b l e p r o ~ e s s been made in reducingpoverty. The Bank’s estimate o f has Tunisia’s incidence o f poverty, as measuredby the head count index, dropped from 40 percent o f the population in 1970 to 11percent by 1985 to 8 percent by 1990 and mher to 4 percent by 2000 (Table 1.3). Although rural poverty has also decreased over the years, its level has remainedtwice the national average. However, there i s controversy about the rural poverty incidence (chapter 3). The rural population comprises 35-40 percent o f the population and the rural poor derive their incomes primarily from agricultural activities, which are subject to large fluctuations. These fluctuations have a strong impact on the economy. A one percentage point decrease i n agriculture causes a 0.25 percent decline in overall GDP, stemming from significant indirect effects on manufacturing and service activities that have a linkage with agriculture. The share o f the poor and vulnerable people in the total population-as measuredby the number o f people having expenditures below and about 30 percent above the poverty line-rose from 14 percent in 1990 to 17 percent i n 1995, before falling to 10 percent in 2000. Addressing this vulnerability, and targeting anti-poverty interventions becomes harder as poverty incidence falls. Table 1.3: Poverty and Inequality Trends in Tunisia, 1990-2000 1990 1995 I 2000 National Rural Urban 1 National Rural Urban , National Rural Urban Incidence:National Headcount index (“ho f population) 7,9 14.8 3.3 8.1 15.8 3.2 1 4.1 8.3 1.7 Inequaliq: Gini coefficient 0.40 0.35 0.37 i 1 0.42 0.35 0.39 I 0.41 0.36 0.39 Source: Bank staff estimate for 2000 and World Bank (2000) Country Assistance Strategy, Report No. 20161-TN, B o x 1, page 6. 1.11 Tunisia made impressive achievements in human development in the past 30 years. L i f e expectancy has grown from 55 to 72 years; adult illiteracy has decreased from 64 to 28 percent; and infant mortality has dropped by nearly two-thirds. By the mid-l990s, Tunisia had succeeded in enrolling almost all o f the country’s six-year-olds in first grade, meeting the Millennium Development Goals (IvIDGs) o f universal primary education. Tunisia’s social indicators are better than the average o f MENA countries, as well as other lower 4 middle-income countries (Table 1.4). The UNDP Human Development Report for 2003 ranks Tunisia 91stout o f 175 countries on the human development index, ahead o f other MENA countries at similar income levels (UNDP 2003). 1.12 Tunisia leads the MENA region with regard to gender equity (Table 1.4). The gap between girls and boys in basic education i s low, and more than half o f all university students are women. Compulsory education for girls and boys through grade 9 h as helped bridge the gap between female and male school enrollment rates. The status o f women has improved s t e d l y , with rates o f female labor force participation that are higher than for other countries in the region, but at 32 percent (in 2001) low compared to other low middle-income countries (World Bank data, 2003). Tunisia’s female participation rate in the workforce increased by 4 percentage points during the 1990s. Tunisian women received the right to vote immediately after independence in 1957, before many other MENA countries, and the proportion o f seats held by women in the national parliament was 12 percent in 2001. Tunisia ranks above the MENA average on the U ” s Gender Development Indicator.’ As indicated earlier, this was due to the direct attention given to hu ma n resource development, with particular emphasis on gender equity. Table 1.4: Selected Human Development Indicators in Tunisia and Comparator Countries a Lower & Tunisia MENA middle-income 1970-75 2000-01 1970-75 2000-01 2000-01 Life expectancy (years) 55 72 46 68 69 Total fertility rate (births per woman) 5 2 6.6 3 2 Infant mortality (per thousand births) 94 26 125 43 33 Gross primary enrollment (% o f school-age pop.) 72 119 69 97 107 Male 79 123 103 107 Female 65 116 90 107 Gross secondary enrollment (% o f age group) 22 73 29 64 70 Adult illiteracy (% of pop. 15 years and above) 64 28 67 34 15 Male 51 18 56 24 9 Female 77 39 77 46 21 aData refer to the most recent year available dunng the penod specified. Source: World Bank, World Development Indicators (various issues); details In Annex A, tables 2d and 2e. 1.13 Further progress in the social sectors i s required to consolidate past gains and prepare Tunisia for a more competitive environment in the 21Stcentury. There i s s t i l l room for enhancing the quality and efficiency o f social achievements. For example, the school system i s s t i l l burdened with high dropout and repetition rates in late grades. Adult illiteracy rates remain high. Public health resources are not used efficiently (as evidenced by low rates o f use o f public health services), and the quality o f services does not meet the population’s expectations. The social progress has been achieved at a relatively high cost relative to comparators: public expenditures on education are 7.7 percent o f GNP compared to a MENA average o f 5.2 percent and a lower middle-income countries average o f 4.9 percent (World Bank 2000: Social and Structural Review). Similarly, Tunisia’s health expenditures o f 5.5 percent o f GDP are higher than the MENA average of 4.6 percent (World Bank data, 2003). ‘The index ranks Jordan 75‘h, Tunisia, 7(ith, Algeria 88‘h, Egypt 99“, and Morocco 102th out o f 175 countries (Human Development Report 2003). 5 Debt Burden and External Assistance 1.14 Despite i t s remarkable economic progress and ability to weather past shocks, Tunisia’s economy remains vulnerable to external shocks. The ratio o f external debt to GDP i s relatively high, hovering around 60 percent (Table 1.2), and the U S dollar, with a share o f over 40 percent, dominates the currency composition o f this debt. These factors together with the current account and budget deficits make the country vulnerable to external shocks. Furthermore, foreign exchange reserves have remained low (below 3 months o f imports). The economy weathered past shocks well (for example, the continued aftermath o f September 11,2001 events and a terrorist attack in Djerba which led to a sharp drop in tourism) in terms o f maintaining macro balances. However, the transition to greater integration into global markets raises challenges for debt sustainability due to competitive pressures and increased exposure to volatility.’ Tunisia has recently been trying to diversify the currency composition o f i t s debt by issuing Euro- dominated sovereign bonds, as it did in July 1999. Also the Government i s gradually shifting from external to domestic sources o f financing, 1.15 Tunisia h as received large net financial flows (including grants and private flows), averaging nearly US$700 million annually (3.5 percent o f GDP) over the 1 9 9 0 1 period (Table 1.5). Inper capita terms, Tunisia received an annual average o f US$70 per capita in net flows, below those for other MENA countries at similar income levels. The Bank has provided significant assistance to Tunisia, committing US$2.7 billion for 40 loans since 1990. With old loans being serviced and repaid, the Bank’s share o f net flows to Tunisia i s about 5 percent. Since 1996 EU member states have provided increased assistance to support the implementation o f Tunisia’s association agreement in 1995. The share o f the EU and France nearly doubled in the 1996-01 period. Also, Tunisia i s one o f the largest recipients o f IDB, assistance with $1.2 billion in financing since 1976 (or about US$2 per capita per year). Ofwhich IBRD 33 5 48 6 18 3 ECI EU 347 50 280 37 413 67 France 98 14 64 8 132 21 Germany 26 4 26 4 23 4 Japan 100 15 100 13 100 16 United States 62 9 128 17 -4 -1 Arab countnes and agencies I 3 0 ‘ 17 2 -10 -2 . aTotalincludes both official and m v a t e flows. from all sources excludine the Islamic Develoument Bank. Source: OECD Geographical Diskbution o f Financial Flows to A i d Recipients, details in Annkx A, table 3a. * Deeper integration into EU markets will make Tunisia more vulnerable to economic swings in the EU. Anemic growth in the EU i s swiftly felt in Tunisia, as in the sharp GDP slowdown seen in 2002. 6 Meeting the Challenges o f Globalization 1.16 The Tunisian economy w i l lface increasing competitivepressures with the implementation o f the E U M and the elimination o f the ~ u l t ~ bAgreement. er The economy i s open, but it i s dependent on one dominant market (the EU) and on a few products (e.g., textiles account for 42 percent o f exports). M o r e than 75 percent o f Tunisia’s trade i s currently with the EU; the region i s the source o f 67 percent o f the capital that flows into Tunisia; i t accounts for a large share o f Tunisia’s tourism market; and is the region with the largest community o f expatriate Tunisians (600,000). Therefore, economic conditions in the EU affect both external demand for Tunisia’s products and domestic demand (through workers remittances and tourism receipts). The economic opening -agreed with the EU over a 12-year period beginning in 1996-poses M h e r challenges: dismantling tariffs, liberalizing the service sector, and establishing a free trade zone by 2008 for manufacturers. Tunisian producers will face m u c h stronger competition in the local market with the implementation o f the EUAA and in their export markets after the elimination o f the Multifiber Agreement (MFA) by 2005. Since Tunisia’s domestic market i s small, investment and growth will depend critically on greater export competitiveness and further integration into the global market. 1.17 The role o f the State in a rapidly changing world scene. The prudent and gradual approach-which has produced positive development outcomes-is now l i k e l y to have reached i t s limit under n e w developments in the international markets. The demise o f the MFA and full implementation o f the EUAA in the next few years impart some urgency to the need to accelerate reforms to enhance competitiveness and integration into the global economy. The Government still involves itself in economic activities with a public investment share o f GDP at 13 percent and still owns significant shares o f the financial sector and public enterprises, w h i c h the Government views as necessary to preserve social cohesion. One such program i s the Mise 2 niveuu program (Box 1.1). The W o r l d Bank has reservations about the program’s efficacy and the distorted incentives it encourages. M o r e importantly, the response o f the private investment to the p o l i c y measures has not been as strong as expected. Tunisia’s private gross fixed investment remains low: averaging 13.5 percent o f GDP during 1997-2001, moderately up f r o m 13 percent over 1990-1996 (World Bank data, 2003) due to the slow pace o f reform. Public investment accounts for another 13 percent o f GDP. The high and persistent unemployment (14.3 percent in 2003) highlights the need to strengthen investment to sustain higher growth and generate jobs under increasing competitive pressures. A s such, sustaining Tunisia’s positive economic performance in the more competitive environment it i s likely t o face in the next decade, will l i k e l y require reducing the Government’s role in economic activity, as w e l l as continuing to improve the design and operational efficiency o f the regulatory and incentives regime with the objective o f leveling the playing field within the private sector. Past positive development outcomes have fostered a large middle class (80 percent o f the population) that will press for more participation in the development process by increasing the role o f c i v i l society and the private sector in such process. 7 Box 1.1: Mise Ci niveau Program (Enterprise Restructuring and Upgrading) Mise b niveau program and the Government Ninth Development Plan (1997-2001). The Ninth Development Plan aimed at improving business conditions and competitiveness. Within such a framework, the mise u niveau program targeted the modernization o f industrial infrastructure by adopting new technology, promoting quality and training workers, T h e program f i n c e s : (i) upgrading and modernization o f equipment, where the subsidy covers 10-20 percent o f the cost; ( ii) cost o f “intangibles” the (e.g., consultants and software), where the subsidy covers up to 70% o f the cost; and (c) financial restructuring, where n o subsidy i s provided. Mise ci niveauprogram coverage. This program started in 1996 and has been targeted at small and medium enterprises (SMEs) (enterprises with more than 10 employees). So far, 2,700 enterprises have participated out o f an “effective” population o f about 3,600. Out o f these, 1,550 have had their res!mcturing programs approved. However, the program i s having difficulty reaching the small end o f the SME sector since these f m have problems in obtaining the required commercial bank sponsorship. They are too small for the commercial banks and too large for the specialized micro credit bank. Program egectiveness. About 1,550 enterprises benefited from the program, requiring total investment expenditures o f TD 2.5 billion (US$1.8 billion) and matching incentives grants from the Government o f TD 356 million (US$260 million or 1.3% o f GDP). These grants are funded by a 1% surcharge o n the VAT, which has raised, so far, about TD 30-40 million annually. Also, the EU and AfDB provided support to the program The management o f the Mise ri niveau concluded that, between 1997 and 2003, the firms benefiting from the program seem to have outperformed the “benchmark” consisting o f the overall manufacturing sector with regard to: turnover (1 1% growth compared to 8.5 for the benchmark); export growth (16% growth compared to 11%); and employment growth o f 4% (not benchmarked). However, the real net effect o f the Mise Li niveau program is not clear; either in terms o f actual improved performance i nrelations to enterprises that nrelation to nterms of penetration o f export markets, again i have not benefited f i o m such assistance, or i some relevant comparators. The Mise a niveau program is controversial. W h i l e the EU and the AfDB are supporting the program financially, the Bank has reservations about i t s efficacy and the distorted incentives it encourages. The Government feels that it would be politically very difficult to subject enterprises to more competition without supporting the enterprises with technical assistance and equipment fmancing to upgrade their operations to , survive the forthcoming increase in competition. The Government also seeks to support social stability through 1 this program. The Bank‘s reluctance to support this program given its reservations about the program’s efficacy and targeted nature o f the support i s justified. Source: Mission findings. 8 2. World Bank Assistance Program would support Tunisia's efforts to: - figure 21 Bank Commitments, Ebbursements - increase i t s outward orientation; develop and Transfers,MOo3 - 5 0 0 a larger and more dynamic private -400 - sector; further strengthen human 300 resources and consolidate I €200 environmental management (Box 2.1). -g I 100 - 3 0 2.5 World Bank strategies were - -100 relevant and consonant with Tunisia's I -200 - -300 development priorities outlined in a 90 91 92 93 94 95 96 97 93 99 00 01 02 03 .I- series o f five-year plans. For example, the 9thDevelopment Plan (1997-2000) Q"k -Masburserrents--MMm was aimed at opening up the economy 4 9 aims to strengthen competitiveness, embrace the knowledge economy and meet the jobs challenge. The Bank strategies reflected Tunisia’s development priorities as outlined in i t s development plans. The increased focus on the social sectors in the Bank strategies has been appropriate and i s reasonably aligned with the Millennium Development Goals (MDGs) and the country’s emphasis on human resource development. Box 2.1: World Bank Strategies Mid-1990s country strategy: An outward-oriented private sector-led growth strategy Goals. The objective was to promote rapid and sustainable outward-oriented and private sector- 3ased growth, while maintaining social stability and environmental sustainability. The strategy to achieve this objective emphasized: ( i) deepening structural reforms to foster competition; (ii) human capital development towards middle-income standards; and ( iii) modernization o f key infrastructure services, and environmental management. 4ssistunce program. Under the base case scenario, lending would average US$240 million per year during fiscal years 1996-99. The proposed program would allocate nearly half the portfolio to sector wide investment loans with the other half divided between policy- based loans and traditional investment projects. The base case scenario assumed satisfactory implementation o f policy reforms and unavailability o f other sources o f finance (e.g., EU and AfDB). Triggers for higher lending level (US$350 million per year) included a strong acceleration o f structural r e f o m andor a shock to the economy. The mid-1990s country strategy envisaged strategy notes o n the role o f the state, and o n structural changes in agriculture, and the general equilibrium model analysis o f the impact o f trade liberalization o n the agricultural sector. In addition the Bank would prepare a seminar o n “Cross-Country Lessons from C i v i l Service Reform”. 2000 CAS: An update o f the earlier strategy Goals. The 2000 CAS substantially reiterated the mid-1990s country strategy objectives, noting that the pace o f private investment remained gradual. The strategy to achieve these objectives was similar to that o f the earlier period. Assistunceprogrum. The fiscal 2000-02 proposed lending program, under the base case scenario, maintained the level o f commitments o f previous years, averaging about US$200 million per year. The proposed program would sustain the change in the mix o f instruments begun with the mid- 1990s country strategy, emphasizing sector investment loans, policy-based lending, and economic and sector work (ESW). The base case would include one policy-based operation (for U S $ l 5 0 million, or 25 percent) focusing o n private sector development andor the financial sector. Under the l o w case program, lending would be scaled back focusing o n one or two investment-type operations targeted at the social sectors. Triggers for the high base case scenario included: (i) implementation o f the free trade agreement with the EU, (ii) a substantial increase in privatization proceeds, ( iii) further progress in financial sector reforms, and (iv) initiation o f social security and labor market reforms. The level o f commitments under the high case scenario was not proposed. Planned ESW included 18 reports, sector notes and workshops covering trade, private sector development, social conditions, education, transport, water, and agriculture. 2.6 W h i l e largely relevant to Tunisia’s development constraints and priorities, the country strategies did not pay sufficient attention to the fiscal sustainability o f social policies, with health care and social affairs absorbing a fifth o f Government spending and general education another fifth o f the budget. There are serious education sector fiscal issues looming, with declining primary student populations and booming demand for secondary and higher education. 10 2.7 World Bank strategies developed indicators for monitoring results, but several o f these are difficult to measure effectively since they are neither quantified nor time-bound. Many indicators exhibit such weaknesses as vague wording, input orientation, or no baseline data. For example, in the education sector, the 2000 CAS progress indicators include, “greater cost recovery in higher education, improvements in teacher training”; in the health sector, “enhance efficiency o f public expenditure on health.” Despite the declaration about the importance o f monitoring and evaluation, the commitment to monitoring and evaluation (M&E) i s weak.3 The 2000 CAS noted that the indicators were subject to refinements, “These indicators, to be refined with additional data availability, have been designed from available baseline values and reasonable medium- term targets,” 2000 CAS, page 33. Economic and Sector Work (ESW) 2.8 ESW was relevant, o f high quality, conformed to the Bank’s assistance strategy, and provided a solid basis for policy dialogue with the Government (Annex A, table 4). Some core diagnostic ESW including the1995 CEM, 2000 Social and Structural Review, and 1995 Poverty Alleviation were emphasized. However, these reports covered macro, social and sectoral issues and informed Bank strategies as discussed below. Other ESW sought to address known policy shortcomings in such sectors as finance and water, as well as labor and employment issues (Annex A, table 4). O n the other hand, the last agricultural sector review was undertaken in 1982. 2.9 The World Bank’s advice and analyses were generally sound although some omissions are mentioned in paragraph 2.16. Tunisia i s a relatively small country and increasing its integration into the global markets was appropriately emphasized as the high tariff and non-tariff barriers o f the 1980s were distortionary, and replacing them with low and uniform tariffs was the right approach. The main thrust o f the 1990 analytical work was to argue the case for a greater openness o f the Tunisian economy to increase competition and thereby the efficiency o f investment. It also emphasized the need to explicitly adopt a more aggressive export-orientation policy. The recommendations o f a subsequent economic report in 1991 reinforced those o f the earlier work and stressed the need to increase the efficiency o f investment by increasing domestic and foreign competition. 2.10 Similarly, the Bank’s analysis and i t s recommendations on private sector development and privatization were sound. The Bank economic report at the beginning o f the 1990s emphasized the need to strengthen significantly the role o f the private sector and to remove the barriers to domestic competition. The 1994 Private Sector Assessment also made a strong case for a relatively small country like Tunisia to improve its export performance and to that end, to significantly expand the role o f the private sector. That, the report argued, would in turn require policies to increase domestic and external competition, and to remove obstacles facing the functioning o f markets. Most o f the World Bank‘s closed projects in Tunisia do not have an operationalizedM&E mechanism. 11 2.1 1 The 1995 CEM: Towards the 21" Century built on the recommendations o f these reports and underpinnedthe three strategic directions o f the mid-1990s country strategy: (i)the pace o f structural reform needed to move forward more decisively, particularly to complete trade liberalization and forcefully open up to private sector development; ( ii ) the State needed to redefine its role in the economy and concentrate on strengthening its role in the provision o f public goods, while opening up much more significantly to the domestic and foreign private sectors; and ( iii) despite good progress so far, the country needed to continue to upgrade human resources and environmental management to meet the expected increase in international competition. The C E M also included environmental considerations in i t s analysis o f growth prospects and the role o f Governrnent, and emphasized the need to assess the sustainability o f land and water resources in an integrated fashion. 2.12 The 2000 Social and Structural Review and the 2000 Private Sector Assessment Update provided the main strategic orientation o f the 2000 CAS. The review, which gave Tunisia highmarks on economic reforms and achievement since the mid-1980s, argued that if the country hoped to achieve a level o f development comparable to countries in the lowest tier o f OECD countries, i t needed not only to maintain reforms, but to accelerate their pace, in view o f the imminent threat o f international competition in general, but particularly within the EU-related economic sphere. The Update represented another piece of good analysis that utilized a survey o f Tunisian enterprises. I t reiterated the main recommendations o f the Review, but presented a detailed review o f private sector development to date and made recommendations for its future development. 2.13 During the first half o f 2001, a sizeable, Bank-Fundmission visited Tunisia twice, as part o f the joint IMF-World Bank Financial Sector Assessment Program (FSAP). The overall assessment was that the authorities had implemented prudent and appropriate financial policies over the preceding decade, enabling the country to achieve reasonably high and stable growth with low inflation. A program to modernize, restructure and consolidate banking, securities markets, and the insurance industry had been gradually implemented. I t had so far included an overhaul o f the legal and accounting frameworks, a strengthening o f financial supervision, and a shift to more market-oriented policies. The paper then went on to go through systematically the whole range o f financial reform areas, pointing out areas where further action was needed, concluding with a list o f policy priorities for the future. 2.14 An internal Bank analytical work tried to assist the Government to understandwhy despite strong growth, unemployment remains high, at around 15 percent. This work provided an in-depth analysis o f the employment and labor market situation and made a number o f recomendations to improve it. I t concluded that unemployment remains high, partly reflecting demographic pressures, and partly the decrease in the employment intensity growth. Whereas this analysis argued that the main solution to the employment problem i s continued growth, it also provided an extensive list o f recommendations to help improve employment policies and procedures to remove rigidities in the labor market, including facilitating exit o f private firms. 2.15 The analytical reports were o f satisfactory quality. QAG assessed a number o f reports, all o f which received either highly satisfactory or satisfactory overall rating. The 12 recommendations were reflected in the 2000 CAS, A summary evaluation o f key reports, i s provided in the forthcoming OED working papers, listed in the bibliography. 2.16 Omissions in ESW include core diagnostic products: public expenditure reviews (PERs), Country Financial Accountability Assessments (CFAAs) and Country Procurement Assessment Reviews (CPARs). Periodic reviews o f public expenditures would have been o f particular importance to improving the efficiency and fiscal sustainability o f social services while at the same time preserving social gains.“ Other fiduciary diagnostic reports-CFAAs and CPARs-are also essential to analyze issues related to economic management, governance and transparency. Because o f these omissions, the share o f resources allocated to Tunisia’s ESW-averaging 16 percent a year during the 1990s-was below the Bank-wide average (18 percent) and far below the MENA average (21 percent) (Annex A, table 6). Lending 2.17 The structure o f the Bank’s portfolio changed rapidly since 1990 with the introduction o f policy-based lending, with commitments amounting to nearly US$900 million (Table 2.1). Economic policy, financial and private sector development drew the largest Bank support (39 percent o f total Bank lending), followed by education and health (21 percent) and rurallagriculture (19 percent). As evident from Table 2.1, the Bank provided support to other sectors, however, the evaluation will be confined to the above- mentioned sectors, constituting 80 percent o f total lending. Table 2.1: Sectoral Distribution o f World Bank Commitments (FY90-03) No. o f Projects Commitment Cofinancing Sector (US$m) % (US$mj % Economic policy, financial and private 8 1,060 39 522 22 sector development a Education 7 474 17 362 15 Health, nutrition and population 3 106 4 108 5 Rural sector 10 525 19 787 33 Energy and mining 1 60 2 39 2 Environment 2 12 0 3 0 Transport 3 139 5 87 4 Urban development 4 250 9 40 1 17 Water supply and sanitation 2 118 4 100 4 TOTAL 40 2,745 100 2,372 100 Memo items Adjustment 5 867 32 484 20 Investment 35 1,878 68 1,888 80 “Includes, ECAL 1-111 ($487 m). Economic and Financial Reform Support ($250 m), Public Enterprise Reform ($130 m). Export Development ($35 m), Industry Support ($39 m) and frivate Investment Credit ($120 m). bIncludesNorthwest Mountainous and Forestry ($34 m) and Areas Development ($28 m). Agricultural Support Services ($21m), Water Sector Investment ($103 m) Agricultural Sector investment I&I1 ($162 m), Natural Resource management ($27 m). National Rural Finance ($65 m), Forestry Development I1 ($69 m), and Agricultural Research ($17 m). Source: World Bank data as of September 30,2002. n . Bank mobilized-in conjunction with various donor 2.18 Resource ~ o b i l i z a ~ i oThe programs-a high cofinancing ratio for i t s support. Between fiscal years 1990-2003 the The Region notes, “it i s important to indicate that it was not the Bank’s choice not to conduct a PER but the Government’s reluctance to l e t the Bank do one.” 13 Bank attracted US$2,372 million in cofinancing against US$2,745 million in IBRD commitments, leveraging nearly US$1.OO on every IBRD dollar (Table 2. l).5 2.19 Bank’s lending volumes were roughly the same as proposed, but the share o f adjustment lending was significantly higher than planned. Some projects included in the 2000 CAS base case were delayed due to low Government interest or interventions by other donors, and others were reduced in scope.6 The difference was made up by increasing the size o f planned policy-base loans. Whereas the 2000 CAS base case called for one relatively small adjustment operation (US$l50 million), the third Economic Competitiveness Adjustment Loan Table 2.2: IBRD Proposed and Actual Lending, FY97-02 (ECAL 1 11) was for US$253 Country strutegy period Country strategy period million, or nearly half o f the total FY97-99 FY00-02 lending program (Table 2.2). Proposed Actual Proposed Actual Loan (in US$ million at currentpricesj OED Findings on CZosed Projects Total 659 658 623 511 Average 220 219 208 170 2.20 OED ratings o f Tunisia’s (in %of total commitmentsj projects have been high-in terms Adjustment 25 36 25 49 Other 75 64 75 51 of outcome and sustainability- Source: Own calculations based on Bank’s strateges. relative to all projects Bank-wide and to other countries in the MENA region (Table 2.3). This i s true for both adjustment and investment lending, while Tunisia’s project rating in terms o f institutional development impact i s similar to the Bank-wide average. Table 2.3: OED Evaluation Findings of Recently Evaluated Projects by Value (Exit since FY90) Total Evaluated Satisfactory outcome Likely Substantial ID Country (US$ millzon) (%) Sustainabihty (?A) (%) Tunisia 2,367 82 84 41 Oiw adjustment lending 967 87 100 17 MENA 15,974 71 52 35 Algeria 3,253 46 7 21 Egypt 2,025 83 40 34 Jordan 1,534 94 80 49 Morocco 4,736 67 38 59 Bank-wide 251,234 76 66 43 Source. OED rahng database, details in Annex A, table 5. Portfolio Performance Assessments 2.21 Ratings o f Tunisia’s project portfolio are also good, and compare favorably with both MENA and Bank-wide. Only 11 percent o f active projects and 6 percent o f commitments were considered “at risk”. For MENA as a whole, the comparable numbers are 25 percent and 28 percent; and Bank-wide they are 18 percent for both projects and commitments. The Bank’s current portfolio comprises 18 operations with commitments o f By way of comparison, only the Bank’s West Bank and Gaza program mobilized more resources than Tunisia. Between FY04-01, the West Bank and Gaza program secured $541 million in cofinancinglparallelfunding against $326 million in Bank commitments-a ratio of $1.66 on every dollar. The Bank’s Jordan program mobilized a cofinancing ratio similar to i t s program in Tunisia. For example Municipal Development Project was postponed and Cultural Heritage and Agricultural Support Services projects were reduced in size by 40 percent. 14 over U S $ l .1 billion. About a third o f the commitments are for financial and private sector development, another third for urban development and water supply (building n e w infi-astmcture and tourism development); a quarter for human development projects; and the remainder for transport, and agriculture/mral development. Efficiency o f World Bank Assistance 2.22 The Tunisian country assistance program i s relatively inexpensive (Annex A, table 6). The average program cost o f US$13 per US$l,OOO o f net commitment for satisfactory and non-risky projects, i s lower than the MENA average o f US$21 and the Bank-wide average o f US$16 for the 1990s. Tunisia’s average project size i s close t o the Bank-wide and MENA averages. 15 3. The Development Impact of World Bank Assistance 3.1 This chapter evaluates World Bank assistance by assessing i t s contribution to Tunisia’s development outcomes. This i s done by examining in more detail the progress on each o f the three areas identified in the Bank’s strategy: macroeconomic stabilization, growth and structural reforms, including financial, trade and private sector development; human resource development; and poverty alleviation and rural development. Macroeconomic Stabilization, Growth and Structural Reforms 3.2 The Bank’s strategy has focused on maintenance o f macroeconomic stability (in conjunction with the IMF) and promoting equitable and sustainable growth mainly through increasing the country’s openness to domestic and extemal competition. To promote increased competition, the Bank’s assistance has been directed at a number o f key structural areas including financial sector reform, trade liberalization, enhancing the business environment, and promoting private sector development. All o f the Bank’s policy-based loans (1987 ITPAL, 1988 SAL, 1991 EFRSL, and the three E C K s , 1996, 1999, and 2001, respectively) have included the maintenance o f a stable macroeconomic environment as a primary component and, therefore, have supported underlying fiscal, monetary and exchange rate policies that have been successfully implemented. A s discussed below, they have also supportedstructural reforms inthe financial, extemal, and private sectors. Tunisia’s prudent macroeconomic management and cautious yet determined structural refoms have led to improving economic performance, essentially across the entire spectrum o f standard indicators: sustained economic growth; declining inflation; a stable real exchange rate; a sound and stable fiscal position; controlled monetary aggregates; and a stable and manageable balance o f payments position (Table 1.2). 3.3 Real GDP growth accelerated from about 3 percent over 1986-90, to about 4 percent over 1991-95, and further to over 5 percent over 1996-2002, meeting the country strategy targets (Annex A, table 7a). Tunisia has been one o f the fastest growing economies as compared to MENA and other lower middle-income countries since the mid-1980s (Table 3.1). Table 3.1: Tunisia and Comparators-Per Capita lncome Indicators Lower middle-income Middle East and North Indicators Tunisia , countries Africa Region*** 1 Mid 1980s* Late 1990s** 1 Mid 1980s* Late 1990s** Mid 1980s* Late 1990s** GDP per capita (S, current) GNP per capita ($, current) , 1, I 58 1,160 2,137 2,060 j 1,422 I 1,250 1,665 1,740 j 2,852 1 1,990 2,512 2,000 * refers to data from 1982 to 1987; ** refers to data from 1994 to 1998;. ***MENA includes oil exporting countries. Source: Social and Structural Review, World Bank, 2000. Financial Sector Reform 3.4 The Bank assistance program set out to decontrol interest rates, improve the soundness o f the banking system, and privatize financial institutions. Next to stabilization policies, reform and modernization o f the financial sector has achieved the most progress. Certainly it has progressed more rapidly than other structural adjustment areas, The Bank and the Fund, among others, have been very active supporters in this area. Except for E C A L I , all the five other Bank adjustment operations had significant 16 financial sector reform components, with E C A L I1having been devoted entirely to that objective. The implementation experience o f all these loans improved after a relatively slow start. These loans were based on analyses contained in several ESW pieces, including the 1995 C E M and the 2000 Social and Structural Review. 3.5 Initial progress was made in conjunction with ITPAL, with the partial freeing o f interest rates, although ceilings were s t i l l maintained for a number o f sectors. A further initial and partial increase in competition was achieved in conjunction with the SAL, when certificates o f deposit and commercial paper were introduced and a branch o f a foreign bank was opened in Tunisia. Steps were also taken then to remove caps on interest rate spreads. In the early 1990s and in conjunction with EFRSL, a new regulatory and supervision framework for banks was put in place, and about 90 percent o f interest rates were liberalized, although money market rates remained fixed by the Central Bank. The level o f reform and Bank support in this sector was ratcheted up in the late 1990s in conjunction with E C A L I1where all the agreed performance criteria for loan disbursement were met. The agreed targets for reducing non-performing loans (NPLs) were also met, although at the expense o f the budget and the banks. The overall soundness o f the banking system improved significantly, in accordance with a number o f prudential ratios. The activities o f non-banking intermediaries increased appreciably, as did those o f the securities and money markets. C i v i l code revisions regarding loan recovery were approved, although with some delay. A revised Banking Law that met international standards was submitted to the Chamber o f Deputies, and a revised C i v i l and Commercial Procedures Code was approved. 3.6 Progress was made in privatization. An insurance company (Tunisian Lloyds) was privatized in conjunction with E C A L 11. Most recently and in conjunction with ECAL, 1 11, another large insurance company (A1 Ittihad) was restructured, and a new mutual fund company was created to take it over. The privatization o f one commercial bank, Union Internationule des Banques (UIB) was completed and that o f another, Banque du Sud, i s proceeding, although at a pace that i s slower than originally envisaged. In October 2002 the French group Socie‘te‘ Ge‘nkralebought a 52 percent stake in UIB. By 2002, assets in private banks were 55 percent o f total bank assets, falling below the 2000 CAS target o f 60 percent (Annex A, table 7a). Eleven private leasing companies are now operating in the country and their share o f financing private investment has risen from 8 percent in 1996 to 12 percent in 2001.7 3.7 At present, only four commercial banks remain in the public sector, with combined assets that represent 45 percent o f the entire commercial banking system.* At least for the foreseeable future, there appears to be no intention to privatize these banks because they The authorities noted that when these private leasing companies are combined with the private banks, the share o f assets of all private credit institutions out o f the total i s about 62 percent. Excludes five “development” banks that are joint ventures with other Arab countries (which account for about 5 percent o f the banking assets) and are not subject to the authority and supervisionof the Central Bank, but are governed by bilateral protocols. These are now being commercialized and the intention i s to bring them under the umbrella o f the Central Bank. There are also three foreign banks operating in Tunisia today, BNP, Citibank and Sociktk Gknkrule, and the Arab Banking Group has recently been authorizedto open up a branch as well. However, the presence of foreign banks in Tunisia remains below that seen in other developing countries, especially in E U accession countries that have modemizedtheir banking systems with a significant involvement o f foreign banks. 17 are viewed as necessary to remain in the public domain to serve “strategic” sectors, one per sector: agriculture, housing, tourism and micro-credit for very small enterprises, although there i s talk o f merging the last two, The Government does not wish to relinquishthe control it exerts over the bank and enterprises through the public banks, as it feels there i s adequate competition since private banks are not prevented from operating in these sectors. Nevertheless, these public banks with a heavy burden o f non-performing loans pose risks to financial stability. 3.8 Progress in the reform o f the insurance industry, with much appreciated World Bank support, has also taken place. However, although two companies have recently been privatized, the largest one, with a 34 percent share o f the entire market, i s likely to remain in the public sector for some time. As with the banks, the State i s reluctant to give up ownership o f some key entities that it uses to exercise control over part o f the market, or to provide subsidized services for social or stability reasons. But when the EUAA comes into effect in 2008, the Tunisian economy will have to align i t s structure along EU norms, and that will require an even greater private role in the financial sector. 3.9 Non-perfonning loans (NPLs) remain a top priority for action in the financial sector and for the economy at large. In conjunction with ECAL 1 1, N P L s were reduced from about 36 percent in 1993 to about 19 percent in 2001; which was s t i l l high. They are believed to have increased to 22 percent since 2002 reflecting the exposure o f banks to the tourism sector, which was hit by the unfavorable international environment. The Central Bank continues to closely monitor the situation and i s implementinga scheme that allows it to work with the banks involved to clean up their portfolios over time. A major problem i s n implementingprocedures related to loan the fact that the judicial system i s very slow i recovery. For example, whereas the seizure o f property used as collateral i s possible in principle, the procedure i s so cumbersome and lengthy that it i s effectively not an option that can be used at present. The Central Bank i s also trying to instill a new credit culture within the banlung system to try to prevent new N P L s in the future. However, in addition to dealing with the stock o f NPLs, it i s even more important to deal with preventing new N P L s by addressing the root causes within the public enterprise (PE) sector (particularly the tourism sector). Trade Liberalization 3.10 By the mid-l980s, Tunisia was a highly protected economy, with extensive restrictions on imports and a widely dispersed and high tariff structure. Immediately following the implementation o f the successfbl stabilization in 1986, the country embarked on a number o f structural reforms, including trade liberalization, to inject more competitiveness and efficiency into the economy. Both the Bank and the Fund gave priority to supporting the Government program, and often pressed it to take action in dismantling the QR regime and reforming the tariff structure. Four Bank structural adjustment operations (ITPAL, SAL, E F R S L and ECAL I )included trade liberalization components, and one investment operation (Export Development Project) supported export development through financing technical assistance and pre-shipment finance guarantees. The reduction in NPLs was largely the result o f the Govemment taking over or guaranteeing bad debts rather than evidence of better lending. 18 Considerable analytical work was undertaken to support reforms intrade policy, including the1994 report on the Determinants o f Export Growth, 1995 CEM, and 2000 Social and Structural Review. 3.11 The early Bank operations met with s t i f f resistance with regard to dismantling the QR regime, and achieved only modest progress in rationalizing the tariff structure (e.g., the tariff range was compressed from 5-235 percent to 14-41 percent). T h i s continued until the mid-1990s when Tunisia joined the WTO and signed the EUAA. At the eve o f these events, 30-40 percent o f imports were still subject to restrictions. Since then, liberalization has proceeded in the context o f the free trade component o f the EUAA. Tunisia's weighted average tariff rate fell from 30 percent in the mid-1990s to 27 percent in 2001. With the exception o f Morocco's rate o f 28 percent Algeria, Egypt, and Jordan have lower rates (Annex A, table 21). Also, the weighted average tariff rate in non-MENA high growth countries (Chile, Korea, Malaysia, Mauritius, and Thailand) i s much lower, ranging from 5 percent in Malaysia to 16 percent in Mauritius. 3.12 Further progress in trade liberalization will be governed by the implementation o f the EUAA (ie., full liberalization o f the trade regime, at least regarding trade with the EU i s now expected in 2008). In the meantime, the implementation o f the early phase o f the EUAA has actually increased effective protection since duties on production inputs have been reduced ahead o f those on final goods, but this i s the standard nature o f this agreement as applied to several other countries that have similar agreements with the EU. The gap between tariffs applied to imports from the EU and the rest o f the world has also widened (Annex A, table 2m)." It would have been preferable for Tunisia to move more forcefully to lower protection and barriers to free trade. However, in view o f the importance o f the EUAA, i t was understandable for the Bank to go along with the requirements o f that agreement while pointing out the need for Tunisia to take other measures to enhance competitiveness, such as reducing cost o f production. Such complementary measures have been slow in coming. In addition, the Bank could have helped design programs to lower the discrimination against non-EU trade in parallel with the implementation o f the EUAA. Private Sector Development and the Enabling Environment 3.13 Under the dirigiste system that characterizedthe economic structure until the mid-l980s, the economy was heavily regulated and public enterprises dominated the business sector, including banks and other financial intermediaries. Since 1987, the Bank ni t s assistance strategy to helping the country inject more has given top priority i competition in the economy by creating a friendlier climate for private sector development, privatizing PES,or helping them become more efficient. To that end, eight Bank's lending operations (ASAL1, ITPAL, S A L , P E W , EFRSL, PICP, E C A L I and E C A L IQ have included major components designed to help achieve these objectives. All these loans were, in turn, based on a set o f high quality ESW that included: the 1994 and 2000 Private Sector Assessments, and the 2000 Social and S t ~ c t u r aReview. l loIn 2002, average (unweighted) Tunisian MFN tariffs were 34.5 percent, marginally down from 35.9 in 2000, compared to 24.3 percent for imports originating in the EU. 19 3.14 The results and achievements o f the country’s efforts and the Bank’s support have been mixed. Progress has been greatest in specific, more “technical” areas such as price decontrol, and some aspects o f the regulatory and procedural environment; while there has been slow but steady progress at the more strategic dimensions regarding the pace o f privatization and dealing with the financial and other problems o f public enterprises. For example, upon the completion o f the EFRSL in the early 1990s, prices and margins h ad been decontrolled for the bulk o f commodities, although some controls remain to date at the retail level. A law prohibiting non-competitive pricing was passed. A unified Investment Code was adopted under the EFRSL, although i t s t i l l contained some costly and inefficient clauses such as tax privileges for foreign investors. A new Company Code was adopted in November 2002 and amendments are being proposed. Some modest measures have been implementedto facilitate labor mobility. A law that created a severance scheme for laying o f f workers has been passed, but enterprises continue to face obstacles and very complex procedures if they want to dismiss workers for “economic reasons.” 3.15 Recent Bank surveys on business climate show that the private sector enjoys a better business climate in Tunisia t h a n in other MENA countries. Specifically, Tunisian entrepreneurs score above the Figure 3.1: Business Climate Indices for Tunisia, MNA and OECD MENA countries average in (Values between 0-100) terms o f starting a business, getting credit, and closing a Com Imolicm: m 2osmg a BUSTICS (higher business. In contrast, they face idlucs mdicue more c o w more rigid employment laws and n\ohemcnr~ 4 more court involvement in the Closing a b&,mcss (highr 23 process o f closing a business mdcdtc n o r e \3hn efhenr n’lrcn) d than the regional average. On the other hand, Tunisia lags I i Getting Credit (higher values indicate easiness o f considerably behind the OECD countries (Figure 3.1). getting adit) I i 3.16 As far as privatization i s Enforcmg Conlracls (highn \ a h a tndlcatc I . . more consleuin’! concerned, 163 PESwere sold for a total o f 2,345 million En.plo)mm! Law (higher I I I I P dinars (US$1720 million or 9 \dIucs mdxarc ngid laus) percent o f GDP) during 1987- _i 2003 (Table 3.2). When the o IO 20 30 40 50 60 70 ao privatization program started in 0Tunisia U 1 Ll MNA Average E3 OECD Average 1 1987, the sectors earmarked burce: Doing Business in 2004 Database (World Bank 2004). for privatization were chosen strategically, but gradually other sectors o f the economy were drawn in. The first privatization program (1987-94) targeted small and medium-size PES,mainly in the textile, tourism, and construction sectors. The Bank supported the reform through P E E . However, the reform program was modest, resulting in the privatization o f a few small scale PES,generating about US$SO million in sales proceeds. Further progress has taken place since 1995 with the privatization o f large PESsuch as the large cement plants under 20 ECAL I ,with privatization proceeds amounting to US$570 million in 1998. Sales take place competitively primarily through invitations to tender with set terms and conditions, or through the securities market (Annex A, table 2j). However, in the recent privatization o f the Global System Mobile, the Bank was not comfortable with the process and allowed the associated floating tranche Table 3.2: Privatization by Sector in million Tunisian Dinar (1987 o f E C A L I11to lapse. to August 31,2003) Moreover, more Sector Total Receipts (TD Of Which Receiptsfrom information is needed on million) Foreign Investors the relative importance o f Tourism 277 93 the privatized enterprises in Transport 69 17 Chemical & Mechanical 108 6 terms o f their size in the PE Trade 137 76 sector and their Agriculture, Fishing, Food 75 contribution to employment Construction Materials 825 77 1 to assess the overall impact Textiles 19 5 Others 835 788 o f the program. Total 2345 1756 Source: Ministry of Economic Development. 3.17 Tunisia attracted a small but rising amount o f foreign direct investment inflows, averaging 2.6 percent o f GDP, during the 1990s compared to an average o f 0.8 percent during the second half o f the 1980s. Annual average FDI inflows to other MENA countries at similar income level during the 1990s were also small: Jordan received an amount o f FDI averaging 0.7 percent o f GDP annually, Morocco 1.1percent o f GDP, and Egypt 1.1percent o f GDP (Danbur 2000).” Apart from small FDI amounts directed to tourism, Tunisia receives negligible FDI in the non-energy services sector (World Bank data, 2003). 3.18 In sum, a successful stabilization and economic growth program supported by the Bank and the Fund was maintained. Tunisia has also experienced a significant diversification o f its resources with non-oillgas manufactures assuming a larger role in the economy. The Bank’s program successfully promoted policy reforms in trade, financial and private sectors, especially banking system’s soundness, as evidenced by a number o f prudential ratios. Nevertheless, incomplete reforms in these areas have the potential to , make it difficult to sustain past economic performance, in light o f the more competitive environment that Tunisia i s likely to face in the next few years. Although tariffs have been reduced and the economy is now more open to the outside world, tariff rates are still high relative to competitors. Progress has been made in privatization, but it i s not clear that the state’s role in commercial sectors has been substantially reduced, because the Bank’s program did not specify objective indicators for measuring progress, such as reducing the percent o f revenues or value added generated by state-controlled firms. Despite recent steps to eliminate past losses and establish a sound regulatory framework for the banking sector, N P L s remain high and have risen recently, reflecting incomplete enterprise adjustment (e.g., privatization) and a slowdown in tourism. As a result, Tunisia’s private investment remains low as a share o f GDP (13.5 percent) and o f total investment (50 percent), and does not compare favorably with other MENA countries at similar income level (Annex A, table 7a). Also, the private investment ratio to GDP in non-MENA high FDI flows also account for only a small percentage o f gross capital formation in the region, about 5 percent in 2000 compare that with Singapore, where FDI flows accounted for 26 percent (World Bank data, 2003). 21 growth countries (Chile, Korea, Malaysia, Mauritius, and Thailand) was 25 percent over the 1990s (World Bank data, 2003). Moreover, the country i s already beginningto face some o f the socioeconomic problems that prevail in more developed countries, such as persistent youth unemployment.12The Bank’s program needs to continue to support Tunisia’s effort to implement the EUAA and pursue trade openness beyond the EU, to improve the regulatory climate for private enterprises, to strengthen the court system to enforce business laws and regulations (related to N P L s in particular), and to continue progress on enterprise and financial sector privatization. Human Development and Progress toward MDGs 3.19 The Bank’s human resource development strategy has emphasized achieving universal primary education, expanding post-primary enrollment, reducing infant mortality and fertility, increasing health coverage, and enhancing the quality and efficiency of education and health services. The Bank’s strategy focus on the social sectors i s aligned with the MDGs and the country’s emphasis on social achievements. With the Bank and other donor support (for example, EU, AfDB and French Development Agency [AFD]), Tunisia h as met some MDGs target levels, and i s likely to meet the target levels by 2015 (Box 3.1). The Bank’s assistance contributed to many o f these outcomes. Education and health were the basis for 21 percent o f all Bank lending to Tunisia during the 1990s. Most o f this went to education, a pattern.repeated from previous decades.I3 3.20 Education. The Bank focused initially on increasing enrollments, then shifted toward improving quality and efficiency. The considerable Bank support to schools, vocational training and more recently to universities supplemented Government resources substantially and also attracted a number o f cofinanciers. The Government has assigned top priority to funding education ever since independence. At times, education accounted for over a quarter o f total central Government budget-higher than in any other comparator group, including countries at much higher income levels. Much o f the Bank support and Tunisia’s investment went into infrastructure and equipment, at times forming 85-90 percent o f total project costs (Annex A, table 20). Bank programs have been credited with improving basic education services, with particular emphasis on poor areas, Basic school enrollments have steadily risen to near 100 percent and from 1990 to 2001, there has been a doubling in enrollment in the second cycle o f basic and secondary schools enrollment (grades 7 to 12) (Annex A, table 7b). 3.21 Although early Bank education projects emphasized enrollment expansion, in line with Government policy, the lending portfolio o f the mid to late 1990s addressed quality and efficiency, Recent projects have focused on teaching and learning processes which are child-centered, and improving the efficiency o f education spending, albeit largely at the tertiary level. Repetition and dropout rates o f six graders declined from 23 percent and 13.6 percent in 1995 to 8.1 percent and 4.7 percent in 2001, re~pectively.’~ Likewise, l2Tunisia’s unemployment rate i s similar to the MENA average o f 15 percent in 2000 (Finance and Development, March 2003, page 19). As indicated in paragraph 2.14, the Bank‘s ESW has examined the unemployment situation and has proposedmeasures to improve it. l3The first education project o f the Bank was for Tunisia in 1962. l4Government data: Statistiques de l’enseignement scolaire, 2002-2003. 22 completion rates for grades 6 and 7 rose from 62 percent and 32 percent in 1995 to 87 percent and 63.5 percent in 2001, respectively (Annex A, table 7b). The facilities and services at basic, secondary, vocational and tertiary education have also been enhanced, although further improvements are needed in the efficiency o f services, For the vocational education sub-sector, attempts to improve the relevance o f training and to strengthen linkages with the job market have been moderately successful. /Box 3.1 : Tunisia’s Progress in Meeting the Millennium DeveloDment Goals ~ 2015 Indicators 1990 1995 1999-2000 Goals 1. Eradicate extreme poverty and hunger Population below $1 a day (%) 2.0 1 Prevalence o f child malnutrition (% o f children under 5) 10.3 9.0 5.15 Income share held by lowest 20% 5.7 2. Achieve universal primary education Net primary enrollment ratio (% o f relevant age group) 93.5 97.8 98.2 100 Youth literacy rate (% ages 15-24) 84.1 89.8 93.4 100 3. Promote gender equality Ratio of girls to boys in primary and secondary education (“7) 81.9 89.1 93.0 100 Ratio o f young literate females to males (% ages 15-24) 81.0 87.6 91.6 100 4. Reduce child mortality Under 5 mortality rate (per 1,000) 52.0 33.0 30.2 17.6 Infant mortality rate (per 1,000 live births) 37.3 30.5 25.8 12.3 immunization, measles (% o f children under 12 months) 93.0 91.0 84.0 5. Improve maternal health Matemal mortality ratio (modeled estimate, per 100,000 live births) 70.0 52.2 Births attended by skilled health staff (“7o f total) 80.0 81.0 82.0 6. Combat HIVIAIDS, malaria and other diseases Prevalence o f HIV, female (% ages 15-24) * Tuberculosis cases detected under DOTS (%) 79.0 * 7. Ensure environmental sustainability Access to an improved water source (% o f population) 80.0 90 Access to improved sanitation (% o f population) 76.0 88 8. Develop a Global Partnership for Development Personal computer (per 1,000 people) 2.6 6.7 22.9 Fixed line and mobile telephones (per 1,000 people) 37.6 58.6 95.6 *halt and begin to reverse. 3.22 Nevertheless, Bank projects have tended to equate quality with inputs (teacher training, class size, equipment and higher spending per student) instead o f student performance and outcomes. Weak monitoring and evaluation mechanisms helped sustain these assumptions and practices, and costs were not kept in check. Recent performance in intemational standardized testing (an outcome measurement) was poor, reinforcing With Bank support, the Government launched concems about the quality o f e d ~ c a t i o n . ’ ~ in 2002 a reform program including the introduction o f n e w subjects (Physics to students l5Third Intemational Mathematics and Science Study measured student performance in mathematics and science achievements and collected relevant information on instruction, curriculum, schools and policies. 23 Figure 3.2 Education S y s t e m Expansion at the P o s t demographic changes and Basic L e v e l 1600000 , the demand for secondary 1 and higher education 1400000 I200000 increases (Figure 3.2).19 1000000 There are now 300,000 800000 university students, which 600000 will rise to 500,000 by the 400000 end o f the decade. 200000 Education expenditure I 77-78 82-83 87-88 92-93 97-98 02-03 composition i s more -lst C y c k ofBasic Education -2ndCycle o f B a s i c Educ.&SecondatyEduc. skewed toward the Source: Government date: Statistiques de l’enseignement scolaire. secondary and higher education levels, compared to other countries.’’ Public spending on education i s already high (27 percent o f total public expenditure and more than 7 percent o f GDP in 2003) and cannot be expected to expand significantly and thus fiuther improvements in efficiency need to be pursued. There i s no mechanism for analyzing the education system’s fiscal sustainability in the on-going Bank-supported Education Quality Improvement Program, Phase 1 (EQIP l), which focuses on promoting inclusion in basic education by reducing l6The on-going Education Quality ImprovementProgram Phase 1 EQIP 1 (see Annex A, table 20). ” Hospital RestructuringSupport Project of 1991. Is The Regionnotes that there has been substantial progress on the reformsconceming the regional health bodies, although it was slow until about 2 years ago. OED notes that the Region in its evaluation o f the health structuringproject mentioned that requiring a legal framework for hospital autonomy a s a condition for the project effectivenessi s important to ensure political commitment. According to the Ministry o f Educationprojectionscovering the period 2000-2020, secondaryeducation student numbers will increase by 80 percent and basic education students will decrease by 40 percent. 2o Tunisia’s expenditure per student rises sharply with the level o f education. For example, per capita tertiary spending i s five times higher than primary level and three times higher than the secondary. These ratios do not compare favorably with other comparator countries (World Bank data, 2003). 24 dropout and repetition rates through improved teaching.21With the upcoming completion o f the EUAA; the projected pressures on the budget for higher social spending; and the need to accelerate the reduction o f the public debt by more ambitious fiscal consolidation, improvingthe efficiency o f social expenditures i s becoming o f paramount importance. 3.25 In sum, the support o f the Bank and other donors (EU, AfDB and AFD) and the Government’s sustained emphasis on human resource development have resulted in remarkable progress in almost all areas covered by the MDGs (Box 3.1). Figures 3.3-3.5 summarize the main achievements in comparison with the averages for MENA and other middle-income countries. Figure3.3: N e t Primary figure 3.5: Jnfant m i t y Figure 3.4 nlitency Enrollement 140 120 1W 60 80 40 60 20 40 20 0 0 1975 1975 1990 2000 1975 1990 2000 BTunisia OMENA ElTunisia DMENA BLower Middle-Incoma BTWI~SOMEVA ~~ ebuMidme-ImxlE Source: World Bank, World Development Indicators database. Poverty Alleviation and R u r a l Development” 3.26 Rapid economic growth laid the groundwork for poverty reduction given that income inequality remained unchanged. The poor accounted for 4 percent o f the population in 2000, down fiom 8 percent in 1990 (World Bank data). Tunisia’s incidence o f poverty i s the lowest among MENA countries at similar income level (Annex A, tables 2b and c). Although rural poverty has decreased over the years, its 2000 level remained four times the urban level (World Bank data). 3.27 Controversy on poverty estimates not yet resolved. As mentioned earlier, there i s a range o f estimates o f poverty in Tunisia. World Bank and Tunisian analysts note that poverty i s predominately rural and this contradicts the findings o f the governmental in~titutions.~~Official Tunisian data shows that poverty h as not been primarily rural since 1990. According to the National Institute o f Statistics (INS), the incidence o f rural poverty has been 5.7,4.9 and 2.9 percent in 1990, 1995, and 2000 respectively. These levels are much lower than those reported by the Bank (Table 1.3).24 The Bank i s working with the Tunisian authorities to reconcile the methodological differences that are driving the 21 Economic and fiscal analysis are light in the context of this program. 22 T h i s section draws heavily on the 2003 OED PPAR, report No. 26260 (World Bank 2003), and a forthcoming OED Working Paper prepared for this evaluation, listed in the bibliography. 23 M. Ayadi et al., “Putting Robust Statistical Methods into Practice: Poverty Analysis in Tunisia,” Swiss Joumal o f Economics and Statistics, Vol. 137, No. 3, Sep. 2001, pp. 463-482. 24 Republic of Tunisia. Ministry o f Developmentand InternationalCooperation. National Institute o f Statistics. National survey on householdbudget, consumption, and living standards -2000. Volume A. Results o f the survey on household budgets. Enquete nationale sur le budget, la consommation et le niveau de vie des mknages-2000. Volume A. Resultats de 1’Enquete sur le Budget des minages, p 33. 25 substantial discrepancies in poverty estimates. I t i s important to close the large gap between estimates so that the focus can be shifted to policy and strategy to reduce poverty. Every attempt should be made before the forthcoming 2005 Household Survey and before the next poverty assessment i s completed (a collaborative effort between the Government and the Bank i s recommended) to address differences in poverty measurements. 3.28 f i e Bank’s rural development strategy. The Bank assistance strategies have broadly agreed on the following priorities for agriculture and rural development: (i)liberalize the agriculture sector, (ii) increase the efficiency o f resource use, (iii) promote sustainable natural resource management, (iv) increase incomes in remote rural areas, (v) strengthen agricultural support services; and (vi) promote land consolidation and tenure security. These objectives were rooted inthe Bank’s analytical work since 1982 (Annex A, table 4).25 To achieve its objectives, the Bank provided a number o f agricultural loans: two Agriculture Sector Adjustment Loans (ASALs), two Agriculture Sector Investment Loans (ASILs); one Water Sector Investment Project (WSP); two Agriculture Research and ExtensiodcumlServices projects; two Northwest Mountainous Areas Development Projects, one Forestry project, one Natural Resource Management Project; and one Rural Finance project. Progress toward addressing Bank’s program priorities i s examined below. 3.29 Liberalization. With assistance from the Bank through the two ASALs, Tunisia has undertaken substantial agricultural policy reforms since 1989. Subsidies for fertilizer, animal feed, seed, irrigation, and mechanized services have been substantially reduced. The supply o f farm inputs, collection o f produce, and the provision o f mechanized plowing and harvesting have been privatized. The role o f private extension agents and veterinarians has expanded. Progress has; however, been slower in liberalizing food marketing, the State remaining involved in cereals, milk, olive oil, sugar, tea, coffee, and tobacco. 3.30 Increased efficiency o f resource use in irrigated perimeters. This objective, supported by ASIL and WSIP loans, was partially achieved as water tariffs were raised, and many water users’ associations were created to manage irrigation in a decentralized way. Since Tunisia has not developed direct measurements o f water savings at farm and irrigation perimeter levels, there i s no direct measure. But there are some indirect measures including the extent o f the use o f water savings devices and the value added from the use o f irrigated perimeters. In 1995, the Government launched a National Water savings program by subsidizing the purchase o f water saving equipment. So far, around 72 percent o f the public irrigation perimeters are equipped with these devices. However, following the drought o f 1998, the Govemrnent started to subsidize water tariffs. This subsidization runs counter to the objective of increasing water tariffs and water savings devices to improve efficient use. Regarding the value-added from the use o f irrigation perimeters, the continued subsidization o f wheat maintains an incentive system that favors the cultivation o f cereals, a l o w value crop. Problems o f accessing the EU 25These objectives addressed all issues the Bank raised in i t s analflcal work except the high risks o f a drought- vulnerable agriculture and the weaknesses o f marketing. The Bank addressed the growth, sustainability, and poverty reduction objectives of the govemment, but did not pay sufficient attention in i t s program to the government’s other major objectives of achieving food self-sufficiency, and increasingrural employment. 26 market,26 and domestic problems o f marketing high-value crops are also undermining the switch to higher value crops; all o f which warrant Bank support. 3.3 1 ~ustainable Natural Resource Management. There have been substantial physical achievements in Forestry 1 1, Natural Resource Management, the Northwest Mountainous Areas and the Northwest Mountainous and ForestedAreas projects. For example, in the Northwest Mountainous Areas project the water conservation component was fully implemented, covering some 53,000 ha. Improved soil management allowed farmers to plant pastures and altemative crops on land that would otherwise have been l e f t fallow. An. increased demand for ago-forestry species was met by the Ofice du Development Sylvo- Pastoral du Nord-Ouest (ODESYPANO), a regional development agency, supporting the establishment o f 36 small private enterprise nurseries. The Bank sought to improve natural resource management in a sustainable fashion by involving local communities. The partnership between the Forestry Department and local NGOs expanded from piloting 10 integrated rural development operations to 40. Forestry Groups with Collective Interest (gvoupementforestier d 'interet collectif(GF1C)) in forested areas or Agricultural Development Groups (gvoupement developpement agricole (GDA)) in agricultural areas have been created. The Government has subsequentlyallocated increased resources- budgetary and from donors-to natural resource management. 3.32 Increased incomes in remote rural areas. The Bank sought to increase the incomes of poor farm families in remote rural areas such as the North West Region through its two Northwest Mountainous Area Development projects. I t substantially achieved this objective as well as the broader objective o f improving the living standards of these fmfamilies (Table 3.3). The major benefits to the poor have been improved access to public goods and services, including schools, health facilities and potable water. The positive results on poverty reduction are supported by the Bank findings in 2003, which noted the overall reduction in rural poverty and pointed that the North West region i s no longer the poorest o f rural areas.27 Table 3.3 also shows that the farm income i s only half o f total household income for small farmers (with less than 5 hectare), reflecting the positive but limited contribution o f improved agricultural techniques to rural vulnerabilitylpoverty reduction. The project report points out that the very poor, and landless did not benefit much from the agricultural interventions.28 This highlights the need for supplementing efficiency gains with better targeted safety nets. 26 The 1995 EUAA excludes agricultural goods. However, an agricultural agreement with the EU in January 2001 presented new opportunities for Tunisian exports, which would boost the country's position in the European market, especially for products such as olive oil, double concentratetomato paste, and table grapes. 27 The Center West i s the poorest, according to the Bank data. In the Natural Resource Management project (NRM, 1997-2003) operating in the north (Jendouba), center west (Kasserine) and south (Medenine), there have been substantial physical achievements, but since there i s no M&E, there i s no systematic evidence on the income-increasing impact which i s presumed to be positive. *' World Bank. Tunisia Northwest Mountainous Ares Development-projectreport. 27 Table 33: Northwest Mountainous Areas Development Project: Selected Results from the 2000 Survey Indicators Unit I996 2000 % difference Agncultural income Less than 5 ha TD 1,113 1,633 46 7 More than 5 ha TD 3,141 4,724 50 4 Contribuhon to total HH income. Less than 5 ha % 47 48 1.o More than 5 ha % 65 67 20 Employment in farmly farm Workday ~ 136 285 109 Distance to potable water KM 1.5 08 -46.7 Areas close to basic education facility % 39 46 17 9 Distance from clinic KM 7 3.9 -44 3 Wheat yeld Less than 5 ha QTmA 11.5 13.6 18.3 M?!?th%.5ha.-. . ---- .- . - --- .- - - - - - - - - - - - - - . .. - 10.7 ..... ..... . . .-. . .. ... 16.1 --.--.. . .. .. . 50.5 . . ... . . - .- . Barley Yield QTlflA 11.1 15.4 38.7 Source: Northwest Forestry and Pastoral Development Agency (ODESYPANO). Note: TD: Tunisian Dnar; KM: Kilometer; Q T M : Quintalper hectare. 1 Quintal= 100 Ihlos. The survey covered 158 households with less than 5 ha farms and 101households with greater than 5 ha farms. These households come f” 28 Community DevelopmentGroups. 3.33 Strengthen agricultural support services. The Bank sought to improve agricultural support services (such as research and extension and rural fmance), and to strengthen several institutions (such as water and community groups) as means to achieving developmental objectives. The outcome i s mixed, The Bank achieved its objectives to improve participation and resource management and to increase family incomes by supporting Water Users Associations and Community Development structures, both local level institutions. Many o f these institutions have been created and are functioning. The Bank’s contribution to strengthening agriculture research and extension and rural finance to assist smallholders was less successful. Despite some progress, research and extension i s far fiom being demand-oriented because the agenda o f researchers still dominate, and the nrural translation o f research results into extendable messages i s still problematic. I finance, the Government policy on debt forgiveness inresponse to drought still continues to undermine financial discipline, and therefore the viability and reach o f rural finance. 3.34 Land consolidation and tenure security. T h e Bank tried to promote land consolidation and tenure security as a means o f improving incentives t o invest in land and increase productivity especially among smallholders. I t succeeded in implementing some pilot cases, but did not succeed in accelerating the process o f land consolidation and tenure security. A 2003 OED PPAR notes that the Bank did not give sufficient attention to these complex and sensitive land issues, and argues correctly that the Bank has largely tacked the land issue onto projects ( A S A L 11,ASIL I and Northwest Mountainous Area , Projects).29 On the other hand, the B a n k contributed in later years to raising Government consciousness and increasing Government resources to land issues, 3.35 To conclude, the Bank was successful in supporting measures that raised farm incomes in remote rural areas, increased local institutions participation, and improved resource management sustainability. On the other hand, the Bank’s contribution t o linking research to extension, to enhancing rural finance, and to promoting land tenure 29 A proposed policy note on land issues (mentioned in the 2000 CAS) was dropped. 28 and output markets was less successful. Future Bank programs should focus on these areas: supporting institutions essential for efficient functioning o f output and input markets (for example, land and rural finance), while maintaining social cohesion through better targeted safety nets for the rural population. Ministry o f Agriculture (MOA) officials suggested that the Bank and the M O A should closely collaborate to undertake a sector wide review as a first step. As M O A officials pointed out, the last agricultural sector review was carried out 2 1 years ago and a new review i s needed to inform future Bank programs. Outcome, Sustainability and Institutional Development 3.36 Bank’s assistance, in tandem with the IR/LF and other donors, made a contribution to maintaining macroeconomic stabilization and structural reforms, which facilitated growth. Along with sustained per capita income growth, solid progress was made in reducing poverty. With Bank assistance, the overall soundness o f the banking system improved. However, large public banks with a heavy burden o f non-performing loans still dominate the banking sector and pose risks to the systems stability. Tariffs have been reduced and the economy i s now more open to the outside world but protection remains high compared to Tunisia’s competitors. Further progress in trade liberalization will be governed by the implementation o f the EUAA. The Bank’s assistance also contributed to significant progress in the rural and social sectors, Inthe rural sector, the Bank’s assistance made important contributions such as achieving sustainable resource use, increasing farm incomes, and improving living standards in remote areas. However, efforts to facilitate rural credit and land consolidation were less effective. With Bank support, remarkable progress in meeting the MDGs was made. Almost all children attend school, more children are surviving their first years, l i f e expectancy has grown substantially, and gender equity has improved steadily. However, the Bank did not pay sufficient attention to the country’s expanding social programs and public expenditure reviews were not periodically undertaken. Overall, the outcome o f the Bank’s assistance program i s rated satisfactory based on its substantial relevance and efficacy. 3.37 There are two riskdvulnerabilities to sustainability: the relatively highlevel o f extemal debt and large fiscal deficit increase Tunisia’s vulnerabilities to external shocks, and vulnerabilities to regional and international developments, including the expiry o f the MFA. However, the country has managed economic and regional political uncertainties quite well by gradually diversifymg its export base, forging closer relations with the EU, and maintaining social and macroeconomic ~tability.~’ The progress achieved in attainting and maintaining macroeconomic stzibility i s likely to be sustained-a broad political consensus that realizes the benefits and understands the importance o f economic stability has evolved. Similarly, the structural reforms that have been accomplished have been based on a consensus among the key actors in the economy and are likely to be sustained. As Tunisia has joined WTO and has signed a free trade agreement with the EU, trade and investment policy reforms are unlikely to be reversed. Sustainability i s rated likely. 30Tunisia has successfully diversified i t s exports toward new manufactured products including electrical machinery, tobacco, footwear, explosives and pyrotechnic (World Bank 2000, Social and Structural Review, Report No. 20976, page 14). 29 3.38 The already relatively good institutional capacity in the country was strengthened fbrther with the Bank’s support. Institutional changes in Tunisia’s policy, regulatory and legal environment were accomplished with the help o f Bank assistance. A broad range o f investment, competition, and banking laws were implemented (Annex A, table 2n). New structures were established and now are operating successfully, such as the bank supervision and the associated revised banking law and the new regulatory framework for mutual funds that complied with international standards and represented good progress in ensuring an adequate legal framework for the sector. On the other hand, there has been poor enforcement o f regulations concerning loan recovery, and although a law that created severance scheme for laying o f f workers has been passed, enterprises continue to face obstacles and very complex procedures if they want to dismiss workers on “economic reasons”. 3.39 Other organizations were restructured. The capacity o f the ODESYPANO, a regional development agency in the North West, one o f the poorest regions, and o f the community development committees has been enhanced. Contracting o f soil and water conservation works to private firms, privatization o f veterinary services, and strengthening of water user and community development groups and agricultural development associations all has a positive impact. On the other hand, the Bank’s efforts to strengthen institutional development to promote rural finance, enhance research and extensions, and address land tenure problems-some o f the most difficult structural problems in rural development-had a limited impact. In contrast, substantial institutional and structural changes were made in the education and health sectors with the Bank’s support, facilitating the remarkable progress toward meeting the MDGs. On average, the Bank’s contribution to institutional development h as been substantial. 30 4. Contributors’ Performance Tunisia’s Own Central Role 4.1 The main party responsible for the significant socio-economic achievements o f Tunisia i s the country itself. The Bank’s support and that o f other development partners no doubt played important roles, but it was the Government’s own belief in the correctness o f the policies it followed and its ability to muster the national consensus to implement them that made the biggest difference. Perhaps three main attributes o f Tunisia’s efforts were crucial for this overall success: (i) program ownership and the explicit policy o f the Government to move ahead with difficult policies and reforms only after a broad consensus with labor unions, the business community and the political structure had been achieved, albeit within a regime that i s governed by a strong central authority. Although this meant that the pace o f reform had to be cautious and deliberate, it also meant that there have been no policy reversals, and that economic agents could count on a basically predictable policy environment; ( ii) the maintenance o f high investment levels in h um anresources which has led to a well-educated population and a well-trained and qualified labor force; ( iii) and the achievement and maintenance o f macroeconomic stability through a combination o f sound fiscal, monetary, and foreign exchange policies. 4.2 This enabled the country to implement reforms across a wide variety o f areas: price liberalization, trade, financial and private sector development, investment incentives, legal and institutional frameworks, human resource, and agriculture and rural development. However, though comprehensive, both the pace and depth o f reforms has been uneven. Whereas stabilization policies were implemented rather swiftly and have been generally maintained, and broad fiscal and financial sector reforms have moved forward rapidly, progress with public enterprise restructuring and privatization has been relatively modest, proceeding at a more cautious pace because the consensus behind them i s not as firm. In addition, labor mobility remains hamperedby rigidities in the labor market whose removal has experienced considerable resistance ftom the unions. Trade liberalization, on the other hand, was initially resisted and had moved slowly, but eventually would accelerate under the EUAA free trade agreement. The Government has placed strong emphasis on education. This investment has paid off impressively: rising education standards were a major contribution to the rise in total factor productivity. 4.3 According to some policy makers, the 1986-93 period represented the first phase o f reforms that were not fully developed at the time and, sometimes, not fully owned by the country. This led to mixed and partial results and some slippages in the implementation o f policies. To these practitioners, 1993 signaled the beginning o f the “post-adjustment,’ phase, in preparation for the signing o f the EUAA in 1995. During this period, the authorities took a couple o f years to develop their own program and build the requisite internal consensus in i t s support. This served as the basis for the three ECALs (the Tunisians made the point that they chose this name, over a S A L , since in their view adjustment had already been completed and the country had entered i t s post- adjustment phase). However, even when the authorities have themselves been convinced o f the reforms that they owned, they have chosen to continue to move prudently and deliberately to ensure that all concerned were on board. I nthe words o f an official: “We wait until things ripen and then we move, step-by-step. This is why there has been no 31 reversals or slippages in this phase. For example, after seven years o f partial trade liberalization and five years o f hesitant privatization, both have now accelerated.” 4.4 Perhaps the most controversial issue has to do with the “appropriate” pace o f reform. The gradualist, cautious approach followed by the Tunisian authorities to ensure as broad a political consensus as possible in sensitive areas has led to some delays, from the standpoint o f the Bank, and it entails some risks, as the economy faces growing competitive pressures. But on the other hand, the gradual approach has allowed the Government to build the necessary consensus and has served the overall objective o f reform well, at least so far. Bank staff went along with this pace in general, but by the late- ~~ 1 9 9 0 started encouraging Tunisia with more urgency to accelerate the implementation o f i t s reforms and make the private sector more open and transparent, in view o f the expected significant increase in competitive pressures for the country. The Tunisians have elected not to abandon their gradualist approach that has served them well so far in order to avoid risking a major derailment o f reforms because o f domestic opposition to the more difficult measures required. The World Bank’s Performance 4.5 The Bank provided significant assistance to support the country’s development efforts. The topics o f the analytical work covered by the Bank’s ESW were timely and driven by socio-economic developments in the country. It was generally o f high quality and important for the design o f Bank’s strategies. It also underpinned Bank’s lending. 4.6 Policy-based and sector investment loans were generally well conceived and designed.31 They covered the right policy areas, starting with a broad catch-all operation like the ITPAL, as was appropriate for the early days o f reform, and became more focused and specific as the process matured. Successive operations covered the same set o f areas, but each time building on previous progress and adding new and deeper dimensions. This reasonable approach worked particularly well in financial reform where Bank assistance has supported the country in introducing the basic rudiments o f a modem financial system in the early days, to adopting more specific measures appropriate for a more advanced system by the tum o f the century. Similarly, early education and health projects placed more emphasis on improving access, but the lendingportfolio o f the later 1990s has been more focused on sector wide policy issues such as enhancing the quality o f services. 4.7 In general, Bank staff and management showed reasonable flexibility during implementation. For example, Bank staff showed flexibility during E C A L I preparation and reached an agreement with the Government to postpone the banking reforms initially envisaged in the operation in order to arrive subsequently at a fully agreed policy package for the sector loan (ECAL I I ). flexibility entailed a reduction o f E C A L I This amount by half. On the other hand, the Bank was not comfortable with the telecommunication privatization process, and decided to allow the floating tranche o f E C A L 111to lapse, In a 31One exception i s the 1993 PERL. The project seems t o have been too ambitious and unrealistic in its design from the onset. It was the first operation to try to help a reluctant country deal with the difficult area o f PE reform, employing an experimental instrument embodied in the performance contracts, and resorting to imprecise conditionalities that started weak and got weaker during implementation. It was also poorly supervised, except for its transport component. 32 few instances, a technical or partial waiver for a tranche release condition had to be given, or a loan covenant was not honored, and the Bank still disbursed the loan. This was normally a negotiable approach, since the agreed measures were subsequently implemented and the momentum o f the overall reform effort maintained. 4.8 Inparticular, an explicit approach o f “incremental progress” by all the parties involved has proven very effective in Tunisia. By that we mean the approach followed by the Bank o f staying the course in a particular policy area and addressing the same or closely related issues in such an area with successive analytical pieces or lending operations, but each time incrementally and patiently introducing additional measures until more complete progress i s achieved over time. This was particularly clear in the more difficult areas in finance, agriculture and investment incentives areas where political resistance initially slowed down the rate o f progress, and patience and persistence proved worthwhile. 4.9 As i s to be expected, where there was strong concordance between the Bank and the Government as in the case o f Natural Resource Management, there was great progress; and vice versa as in the case o f rural finance. The Bank was not able to change the Government’s traditional approach o f re-scheduling and forgiving debts as a method o f drought relief. This behavior undermined incentives to repay the National Agricultural Bank (Banque ~ a t ~ o n aAgricole le BNA) loans even among farmers in irrigated areas who were not drought-afflicted. 4.10 While turnover o f country directors for Tunisia has not been high (Annex A, table 9), staff rotation i s relatively high at the project level. There have been three or more task managers in eight (24 percent) out o f 33 projects (Annex A, table 8). The turnover was i n g that had five task managers, and the the highest for the Hospital ~ e ~ t ~ c t u rLoan Private Investment Credit that had four. On-going projects with a high turnover o f task managers include the Education Quality Improvement Program (with 3 task managers). Other Development Partners 4.1 1 The I n t e r n a t i ~ n aMonetary l Fund. Tunisia joined the Fund in April 1958. The IMF has played a significant role in supporting the country’s successful stabilization and financial sector reform efforts. As with the Bank, the Fund provided valuable technical advice and considerable fmding, and played an important role in helping the Government avert the threatening balance o f payments crisis in the mid-1980s. A Standby Arrangement in an amount o f SDR 103.65 million was approved in July 1988, and a drawing o f SDR 207.30 from the Extended Fund Facility was approved in July 1992. These amounts were very important in helping Tunisia meet external financing requirements, and the underlyingprograms supported the Government’s efforts to maintain macroeconomic stability and implement structural reforms in a number o f the areas also supported by Bank adjustment lending. The Fund and the Bank jointly conducted a financial assessment. The Fund also provided assessments o f the country’s macroeconomic conditions under the three ECALs. The Fund and the Bank also cooperated in a number o f areas to provide technical advice, most notably for the financial sector and debt management. 33 4.12 The European Union. The partnership between Tunisia and the EU has been very strong, both with the Commission itself and with EIB. Over the 1977-1996 period, four financial protocols were implemented, for a total support from the EU o f Euro 742 million; Euro 324 million directly from the Commission’s budget, and Euro 418 million from EIB. Priority was given during this period to support agriculture and rural development, environmental management, transport, industry, infrastructure, and training. Following the signature o f Tunisia o f the Association Agreement in 1995, the nature o f the support shifted significantly under the MEDA I program (1996-99). In line with the evolving Government priorities at the time, 48 percent o f this program o f Euro 428.4 million was in support o f structural adjustment, in conjunction with the World Bank E C A L series. In addition, Euro 620 million o f loans were provided by EIB, mainly in support o f infrastructure, environmental protection and private sector development. MEDA I1(2000-2006) was designed to support similar priorities that were further emphasized in the Document de Strategie (2002-2004) and the accompanying Programme Indicat~~u~ionul(2002-2004). Under this program, a total o f about Euro 249 million in Commission funds would support structural adjustment; modernization o f industry, the judiciary, ports, and IT; the media and greater participation o f civil society in socioeconomic development. The EU analysis o f economic developments and prospects in Tunisia are similar to those o f the Bank; giving the country high marks on macroeconomic stabilization, good overall performance on structural adjustment, but stressing the need to accelerate the implementation o f policies that would increase competitiveness, such as, further export-orientation, private sector development, and dealing more decisively with the public enterprise sector through the mise ci niveau program. Finally, the EU h as also given Tunisia high marks for i t s efficient absorptive capacity o f the EU assistance program. 4.13 The EU has cofinanced all three Bank-supported ECALs, for a total o f Euro 260 million, Also, the EU along with KfW and the French Development Agency have been important partners in the Bank’s rural development program. Staff o f the EU delegation in Tunis feel that the cooperation with the Bank h as basically been very good, especially during loan preparation and appraisal, but that the Bank could do a better j o b o f actively engaging EU staff during loan implementation and supervision. The EU noted the lack of a Bank representation in Tunis. At present the Bank has only a liaison office in Tunis staffed by one Operations Officer; the Country Director is based in Washington D.C. 4.14 The African Development Bank. AfDB has enjoyed excellent cooperation with Tunisia and has contributed significantly to i t s development effort. Since the beginning o f i t s operations in the country in 1968, it has committed about US$4,290 million equivalent in support o f 84 operations. AfDB loan commitments have averaged about US$250 million equivalent annually in recent years. These loans have given priority to electrification, roads, railways, water resources, agriculture and rural development; as well as structural adjustment, in conjunction with the three ECALs (for a total o f about 330 million AfDB currency units), and SME development through support o f the mise d niveau program in conjunction with the EU. AfDB staff working on the ECALs commended the excellent working relationship with the Bank. 4.15 The Islamic Development Bank. Tunisia joined the IDB in 1974 and since then has enjoyed an exemplary relationship with the IDB. The IDB supported Tunisia’s 34 development efforts by providing trade financing (US$8 18 million), project financing (US$355 million), and special assistance (US$4 million). Priorities for IDB assistance have been public utilities, mainly water and sewerage (44 percent), agriculture and integrated rural development (17 percent) and social sectors (15 percent). The IDB co-financed one World Bank project and the working relationship between the two institutions has been excellent. Exogenous Factors 4-16 The amount o f rainfall in a particular year i s a very important, unpredictable, and ever-present exogenous factor for Tunisia. I t has an immediate effect on agricultural production, which because o f its significant share o f GDP, greatly influences aggregate production. The cyclical nature o f GDP in Tunisia i s due to rainfall cycles, and it is interesting to note in this context that this cyclical relationship i s asymmetric. The influence o f agriculture production on GDP is stronger in the contraction phase than in the expansion phase, since when agricultural output i s higher t ha n normal, i t s multiplier effect through its use by agro-industries takes place only if spare capacity i s available. There is also a household incomes effect that reinforces this asymmetry. 4.17 Another important exogenous factor that applies to most countries, is the level o f economic activity in trading countries. In the case o f Tunisia, this means essentially the rate of economic growth in the EU. Because o f the increasing international competition in exports to the EU, this factor i s likely to be quite significant, particularly during years o f low, or negative EU growth. 4.18 Although Tunisia i s not a direct participant in the Middle East conflict, i t s economy can s t i l l feel any significant perturbations in the region, as happened during the Gulf War, the attack in Djerba, a tourist resort, and as i s currently the case in view o f the uncertain situation in Iraq. 4.19 By their nature, exogenous factors are not within the country’s control. However, Tunisia can try to build up i t s resilience against them by increasing the flexibility o f i t s economic structure so it can respond more rapidly to unpredictable changes in its environment. We have seen above that through i t s prudent macroeconomic stabilization measures and adjustment program to make the economy more open and competitive, it has been able to weather some o f these factors over the past couple o f decades. 35 5. Recommendations 5.1 This evaluation finds that a combination o f macroeconomic stability, attention to human resource development and structural reform can yield dramatic improvements in the living standards o f developing countries. Also, government ownership o f reforms and the reform program are important ingredients o f a successful Bank assistance program. It also shows that ESW can play an important role in formulating and supporting reform programs that underline Bank lending, particularly adjustment lending. In this regard, omission o f diagnostic work, such as sector work, public expenditure analysis and core fiduciary work do have an impact on the Bank’s programs in sectoral reform, the efficiency of public expenditures and accountability. 5.2 This evaluation has the following recommendations: Follow through on supporting programs to improve the environment for private sector development and enhance competitiveness as Tunisia seeks to integrate within the world economy. Specifically, the Bank should help the country (i) pursue trade openness with the EU and the rest o f the world; ( ii) improve the enabling environment to attract private and foreign investment; ( iii) strengthen the judicial system to implement laws and regulations, regarding loans recovery, particularly non-performing loans and measures to facilitate exit of private firms; and (iv) continue progress on privatizing public financial and enterprise firms. Continue support for social sectors. While supportive o f the MDGs, the Bank’s program needs to continue this emphasis and focus on improving the country’s capacity to prioritize public spending and address bourgeoning demand for secondary and tertiary education-given the demographic transition underway- while preserving social gains. As expenditures on social services remain high, representing over 40 percent o f expenditures, education expansion at the post- basic level will necessitate efficiency improvements. A public expenditure review could help build capacity to prioritize social spending and provide the basis for measures to efficiently address education expansion. Focus on institutional development and safety nets in the rural sector. Future Bank programs should focus on institutional development to support efficient output and input markets (for example, land and rural finance), while maintaining social and political stability through better targeted rural safety nets. Good quality economic and sector studies should inform future Bank programs. After 2 1 years without a comprehensive Bank agricultural sector review, OED agrees with the Govement’s suggestion that i t i s time to undertake one. e Enhance a results-based monitoring and evaluation approach. Strengthening monitoring o f output and outcome indicators embedded in an improved monitoring and evaluation function would help to anchor future Bank’s assistance program in a result-based approach. 37 Annex A: Statistical Annexes Annex 1: Tunisia at a Glance................................................................................................................. 39 Annex 2: Table 2a: Tunisia-Key Economic Indicators, 1990-2001 ................................................. 41 Table 2b: Poverty and Inequality in Tunisia, Egypt, Morocco and Jordan.......................... 42 Table 2c: Comparing National and International Poverty for Selected Countries in MENA R e g o n..................................................................................................... 42 Table 2d: Social Indicators for Tunisia and Comparator Countries, 1975-1980 ................. 43 Table 2e: Social Indicators for Tunisia and Comparator Countries 1995-2001 .................. 44 Table 2f: Tunisia-Privatization and Restructuring by Sector (1987-August 2003) ............ 45 Table 2g: Tunisia-Foreign Investment in Privatization ....................................................... 45 Table 2h: Tunisia-Privatization and Restructuring by Sector (1998-August 2003) ............ 46 Table 2i: Tunisia-Privatization Types (between 1982 and August 3 1, 2003) ..................... 46 Table 2j: Tunisia-Mode o f Privatization (between 1982 and August 3 1, 2003) ................. 46 Table 2 k Trade and Openness-Tunisia and Comparator Countries .................................... 46 Table 21: Average Tariff Rates (Weighted, %) ................................................................... 47 Table 2m: Tunisia-Summary o f Tariff Statistics, 2000-2003 ............................................... 47 Table 2n: L i s t o f Investment, Competition and Banking Laws ........................................... 47 Table 20: Categories o f Investment in Five Most Recently Closed Education Projects and in the Ongoing Quality Project (EQIP) .......................................... 47 Annex 3: Table 3a: External Assistance to Tunisia (Net Receipts o f External Financial Resources 1990-2001 .......................................................................................... 48 Table 3b: Tunisia - World Bank Flows (US$ million) 1990-2003 ..................................... 48 Table 3c: Algeria - World Bank Flows (US$ million) 1990-2003 .................................... 48 Table 3d: Egypt - World Bank Flows (US$ million) 1990-2003 ........................................ 48 Table 3e: Morocco - World Bank Flows (US$ million) 1990-2003 ................................... 49 Table 3 2 Jordan - World Bank Flows (US$ million) 1990-2003 ....................................... 49 Annex 4: Selected ESW and CAS L i s t for Tunisia ............................................................................... 50 Annex 5: Table 5a: Ratings for Tunisia and Comparator Countries .................................................. 52 Table 5b: Ratings for the Active Portfolio ........................................................................... 52 Table 5c: All Approved Project, Evaluated and Ongoing as o f December 18, 2002 ..................................................................................................................... 53 Annex 6: Cost o f Bank Programs for Tunisia and Comparator Countries ............................................ 57 Table 6a: Costs .................................................................................................................... 57 Table 6b: Efficiency Table .................................................................................................. 57 Annex 7: Table 7a: 1996 and 2000 Countsy Strategy Objectives and K e y Macroeconomic and Structural Reform Performance Indicators ..................................................................... 58 Table 7b: 1996-2000 Country Strategy Objectives and K e y Human Development Performance Indicators .......................................................................................................... 59 Annex 8: Tunisia- Task Manager Turnover o f Projects Approved in FY90-03 .................................... 60 Annex 9: Tunisia: Bank's Senior Management, 1991-2001 ................................................................. 61 39 Annex A Annex Table 1: Tunisia at a glance 9/4/03 M. East Lower- POVERW and SOCIAL B North middle- Tunisia AfriCa income diamond* D~VBlODment 2002 Population, mid-year (millions) 9.8 306 2,411 Life expectancy GNI per capita (Aflas method, US$) 2,000 2,070 1,390 GNI (Atlas method, US$ billions) 19.6 670 3,352 Average annual growth, 199&02 Population PA) 1.2 1.9 1.o Labor force 1%) 2.4 2.9 1.2 GNI Gross per primary Most recent estimate (latest year available, 1S96-02) Capita nroilment Povelty (% of population below nationalpovertyline) Urban population (% of total POpulationJ 87 58 49 Life expectancy at birth (years) 73 69 69 infant mortality (per 1,OOO live births) 24 37 30 Child malnutrition (% of children under 5) 4 11 Access to improved water source Access to an improvedwater source (% ofpopulation) illiteracy (% ofpopulationage 15+J Gross primary enrollment (% of schod-age Populationf 80 27 117 88 35 95 81 13 111 - Tunisia Male 120 96 111 ~ ~ ~ c ~ L o w e r ~ i d d lgmup Female 115 90 110 KEY ECONOMIC RATIOS and LONG-TERM TRENDS 1982 1992 2001 2002 Economic ratios. GDP (US$ billions) 8.1 15.5 20.0 21.2 Gross domestic investrnentlGDP 31.7 34.3 27.9 25.8 Trade Exports of goods and serviceslGDP 36.9 39.5 47.1 44.3 Gross domestic savingdGDP 21.2 27.4 23.4 21.4 Gross national savingslGDP 22.5 26.4 23.6 22.4 Current account balandGDP -9.2 -7.0 -4.3 -3.5 Interest paymenWGDP 2.7 2.6 2.1 2.2 Total debffGDP 46.4 55.1 54.5 57.2 Total debt servicdexports 16.2 20.0 13.9 15.4 Present value of deWGDP 54.2 Present value of deWexports 102.7 Indebtedness 198242 199242 2001 2002 200245 1 (average annualgrowth) GDP 3.8 4.7 4.9 1.7 4.7 -Tunisia GDP per capita 1.3 3.2 3.7 0.5 3.7 __ Lower-middlejncomeomuo Exports of goods and services 7.2 5.6 12.1 0.0 5.5 STRUCTURE of the ECONOMY 1982 1992 2001 2002 Growth of investment and GDP (%) (% of GDPJ Agriculture 13.2 16.1 11.6 10.4 *O T Industry 31.1 28.5 28.8 29.1 10 Manufacturing 11.1 16.5 18.5 18.6 Services 55.8 55.4 59.5 60.5 0 Private consumption 62.3 56.6 60.9 62.3 -10 General government consumption Imports of gwds and services 16.5 47.4 16.0 46.5 15.7 51.7 16.3 48.7 I -GDI *GDP (average annualgrowth) 1982-92 199242 2001 2002 1 Growth of expo- and imports (%) c Agriculture 5.3 1.9 -1.5 -10.3 Industry 3.6 4.8 5.7 3.4 Manufacturing 2.0 5.6 6.9 2.2 Services 3.4 5.3 6.0 3.7 Private consumption 2.7 4.6 5.4 3.4 General government consumption 3.0 4.2 5.0 4.5 Gross domestic investment 0.8 3.7 6.4 6.2 Imports of goods and services 3.0 4.7 13.4 -1 .7 Note: 2002 data are preliminary estimates. 'The diamonds show four key indicators in the country (in bold) compared with its income-gmup average. if data are missing, the diamond will be incomplete. Annex A (continued) 40 ~ ~ Tunisia PRICES and GOVERNMENT FINANCE Domestic prices 1982 1QQ2 2001 2002 Idlation (%) 1 (% change) Consumer prices 5.8 1.9 2.8 Implicit GDP deflator 16.0 5.7 2.7 2.8 Government finance (% of GDP, includes cun-en! grants) Current revenue Current budget balance Overall surplusldeficit 31.7 6.7 -2.2 26.8 4.1 -3.0 24.6 5.2 -3.5 24.6 4.7 -3.1 1 97 98 ----GDPdeRator 99 M) 'O'CPI 01 TRADE 1982 1892 2001 2002 Export and import levels (US$ mill.) (US$ millions) Total exports (fob) 1,980 4,014 ~ 6,606 6,857 Fuel 911 609 610 641 Agriculture 63 416 541 489 Manufactures 965 2,432 4,981 5,272 Total imports (cif) 3,389 6,432 9,521 9,503 Food 356 430 654 653 Fuel and energy 377 449 888 886 Capital goods 1,032 1,578 2,240 2,236 46 97 98 99 00 01 Export price index (1995=100) 79 151 154 Import price index (1995=100) 89 107 109 mExportS BInportS Terms of trade (1995=100) 89 141 141 BALANCE of PAYMENTS 1982 1992 2001 2002 Current account balance to GDP (x) (US$ mi//ions) Exports of goods and services 3,002 5,973 9,518 9,539 Imports of goods and sewices 3,859 6,978 10,423 10,431 Resource balance -856 -1,005 -905 -893 Net income -294 -654 -941 -984 Net current transfers 403 570 983 1,130 Current account balance -748 -1,089 -863 -746 Financing items (net) 776 1,171 1,118 895 Changes in net reserves -27 -82 -255 -149 Memo: Resecves including gold (US$ millions) 614 862 1,999 2,301 Conversion rate (DEC, loca//US$) 0.6 0.9 1.4 1.4 EXTERNAL DEBT and RESOURCE FLOWS 1982 1992 2001 2002 (US$ millions) :omposition of 2001 debt (US$ mill.) Total debt outstanding and disbursed 3,772 8,543 10,884 12,100 IBRD 376 1,470 1,297 1,464 G: 682 A: 1,297 IDA 68 56 37 35 Total debt service 563 1,342 1,465 1,641 IBRD 53 267 226 233 IDA 1 2 2 2 Composition of net resource flows Official grants 29 140 Official creditors 279 278 365 -90 Private credtors 29 74 229 556 Foreign direct investment 340 526 Portfolioequity 0 0 0 E: 2,529 World Bank program Commitments 0 210 326 112 ,- IBRD E - Bilateral Disbursements 83 111 293 117 I- IDA D - Other multilateral - F Private Principal repayments 27 149 148 156 :- IMF G - Short-term Net flows 56 -39 145 -39 interest payments 27 120 80 79 Net transfers 29 -159 65 -118 __ Development Economics 9/4/03 41 Annex 2 (continued) 42 A n n e x T a b l e 2b: Poverty and Inequality in Tunisia, Egypt, Morocco, and J o r d a n Gini Urban Rural Overall Country and coefficient survey year Headcount Poverty Headcount Poverty Gap Headcount Poverty Index (%} Gap (%) Index (%} (%I Index (%) Gap (!?A) Tunisia 1985 4.6 NA 19.1 NA 11.2 NA 0.406 1990 3.5 0.7 13.1 3.2 7.4 1.7 NA 1995 3.6 0.7 13.9 3.1 7.6 1.6 0.400 2000 1.7 8.3 4.1 0.4 Egypt 1981182 18.2 3.5 16.1 3.1 17.2 NA 0.394 1990191 20.3 4.3 28.6 4.5 25.0 NA NA 1995196 22.5 4.9 23.3 4.3 22.9 NA 0.320 1997 22.5 5.6 24.3 6.4 23.5 6.7 0,320 1999100 3.7 18.3 16.7 Morocco 1984185 17.3 NA 32.6 NA 26.0 NA 0.446 1990191 7.6 1.5 18.0 3.8 13.1 2.7 NA 1998199 12.0 2.5 27.2 6.7 19.0 4.4 0.395 Jordan 1986187 2.6 NA 4.4 NA 3.0 0.3 0.36 1992 12.4 3.1 21.1 5.1 14.4 3.6 0.40 1997 10.0 2.1 18.2 4.0 11.7 2.5 0.36 1999” 12.0 3.03 0.36 200 1a 11.6 3.01 0.36 a (World Bank ,002, Jordan welopment F i c y Review, page 11). Source: Jobs, Growth, and Governance in the Middle East and Nohh Africa - Unlockingthe Potential for Prosperity, The World Bank and A d a , Richard and John Page 2003. “Poverty, Inequalityand Growth in Selected Middle East and North Africa Countries, 1980-2003.” World Development, Vol. 31, No. 12, pp. 2027-2048. Annex Table 2c: Comparing National and International Poverty Lines for Selected Countries in M :%ARegion Internationai overty Lines Survey v‘ationalPoverty Lines Survey Population below Population below Country Year Population below the Year $I.OO&erson/day $2.OO/person/day Poverty line (%} % ( ) Algeria 1995 22.6 1995 <2 15.1 Egypt 1997 23.5 1995 3.1 52.7 Jordan 1997 11.7 1997 <2 7.4 Morocco 1998199 19.0 199019 <2 7.5 Tunisia 1995 7.6 1995 <2 10.0 West Bank & Gaza 1998 23.2 NA NA NA Yemen 1991192 19.1 1998 15.7 45.2 Source: Jobs, Growth, and Governance i he Middle East and North Africa - Unlocking the Potential for Prosperity, The World Bank, 43 Annex A (continued) : : : : o c : Annex A (continued) 44 Annex A (c~ntinued~ 45 Table 2f: Tunisia-Privatization and Restructuringby Sector (1987 to August 2003) Volume No. of Enterprises Sector in illi ion TD in % No. in % Agriculture, Fisheries, and Agro-industry 72.0 3.2 18.0 10.7 Industry 952.0 40.6 56.0 33.3 Construction Materials 825.0 35.1 18.0 10.7 Mechanical, Electrical and Chemical Industries 108.0 4.6 30.0 17.9 Textiles 19.0 0.8 8.0 4.8 Services 1318.0 56.2 94.0 56.0 Tourism and Handicrafts 277.0 11.8 37.0 22.0 Commerce 137.0 5.8 21.0 12.5 Transport 69.0 3.0 16.0 9.5 Others 835.0 35.6 20.0 11.9 Total 2346.0 100.0 168.0 100.0 Source: Directorate of Privatization, Govemment of Tunisia. Table 2g: Tunisia-Foreign Investment in Privatization(million TD) (1987 to August 31,2003) Sector Receipts from foreign investors %of Total Agriculture, fishing & food 0 0 Industries 782 44.6 Construction materials 77 1 43.9 Chemical & mechanical industries 6 0.3 Textiles 5 0.3 Services 974 55.5 Tourism & Handicrafts 93 5.3 Transport 17 1.o Trade 76 4.3 Others 788 44.9 Annex A (continued) 46 Table 2h: Tunisia-Privatization and Restructuringby Sector (October 1998 to August 2003) Sector Receipts in Million TD %of Total Agriculture, fishing & food 24 1 Industries 855 45 Construction materials 798 42 Chemical & mechanical industries 51 3 Textiles 6 0 Services 205 11 Tourism & Handicrafts 143 8 Transport 0 0 Trade 62 3 Others 806 43 Total 1891 100 Source: Ministry o f Economic Development. Table 2i: Tunisia-Privatization Types (between 1982 and August 31,2003) No. of Enterprises %of Total Full Privatization 87 52 Partial Privatization 31 18 Liquidation 38 23 Others 10 6 Concession 2 1 Total 168 100 Note: Total Receipts amounted to 2,346 MDT. Source: Privatization Directorate, Government o f Tunisia. Table 2j: Tunisia-Mode o f Privatizations (between 1982 and August 31,2003) Privatization proceeds I n MDT %of Total Sales of shares 1239 53 Sales o f assetlcapital (Vente d’tltments d’actif) 352 15 Concession 756 32 Total 2346 100 Source: Privatization Directorate, Govemment o f Tunisia. Table 2 k Trade and Openness-Tunisia and Comparator Countries 1985 2000 Algeria 50 64 Egypt, Arab Republic 52 39 Jordan 113 110 Morocco 60 69 Tunisia 70 92 MENA 45 59 Source: World Development Indicators, and World Bank (2003), “Job, Growth, and Governance in the Middle East and North Africa”. 47 Annex A (continued) Table 21: Average Tariff Rates (Weighted, %) Country 1992-95 2001-02 Algeria 16.1 7.6 Egypt, Arab Rep. 17.1 9.7 Jordan n.a. 11.1 Morocco 47.0 27.9 Tunisia 30.0 27.4 Chile 10.98 7 Korea, Rep. 6.94 5.68 Mauritius 22.64 15.76 Malaysia 4.7 5.17 Thailand 13.18 9.33 Source: World Bank, World Integrated Trade Solutions ( WITS) as of October 2003. Table 2m: Tunisia-Summary Tariff Statistics, 2000-2002 MFN Tarifs EU-Preferential Tarifs 2000 2001 2002 2000 2001 2002 Average 35.9 35.9 34.5 28.5 25.6 24.3 Agricultural 77.1 77.1 71.6 77.2 76.7 76.6 Non-agricultural 25 25 22.8 16 12.5 10.9 Maximum 220 220 215 n.a. n.a. n.a. Source: IMF (2003) Tunisia-Staff Report for the 2003 Article IV Consultation, July 10,2003, Table 2, page 20. Table 2n: List of Investment, Competition and Banking Laws A new unified InvestmentCode was adopted in December 1993 under EFRSL that represented an important improvement over the previous system. A revised Banking Law and a new regulatory Eramework for mutual funds were submittedto the Chamber of Deputies in the context of ECAL 11. Overall, the law complied with intemational standards and represented good progress in ensuring an adequate legal framework for the sector. An amended Civil and Commercial Procedures Code in 2003 to facilitate the judicial process for recoveringloans under ECAL 11. A law prohibiting non-competitive pricing was passed under EFRSL in the early 1990. Table 20: Categories of Investment in Five Most Recently Closed Education Projects and in the Ongoing Quality Project WQIP) ProjecffActual Costs in $ million evcept for EQIP EQIP 1 See. Ed. Higher Ed. Employment & Education & Fifth Ed. Category (2000-05) Support Restructuring Training Fund Training Sector Project (1995-02) (1992-02) (1990-97) Loan (1989-97) (1983-90) School Infrastructure 122 150 59 114 8.7 EquipmedInformation & 49 54.7 18 Comm. Technology TrainingiTAiInnovation 11 7.3 15 18.5 2.8 0.5 Mgt./Adm./Systemic 0.3 3 2.2 Improvements Total 182 157.3 77 20.7 172 27 Source: Intemal World Bank data. Annex A (continued) 48 Annex 3: External Assistance to Tunisia Annex Table 3a: Tunisia - Net Receipts of External FinancialResources ($million), 1990-01 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 - All Donors 619.9 333.5 696.5 717.9 694.5 1510.9 650.7 522.6 499.3 622.1 665.5 729.6 World Bank 103.2 172.8 -35.4 108.6 14.6 -68.4 -3.1 -48.9 -39.3 41.0 -16.9 144.7 - IBRD 102.0 172.0 -36.9 101.2 15.3 -64.7 14.6 -45.8 -36.5 43.8 -14.5 146.9 - IDA -1.0 -2.0 -1.9 -2.0 -2.1 -2.1 -2.1 -2.1 -2.1 -2.1 , -2.1 -2.1 - IFC 2.2 2.8 3.4 9.4 1.4 -1.6 -15.6 -0.9 -0.6 -0.6 -0.3 WFP 13.6 3.4 2.6 3.7 3.7 3.9 2.5 4.0 -0.1 France 11.0 -101.8 142.6 105.9 105.3 118.8 103.9 65.3 192.1 257.2 35.7 139.5 Germany 23.4 21.6 52.7 50.2 22.8 -16.0 3.5 180.3 -15.0 -69.2 28.9 24.2 Japan 14.8 -263.1 -70.8 10.2 380.2 530.9 284.4 14.8 15.1 45.8 119.5 117.8 Sweden 28.4 32.9 12.6 20.7 9.7 0.2 -7.3 -6.4 0.7 -0.9 4.4 1.5 United Kingdom 15.0 13.8 103.4 1.2 8.4 -1.4 4.3 4.1 43.9 -3.3 50.8 -26.8 United States 24.0 8.0 -1.0 -14.0 -13.0 766.0 2.0 51.0 -5.4 -48.0 4.0 -30.0 Arab Countries 105.0 -3.0 -4.4 -4.5 -15.1 -22.6 -38.3 -20.5 -32.0 -18.4 -11.5 -1.5 Arab Agencies 32.0 28.5 46.8 34.1 3.0 -0.8 0.7 0.1 0.5 0.4 -0.4 -1.1 EClEU 205.4 166.3 582.8 393.1 171.0 164.0 307.8 467.0 424.0 329.6 619.1 333.0 Others 44.4 254.1 -135.4 8.8 4.1 36.4 -9.7 -188.2 -85.2 88.0 -168.1 28.4 Net receipts Algeria 64 1 1968 - 1062 -15 66 1 548 1876 -391 203 -934 -384 552 Egypt 3311 4237 1661 2677 3228 2441 2737 2916 4119 1771 3242 2800 Jordan 1087 747 404 118 465 944 846 503 611 511 573 490 Morocco ~ ~~~ ~ ~ ~ 1620 1888 1182 746 811 617 812 549 895 587 586 377 Source: OECD Geographical Distribution of Financial Flow Aid Recipients. Annex Table 3b: Tunisia-World Bank Flows (US $million), 1990-2003 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commitments 147 68 385 144 268 273 99 242 222 194 202 76 253 112 Net Disbursements 140 109 58 27 14 10 -57 28 -48 33 -16 28 77 -19 Net transfers 47 -1 -56 -92 -106 -118 -182 -80 -145 -62 -99 -48 -3 -79 Netdisbur. Percapita(US$) 17.2 13.1 6.8 3.1 1.6 1.1 -6.3 3.0 -5.2 3.5 -1.7 2.9 7.9 -1.9 Annex Table 3c: Algeria -World Bank Flows (US $million), 1990-2003 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commitments 458 431 215 240 140 331 428 89 150 0 98 42 31 89 N e t Disbursements 171 95 236 36 9 203 256 -131 -4 -147 -119 -105 -104 -114 Net transfers 95 11 127 -80 -104 77 112 -260 -118 -276 -248 -229 -217 -188 Net disbur. per capita (US$)** 6.8 3.7 9.0 1.3 0.3 7.2 9.0 -4.5 -0.1 -4.9 -3.9 -3.4 -3.3 -3.6 Annex Table 3d: Egypt -World Bank Flows (US $million), 1990-2003 1990 1991 1992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commitments 62 524 376 338 121 80 172 75 142 550 50 0 50 12 Net Disbursements -70 -98 -60 33 -16 -84 -67 -55 29 -51 -38 -57 -48 -26 Net transfers -207 -249 -184 -92 -136 -207 -180 -146 -41 -114 -94 -105 -87 -53 Netdisbur. percapita(US$) -1.3 -1.8 -1.1 0.6 -0.3 -1.5 -1.1 -0.9 0.5 -0.8 -0.6 -0.9 -0.7 -0.4 49 Annex A (continued) Annex Table 3e: Morocco -World Bank Flows (US $million), 1990-2003 1990 1991 1992 I993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commitments 483 626 325 549 412 58 540 108 200 440 8 98 5 4 Net Disbursements 189 135 263 58 19 -102 141 -24 -31 113 -227 -130 -218 -197 Net transfers -20 -103 22 -201 -245 -381 -134 -274 -249 -103 -427 -310 -375 -305 Netdisbur. percapita(US$) 7.9 5.5 10.5 2.3 0.7 -3.9 5.3 -0.9 -1.1 4.0 -7.9 -4.5 -7.3 -6.5 Annex Table 3f: Jordan -World Bank Flows (US $million), 1990-2003 1990 1991 I992 1993 1994 1995 1996 1997 1998 1999 2000 2001 2002 2003 Commitments 175 25 0 55 100 147 120 140 67 210 35 120 5 120 Net Disbursements 78 -17 21 38 22 31 40 109 -7 89 -24 103 -10 99 N e t transfers 43 -61 -20 -4 -22 -17 -9 63 -56 41 -75 50 -53 70 Netdisbur. percapita(USS) 24.7 -4.7 5.5 9.8 5.4 7.3 9.2 24.5 -1.5 18.7 -4.9 20.6 -1.9 18.5 * Until April 29,2003. ** 2002 and 2003 population figures extrapolated using 2001-population growth rate. Source: World Bank's data as of April 29,2003. Annex A (continued) 50 Annex Table 4: Selected ESW and CAS List for Tunisia Report Title Report Date Report# Year Type* ' I. Tunisia - Country Assistance Strategy CAS 03128100 20161 2000 Agriculture 1. From universal food subsidies to a self-targeted program: a case study in Pub 12/31/96 WDP351 1996 Tunisian reform Economic Policy 1. Morocco, Tunisia -Export growth: determinants and prospects SR 10131/94 12947 1994 2. Tunisia - Poverty alleviation: preserving progress while preparing for the SR 0813 1/95 13993 1995 future (Vol. 1-2) 3. Tunisia - towards the 21'' century (Vol. 1-2) ER 10131195 14375 1995 4. Logistical constraints on international trade in the Maghreb PRWP 05/31/96 WPS1598 1996 5, From universal food subsidies to a self-targeted program SR 06130196 15878 1996 6. Tunisia's global integration and sustainable development: strategic Pub 0813 1/96 15966 1996 choices for 21" century 7. Implementationof Uruguay Round commitments: the development PRWP 10131/99 WF'S22 15 1999 challenges 8. Trade policy developments in the Middle East and North Africa Pub 02129100 20322 2000 9. Exports and information spillovers PRWP 11130100 WPS2474 2000 Education 1. Tunisia - Higher education: challenges and opportunities SR 05108197 16522 1997 2. Education in the Middle East and North Africa: a strategy towards WP 04130199 21589 1999 learning for development 3. L'Enseignement Superieur Tunisien: Enjeux et Avenir Pub 03131198 17493 1998 Energy 1. Tunisia - Inter-fuel substitution study: a joint report ESMAP 05131190 ESM114 1990 2. Tunisia - Power efficiency study ESMAP 02/29/92 ESM136 1992 3. Tunisia - Energy management strategy in residential and tertiary sectors ESMAP 04130192 ESM146 1992 4. Increasing the efficiency of gas distribution - Phase 1 : case studies and ESMAP 0713 1199 ESM218 1999 thematic data sheets Environment 1. The greening of the economic policy reform (Vol. 1-2) EWP 02/28/97 16339 1997 Finance 1. Extemal finance in the Middle East - trends and prospects DWP 12131193 20956 1993 2. Making micro finance work in the Middle East and North Africa WP 12131/98 23076 1998 Health 1. How access to contraception affects fertility and contraceptive use in PRWP 01131192 WPS841 1992 Tunisia 2. Towards a virtuous circle: nutrition review of MENA DWP 08/31/99 20960 1999 3. Risks and macroeconomic impact of HIVIAIDS in the Middle East and PRWP 08131102 WPS2874 2002 North Africa: why waiting to intervene can be costly Multisector 1. The World Bank research oberver Pub 02/28/98 17258 1998 Others 1. Strengthening Tunisian municipalities to foster local urban development OEDRP 01101101 24568 2001 3. The World Bank in action: stories of development WP 0 1/0 1102 24928 2002 3. Initiative in legal and judicial reform WP 03/31/02 25082 2002 Abbreviations: CAS: Country Assistance Strategy DWP: Departmental Working Paper ER : Economic Report ESMAP: Working Paper, Economic & Social Council for Asia & Pacific EWP: Environmental Working Paper IDP: internal Discussion Paper OEDAR: OED Annual Report'Review PRWP: Policy Research Working Paper Pub: Publication S R Sector Report 51 Annex A (continued) Report Title Report Date Report# Year Type* Social Protection and Poverty Analvsis 1. Options for pension reforms in Tunisia PRWP 0713 1193 WPS1154 1993 2. Tunisia’s insurance sector PRWP 05131195 WPS1451 1995 3. Tunisia- Social Structure review 2000: integratinginto the world economy WP 06130100 20976 2000 and sustaining economic and social progress Private Sector Development 1. Privatization in Tunisia DWP 01131193 1164s 1993 2. Tunisia - Private sector assessment SR 11130194 12945 1994 3. Tunisia - Private sector assessment update - meeting the challenge of SR 12114100 20173 2000 globalization (Vol. 1-3) 4. I s inequality bad for business: a non-linear microeconomic model wealth PRWP 01131101 WPS2527 2001 effects on self-employment Public Sector Management 1. Partners for development: new roles for government and private sector in Pub 09130199 19807 1999 the Middle East and North Africa Transportation 1. Optimal user charges and cost recovery for roads in developing countries PRWP 10131/91 WPS780 1991 Urban Development 1. The urban age - innovations in urban management 3 (4) Newsletter 0113 1/96 17449 1996 Water Supply and Sanitation 1. water pricingexperiences: an international perspective Pub 10131197 WTP386 1997 Source: Imagebank, Word Bank. Annex A (continued) 52 Annex Table 5a: Ratings for Tunisia and Comparator Countries Total o/w AdJustment County Outcome Sustainabili~* Inst Development. Impact. * Evaluated $m % Satis$ % %Likely % Substan. % Substan. A 4 %Satid Aclj. Ljkely Adj before 1990 Tunisia 2,180 533 91 100 73 12 20 29 MNA 14,282 1,897 76 87 48 45 30 59 Algeria 2,056 48 7 1 Egypt 3,130 70 83 0 56 0 19 0 Jordan 753 77 0 51 31 Morocco 4,177 1,256 81 88 52 38 51 76 Bank wide 186,355 29,568 71 68 53 55 33 34 *The Institutional Development Impact and Sustainability ratings have been in use only since FY 89 Hence, the data for these two rahngs for the penod before FY 91 apply for smaller levels of total net commitment than shown in columns 2 and 3 of the tab Source. OED intemal database as of May 1,2003 OED Evaluation Findings of Evaluated Projects (Exits FY90-03) Net commitment O/w Adjustment Country (us$M) Satisfactory outcome (%) Likely SustainabiIi~ (%) Substantial ID (%) (US$M) Net Oiw Net oiw Net Oiw Commitment Adjustment Commitment Adjustment Commitment Adjustment Tunisia 2,367 967 81.8 86.5 83.8 100 41 17 MENA 15,974 5,276 71 I 72 1 52 1 56 5 35 41 Algena 3,253 1,099 45 8 41 72 0 21 27 EDPt 2,025 150 83 2 100 39 5 0 34 100 Jordan 1,534 870 93 6 100 79 5 90 8 49 63 Morocco 4,736 1984 67.2 67 6 38 46 58 9 51 4 Bankwlde 25 1,234 87,978 75 9 76 9 65 5 71 9 43 44 Note Sustainability and institutional development impact rahngs have been in use only since FY98 Source OED and World Bank internal data Annex Table 5b: Ratings for the Active Portfolio Country No. of Projects Net commit., $m Projects at risk, % Commit. at risk % Tunisia 18 1,168 11 6 MNA 110 4,801 25 28 Algeria 13 566 38 52 Egypt 16 905 25 40 Jordan 6 192 17 18 Morocco 15 418 13 25 Bank wide 1376 95,489 18 18 Source World Bank date as of May 2003. 53 Annex A (continued) * * 3 3 P P 332 I * * + m i d m c VIVIVIV * 2******** id 3dddddddd VIl-mwmmmmmQc-c m o o - m m m m m m o v v , ~ w w w w w w w ~ c - r *mmmv,v,v,v,mmv,v O O O O O O O O O O m C oooooooooooc aaaaaaaaaaae Annex A (continued) 54 4 J c 0 U 4 c 0 * * * m m m i ll c W millill 3: v: d d d d d Y < a < a < a 2millill a w w w 3 m d 4 W P , ~ 'c! r- x 2 0 Y d d 4 z z ill !2 e? z !2 * z m * * * rA m v) v c- 2 f 0 N r I * * * H E H 8 8 8 I F 3 2 w E 7 < * B P + .e D * E 0 i i 55 Annex. A (continued) * * ulu l 3 EE 3 ’ * m m mm e 4 e W W L .* s V a a * 5 8 B b C R f Annex A (continued) 56 f P 2 U 7 E 0 .- 8 9 57 Annex A (continued) x A (continued) 58 0 . N 0 0 N x e \o N A B a a 2 E c3 *0 .- 0 E c) 3 8 8 c -. $ ' W E E E I a I* 0 0 59 Annex A (continued) - n M E 9 a . . 0 . a . Annex A (continued) 60 Annex Table 8: Tunisia: Task Manager Turnover of Projects Approved in FY90-03 Project Name No. of Changes (FY90-03) FY98 FY99 FYOO FYOl FY02 Economic and Financial Export Development Project 0 a a a a a Industry Support Institutions Upgrading 3 a a a b b Private InvestmentCredit 4 a a b b b Education Education Quality ImprovementProgram 2 a a a b b Higher Education Reform Support 11 1 a a a b b Training and Employment I1 1 a a a a b Education Support I1 1 a a b b b Higher Education Restructuring 2 a a a b b Environment, Energy and Mining Gas InfrastructureDevelopmentProject 0 a a a a a Health, Nutrition and Population Health Sector Loan 1 a a a b b Hospital RestructuringSupport 5 a a b b b Population and Family Health 1 a a a a a Rural Sector Northwest Mount. and Forestry Areas Dev. 1 a a a a a Agricultural Support Services 1 a a a a b Water Sector Investment Loan 2 a a a b,c C Second Agricultural Sector Investment 1 a a b b b Natural Resources Management 2 a a b b c National Rural Finance 2 a a b,c c C Agricultural Sector Investment Loan 1 a b b b b Northwest Mountainous Areas Dev. 2 a b b b b Second Forestry Development 2 a a b b b Transport Transport Sector Investment I 0 a a a a a Rural Roads 2 b c C C C Urban Development, and Water Supply and Sanitation Municipal Development I11 1 a a a a a Cultural Heritage 0 a a a a a Municipal Development I1 3 a b,c c d d Municipal Sector Investment 4 a b,cd d d d Greater Tunis Sewerage Project 3 a a b b c,d Water Supply and Sewerage 3 a a b b c,d Adjustment ECAL I11 0 a a a a a ECAL I1 1 a a a a b ECAL I 2 a a a a a Economic and Financial Ref. Supp. Loan 1 a a a a a Note: a=no change since FY98; b=one change since FY98; c=two changes since FY98; d=three changes since FY98. Source: World Bank project data. 61 Annex A ~continued~ - Annex Table 9: Tunisia Bank’s Senior Management, 1991-2002 Year Vice President Country Director Resident Representative 1991 Willi A. Wapenhans Kemal Dervis - 1992 Caio Koch-Weser Pieter P. Bottelier - 1993 Caio Koch-Weser Harinder S. K o h l i - 1994 Caio Koch-Weser Daniel Ritchie 1995 Caio Koch-Weser Daniel Ritchie 1996 Kemal Dervis Daniel Ritchie 1997 Kemal Dervis Christian Delvoie 1998 Kemal Dervis Chnstian Delvoie 1999 Kemal Dervis Christian Delvoie - 2000 Jean-Louis Sarbib Christian Delvoie - 200 1 Jean-Louis Sarbib Christian Delvoie 2002 Jean-Louis Sarbib Theodore 0. Ahlers 2003 Christiaan J. Poortman Theodore 0. Ahlers Source: World Bank Group Directov. 63 Annex B List o f People Met on Mission in Tunisia (and World Bank and IMF Staff Interviewed) a. Government officials, donors and private sector representatives Ministry o f Development & International Tunisia Central Bank Cooperation Habib El Montacer, Managing Director Kamel Ben Rejeb, Director General Badreddine Barkia, Director General, Monir Boumessouer, Director General, Supervision Infrastructure Samir Brahimi, Director General, Services & Fouad ElShrafi, Director Audit Lutfi Frad, Director Mohamed Naceur Braham; Counsellor o f Public Ministry of Transport Services, Director o f Agriculture and Agro- Salem Miladi, Director General Industries Foued Charfi; Director General, Productive Sectors Ministry of Industry and Energy B o r D Kacem; Director General o f Regional Hamdi Guezguez, Principal Engineer Development Ridha Ben Mosbah, Dir-Gen., D e mise Q niveau Abel Hamid Triki, Director Mohamed El Kamel, Project Manager, I S n r P Moncef Youzbachi Private Sector Ministry of Finance Noureddine Ferchiou, Advocat, Ferchio Assoices Belhadji Jameleddine, Director General Ahmed Benghazi, Associe-GCrant, A x i s Ahmed Smaoui, Ministry of Higher Education Prof. Marouanne El Abassi Abdallah Riahi, Director, Studies and Planning Faycal Lakhoua, Counsellor, I A C E Mohamed El Hedi Zaiem, Consultant Jurgen Blanken, Water sector Economist, Private Consultant Ministry of Education and Formation and Institute of Training National Agricultural Bank H. E. Mohamed El-Monsif Ben Saad, Govemment Berraies Mohamed, Directeur Secretary General (Deputy Minister) Abdelkader Lgoulli, Director General, Services Exports Promotion Agency (PAMEX) Abdelmalik Elsallami, Advisor to the Minister Slim Chaker, Director for Coordination Ahmed Midamia, Director General, N V C Mohamed Nazar El-Aish, Director General Trade Union Farahat El-Nasiri, Director Mohamed Trabelsi, Secretaire Mohamed El-Nasir, Director Ibrahim Eltoumi, Director AfDB Lutfi Blzabis, Director 0. Ojo, Chief Evaluation Officer Hofia El-Bahri, Director K. Diallo, Principal Economist Ministry of Health EU Dr. Khaled Kheireddine, Director o f Planning Bernard Brunet, Premier Secrktaire Slaheddine Kalat, Director o f Equipments Manfiedo Fanti, Premier Secrktaire Nacer Kamel, Director o f Studies Paul Mathieu, Economist Philippe Massin, Rural Development Expert National Statistical Institute Amparo Gonzalez Diez, Section Chief, Rural Khalifa Ben Faqih, Director General Development and the Environment Abdel majd El-Wislati Jose-Maria Bellostas, Rural Development Expert Annex B (continued) 64 Tunisia Leasing b. World Bank, IMF and Islamic Development Bank Fethi Mestri, Director General Theodore 0.Ahlers (Country Director) Ministry of Agriculture, Environment and Christian Delvoie (then Country Director) Water Resources Dimmitri Vittas (Senior Adviser, OPD) Ahmed El Achek; President Director General, Daniel Ritchie (then COD Division Chief) Office o f Sylvo-Pastoral Development o f the John Page (Director, PRMPR) North West Aristomene Varoudakis (Country Economist) Badr Ben Atmnar; General Rural Economist, Cecile Fruman (Country Officer) Director General o f Studies and Agricultural Pedro Alba (Sector Manager, MNSED) Development Mustapha Nabli (Chief Economist and Director, Abderraman Chaffai ;Director, Studies and MNSED) Agricultural Development Setareh R a m a r a (Senior Economist, MNSHD) Ahmed Ridha Fekih Salem; General Engineer, Sara Johansson (Economist, MNSED) Director General o f Forests Hamid Alavi (Senior Private Sector Mohamed Gharbi; Director General, Agricultural Development Specialist, MNSIF) Land Agency Jeffery Waite (Senior Education Specialist, Abdellatif Ghedira; Chief o f Mission, Cabinet o f MNSHD) the Minister, Director o f the Bureau o f Planning Meskerem Mulatu (Senior Education Specialist, and Hydraulics AFTH2) Lamine Ben Hamadi, Deputy Director o f Planning Anwar Bach-Baouab (Lead Operations Officer, and Budget, Institute o f Research and Higher AFTH3) Learning Gillian Perkins (Consultant OEDST) Mohamed Ben Hamouda, Teacher-Researcher, Domenico Fanizza (Deputy Division Chief Coordinator o f Regional Research Pole o f the IMF) Northwest, Institute o f Research and Higher Bader Elddine Nouioua, Advisor, Operations Learning Evaluation Office, Islamic Development Mohamed Mounir Hedri, Director o f Research Djelloula Saci, Head, Operations Evaluation Institute o f Research and Higher Learning Office, Islamic Development Bank Said Helal; Chief Engineer, Water and Forests, Abdel Ouahab Ghazala, Operations Director o f Socio-Economic Development o f the Evaluation Office, Islamic Development Forest Population Bank Abdelkadar Hamdane; Director General o f Rural Works and o f Hydraulics Abdallah Mallek; Director General o f Finance, Investment and Professional Organisations Bellakhal Moktar, Director o f Agriculture Extension Kachouri Mondher, Deputy Director o f Monitoring & Evaluation o f Research Programs, Institute o f Research and Higher Learning Sahla Mezghani; Ago-economist, Section Chief Finance, Investment, and Professional Organizations Ben Mohamed Mongi; Chief, General Laboratory, Director o f Tunis0 Japanese Project Abdelaziz Mougou, Predident, Institute o f Research and Higher Learning Hamda Zeramdini, Agriculture Extension and Training Agency, Coordinator o f the Agnculture Support Services Project 65 Annex C Guide to OED’s Country Evaluation Rating Methodology 1. This methodological note describes the key elements o f OED’s country assistance evaluation (CAE) meth~dology.~’ CAEs rate the outcomes ofBank assistanceprograms, not Clients’ overall development progress 2. An. assistance program needs to be assessed on how well it met i t s particular objectives, which are typically a sub-set o f the Client’s development objectives. If an assistance program i s large in relation to the Client’s total development effort, the program outcome will be similar to the Client’s overall development progress. However, most Bank assistance programs provide only a fraction o f the total resources devoted to a Client’s development by donors, stakeholders, and the government itself. In CAEs, OED rates only the outcome o f the Bank’s program, not the Client’s overall development outcome, although the latter i s clearly relevant for judging the program’s outcome. 3. The experience gained in CAEs confirms that program outcomes sometimes diverge significantly from the Client’s overall development progress. CAEs have identified assistance programs which had: satisfactory outcomes matched by good Client development; unsatisfactory outcomes in Clients which achieved good overall development results, notwithstanding the weak Bank program; and, satisfactory outcomes in Clients which did not achieve satisfactory overall results during the period o f program implementation. Assessments of assistanceprogram outcome and ~ a n k ~ e r f o r m a n c e not the same are 4. By the same token, an unsatisfactory assistance program outcome does not always mean that Bank performance was also unsatisfactory, and vice-versa. This becomes clearer once we consider that the Bank’s contribution to the outcome o f its assistance program i s only part o f the story. The assistance program’s outcome i s determined by the joint impact o f four agents: (a) the Client; (b) the Bank; (c) partners and other stakeholders; and (d) exogenous forces (e.g., events o f nature, international economic shocks, etc.). Under the right circumstances, a negative contribution from any one agent might overwhelm the positive contributions from the other three, and lead to an unsatisfactory outcome. 5. OED measures Bank performance primarily on the basis o f contributory actions the Bank directly controlled. Judgments regarding Bank performance typically consider the relevance and implementation o f the strategy, the design and supervision o f the 32 In t h s note, assistanceprogram refers to products and services generated in support o f the economic development o f a Client country over a specified period o f time, and client refers to the country that receives the benefits o f that program. Annex C (continued) 66 Bank’s lending interventions, the scope, quality and follow-up o f diagnostic work and other AAA activities, the consistency o f Bank’s lending with i t s non-lending work and with i t s safeguard policies, and the Bank’s partnership activities. Evaluation in Three Dimensions 6. As a check upon the inherent subjectivity o f ratings, OED examines a number o f elements that contribute to assistance program outcomes. The consistency o f ratings i s further tested by examining the country assistance program across three dimensions: (a) a Products and Services Dimension, involving a “bottom-up” analysis o f major program inputs -- loans, AAA, and aid coordination; (b) a Development Impact Dimension, involving a “top-down” analysis o f the principal program objectives for relevance, efficacy, outcome, sustainability, and institutional impact; and, (c) an Attribution Dimension, in which the evaluator assigns responsibility for the program outcome to the four categories o f actors (see paragraph 4. above). Rating Assistance Program Outcome 7. nrating the outcome (expected development impact) o f an assistance program, I OED gauges the extent to which major strategic objectives were relevant and achieved, without any shortcomings. Programs typically express their goals in terms o f higher-order objectives, such as poverty reduction. The country assistance strategy (CAS) may also establish intermediate goals, such as improved targeting o f social services or promotion of integrated rural development, and specify how they are expected to contribute toward achieving the higher-order objective. OED’s task i s then to validate whether the intermediate objectives prpduced satisfactory net benefits, and whether the results chain specified in the CAS was valid. Where causal linkages were not fully specified in the CAS, i t i s the evaluator’s task to reconstruct this causal chain from the available evidence, and assess relevance, efficacy, and outcome with reference to the intermediate and higher-order objectives. 8. Evaluators also assess the degree o f Client ownership o f international development priorities, such as the Millennium Development Goals, and Bank corporate advocacy priorities, such as safeguards. Ideally, any differences on dealing with these issues would be identified and resolved by the CAS, enabling the evaluator to focus on whether the trade-offs adopted were appropriate. However, in other instances, the strategy may be found to have glossed over certain conflicts, or avoided addressing key Client development constraints. I neither case, the consequences could include a diminution o f program relevance, a loss o f Client ownership, andlor unwelcome side- effects, such as safeguard violations, all o f which must be taken into account injudging program outcome. 67 Annex C (continued) Ratings Scale 9. OED utilizes six rating categories for outcome, ranging from highly satisfactory to highly unsatisfactory: Highly Satisfactory: The assistance program achieved at least acceptable progress toward all major relevant objectives, had best practice development impact o n one or more o f them. N o major shortcomings were identified. Satisfactory: The assistance program achieved acceptable progress toward all major relevant obj ectives. No best practice achievements or major shortcomings were identified. Moderately Satisfactory: The assistance program achieved acceptable progress toward most o f i t s major relevant objectives. No major shortcomings were identified. Moderately Unsatisfactory: The assistance program did not make acceptable progress toward most o f i t s major relevant objectives, or made acceptable progress o n all o f them, but either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. The assistance program did not make acceptable progress toward most o f i t s major relevant objectives, and either (a) did not take into adequate account a key development constraint or (b) produced a major shortcoming, such as a safeguard violation. Highly Unsatisfactory: The assistance program did not make acceptable progress toward any o f i t s major relevant objectives and did not take into adequate account a key development constraint, while also producing at least one major shortcoming, such as a safeguard violation, 10. The institutionaldevelopment impact (IDI) can be rated as: high, substantial, modest, or negligible. ID1 measures the extent to which the program bolstered the Client’s ability to make more efficient, equitable and sustainable use o f i t s human, financial, and natural resources. Examples o f areas included injudging the institutional development impact o f the program are: 0 the soundness o f economic management; 0 the structure o f the public sector, and, in particular, the civil service; 0 the institutional soundness o f the financial sector; 0 the soundness o f legal, regulatory, andjudicial systems; 0 the extent o f monitoring and evaluation systems; the effectiveness o f aid coordination; 0 the degree o f financial accountability; 0 the extent o f buildingNGO capacity; and, 0 the level o f social and environmental capital. Annex C (continued) 68 11. Sustainability can b e rated as highly likely, likely, unlikely, highly unlikely, or, if available information i s insufficient, non-evaluable. Sustainability measures the resilience to r i s k of the development benefits of the country assistance program over time, taking into account eight factors: e technical resilience; e financial resilience (including policies o n cost recovery); e economic resilience; e social support (including conditions subject to safeguard policies); 0 environmental resilience; 0 ownership by governments and other k e y stakeholders; e institutional support (including a supportive legallregulatory framework, and organizational and management effectiveness); and, resilience to exogenous effects, such as international economic shocks or changes in the political and security environments. 69 Annex D Management Action Record Major Monitorable OED Re~ommen~ations Requiring a Management Response Response b Follow through on s u p p o r t i ~programs g to improve The proposed CAS for FY05-08 addresses these issues the environment for private sector development and squarely. The first pillar o f the CAS focuses on enhance competitiveness as Tunisia seeks to integrate improving the business environment and enhancing within the world economy. Specifically, the Bank :ompetitiveness, while the second pillar supports greater should help the country (1) pursue trade openness with quality and efficiency o f the education system to address the EU and the rest o f the world; (ii)improve the the needs o f the market place. The CAS supports greater enabling environment through regulatory and judicial :ompetition in infrastructure through the PPI (private reforms to attract private and foreign investment; and 3articipation in infkastructure) agenda. ( iiiprogress on privatizing public financial and ) enterprise firms. b Continue support for social sectors. While This i s also addressed in the new CAS though the supportive o f the MDGs, the Bank’s program needs to second pillar (education) and the third pillar which continue this emphasis and focus o n improving the supports great efficiency o f social programs (pension, country’s capacity to prioritize social spending and health and social protection). A PER i s proposed and the address education expansion at the post-basic level Country Team agrees that emphasis should be given to given the demographic transition underway. The Bank reviewing expenditures in social sectors. should undertake a public expenditure review in partnership with the Government. This should help build capacity to prioritize social spending and provide the basis for measures to efficiently address growing demand for secondary and tertiary education. b Focus on institut~onal development and safely nets The Country Team has taken CAE’s recommendation in the rural sector. Future Bank programs should focus and proposes to conduct a comprehensive agricultural on rural institutional development to support efficient sector review. T h i s will inform policy dialogue and output and input markets, including land, rural finance, future lending to this sector. and research and extension, while maintaining social cohesion through better targeted safety nets. After 2 1 years without a comprehensive agricultural sector review, the Bank should undertake one to inform i t s future programs. b Enhance a results-based monitoring and evaluation T h e proposed FY05-08 CAS i s a results-based CAS and approach. Enhancing a results-based approach with will lead to regular monitoring o f CAS outcomes and agreed and monitorable output and outcome indicators results (yearly reports and CAS progress report in 2006), embedded in an improved monitoring and evaluation In addition, country team has already started reinforcing framework would help to anchor the Bank’s assistance capacity o f project implementation staff in Tunisia in program in the future. regular M&E o f projects. C B will also be strengthened for Bank teams. 71 Attachment 1 ISLAMIC DEVELOPMENT BANK TUNISIA COUNTRY ASSISTANCE EVALUATION Executive Summary The Operations Evaluation Office (OEO) o f the Islamic Development Bank (IDB) has recently embarked on new areas o f operations evaluation, such as country assistance evaluation, sector or thematic studies and impact evaluation. The second Country Assistance Evaluation (CAE) was conducted by OEO for Tunisia in September 2003 in collaboration with the World Bank's Operations Evaluation Department (OED) - the first being the C A E conducted for Jordan in October 2002. The main objective o f the C A E i s to assess the relevance and effectiveness o f IDB's interventions in Tunisia since the start o f IDB operations in 1976. The scope o f the present C A E report i s limited to the Bank's project financing activities. Regarding i t s economy in general, the determined structural reforms in Tunisia led to markedly improving economic and social performance. Real GDP growth increased from 2.8 percent during 1982-86 to 4.8 percent during 1991-2001. Meanwhile, both inflation and the current account deficit decreased significantly. The 2002 GPD growth was reported to have decelerated sharply due to the combined effect o f the aftermath o f September 11,2001 and a 4-year severe drought. The growth outlook for 2003 appears to be highly imperilled by several risky parameters. I t is estimated to stand at around 4%, owing to the sluggish recovery o f traditional export markets to the European Union (EU)and the slight recovery from the drought. However, the main factor o f challenge for the Tunisian Economy in the near future, especially for i t s industry, i s definitely whether it can stand up to the expected competition when the free trade agreement with the European Union will come into force in 2008. During the 1970s and 1980s, IDB's strategy for development assistance to Tunisia was mainly targeted to the development o f the industrial sector mainly through equity participation, public utilities sector (potable water supply and sanitation) together with development in agriculture (including integrated rural development) in line with priorities o f the Government. Inthe 1990s, the IDB Assistance programmes were mainly guided by the Country Assistance Strategy Study (CASS) prepared in 1996 for the period 1997- 1999 and the subsequent finalisation o f a 3-year rolling work programme for the period 1420- 1422H. The Bank's operations had sharply declined over the 3 years preceding the preparation o f the CASS for Tunisia. The main reason was the availability o f more competitive alternative financing sources particularly from the EU and various bilateral donors. This really was a threat for more IDB involvement in Tunisia especially since it has been categorized as mid-high income country and could not benefit any more from blending o f concessional and non-concessional modes o f financing. By and large, IDB assistance to Tunisia has been diverse. The Bank assistance focused on public utilities, agriculture and rural development, industry, financial sector and more recently on social sectors (education and health). As o f June 2003, the IDB has approved a total amount o f U S $1.18 billion for Tunisia, 70% o f which for trade operations. Out o f 44 ordinary project financing operations, 20 operations are currently active while 24 operations have already been completed. The total amount actually Attachment 1 (continued) 72 disbursed by the Bank for projects and technical assistance operations up to mid-2003 was ID 94.48 million, or around one-third o f the net approved amount. This low figure implies partially that there has been under-utilisation o f the extended financings as there were many cost savings that stemmed from both the depreciation o f the Tunisian Dinar and a tendency to overestimate the project costs at appraisal time. With regard to the performance o f the 11 post-evaluated projects, 10 projects were considered as successfil or partly successful and one project not successful. Currently, a 3-year work programme for 1423-1425H i s being implemented as planned. Duringtwo decades (1980s & 199Os), Tunisia’s commitments in trade were almost constant and in line with earmarked allocations, thanks to annual operations entered into with traditional clients in that member country. However, i t i s felt that Tunisia has not been engaging with IDB o n trade financing operations at a level that i s commensurate with the high credit worthiness that the country does enjoy. The main reason why Tunisia does not take advantage o f IDB’s trade financing operations, at a similar pace to other member countries o f comparable economic development i s that IDB’s mark-up i s perceived - particularly by the private sector not to be competitive enough as compared with the rates available. Water supply and sanitation has been the primary beneficiary sector o f IDB project financing (45%), with particular emphasis on the construction o f sewerage infrastructure in favour o f the Sewerage Authority (ONAS). Under IDB financing, ONAS procured new technology o f sludge mechanical dewatering and handling. Regarding the water supply, two projects are currently being implemented by the Water Authority (SONEDE). In view o f the relatively low rate o f access to potable water o f northern zones, IDB may envisage in the future to finance projects in these regions. I t was proposed also that IDB might contribute to SONEDE programme o f renewal o f transmission lines in urban areas. IDB assistance to the industrial sector was primarily provided in the early 1980s through equity participation in three companies. The C A E mission recommends to undertake a review o f the equity portfolio performance in Tunisia, in the light o f the difficulties faced by these companies. The Bank’s intervention in the Integrated Rural Development (IRD) sector related to 5 projects which entailed activities that were spread all over Tunisia, and whose scope encompassed a multitude o f components o f both agricultural and non- agricultural nature. All the 5 IRD projects have been post evaluated and their performance was assessed as satisfactory since the targeted objectives were attained in terms o f regional development and improvement o f the living conditions o f the most disfavoured populations. IDB involvement in the social sectors has rather been modest and tardy. Although the human resources development was a top priority for Tunisia, IDB was involved neither in primary and secondary education nor in vocational training. IDB involvement in higher education and health sector i s relatively recent and i t i s premature to assess i t s performance. 73 Attachment 1 (continued) With regard to education, many stakeholders interviewed expressed to the mission high concern about the lagging improvements in the quality o f education at all levels. For higher education in particular, the Tunisian officials informed the mission that their country i s putting more emphasis on vocational and technical education, especially computers and information technology, to combat unemployment among the youth which now stands at around 16%. In this connection, the Ministry in charge o f higher education i s preparing a project for the creation o f technological poles and IDB may envisage i t s contribution to this project. O n the other hand, IDB extended several lines o f financing to Tunisia but most o f them have remained dormant. The main reason for the non-utilization o f these lines o f financing i s the foreign exchange risk which the local investorshusinessmen are unwilling to bear. In this respect, a new global line was approved in 2003. It has been devised to overcome all the shortcomings related to previous lines o f financing extended to local banks in Tunisia, especially through the introduction o f a mechanism for the exchange r i s k coverage, involving local banks and insurance companies. In conclusion, the Tunisian Authorities affirmed the importance and the timeliness o f the current evaluation o f IDB’s activities in Tunisia. The IDB’s assistance to Tunisia has been appreciated and acknowledged by them. There was a general agreement that this assistance was relevant. As a matter o f fact, IDB’s experience in dealing with the different executing agencies i s considered very successfkl due to the fact that Tunisia possesses a very efficient and experienced technical and administrative staff. However, there were a number o f criticisms o f bank assistance. The complaints concern mainly operational aspects such as time-consuming disbursement procedures and IDB financing cost which i s viewed to be rather high. 75 Attachment 2 Chairman’s Summary Committee on Development Effectiveness Meeting o f April 21,2004 1. T h e Informal Subcommittee (SC) o f the Committee on Development Effectiveness (CODE) met on April 21, 2004 to discuss the Tunisia Country Assistance Evaluation prepared jointly by the Operations Evaluation Department (OED) and the Islamic Development Bank (IDB). 2. Background. OED’s evaluation commended Tunisia’s remarkable socio-economic progress and reduction in poverty rates and underlined the important role o f country ownership, a broad political consensus, a well-developed human resource base and a stable macroeconomic environment. T h e report noted that the Bank program in Tunisia succeeded in promoting reforms in the financial, rural and private sectors by providing assistance in terms o f policy advice, lending and resource mobilization. It also noted some shortfalls that may pose r i s k s for sustaining high performance in a more competitive environment that Tunisia i s likely to face in the near future, such as l o w levels o f private investment, the significant role o f govemment in economic activities, the large number o f non-performing loans at public banks and high tariffs. The evaluation concluded that the Bank should concentrate i t s efforts o n helping the authorities to improve the business environment through regulatory reform, to continue support for the rural sector and social institutions and on high quality analytical studies. 3. Management broadly agreed with the CAE conclusions and noted that they will be largely reflected in the new Tunisia country strategy. In particular, the new country strategy will be focusing o n three strateglc objectives: ( i) strengthening environment for private investment; ( ii)improving the quality o f output fi-om the education system and i t s link to the labor market; and (iii) improving public services through a focus o n efficiency and sustainability o f public expenditures. 4. The Chair representing Tunisia thanked OED for preparing a very balanced and insightful report and reiterated the Tunisian authorities’ general agreement with the main conclusions and recommendations o f the evaluation. H e concurred with the OED assessment o f the Bank assistance as satisfactory and highlighted the important role o f the Bank’s lending, policy advice and analytical work in the country’s socioeconomic development. At the same time, he stressed that the authorities have employed a cautious approach to structural reforms in order to ensure a broad consensus. H e also expressed concerns about the increasing pressure o f the cost o f doing business with the Bank and noted that the report could have benefited from drawing comparisons with other MDBs, as well as specific proposals to improve flexibility o f the country strategy program and IFC’s involvement in the country. 5. M a i n Conclusions and Next Steps. T h e Subcommittee welcomed the CAE and agreed with the OED rating o f Bank assistance as satisfactory. Members endorsed the main conclusions and recommendations o f the report. They commended management for including the CAE’s recommendations in the new country strategy and stressed the importance o f drawing lessons fi-om Tunisia’s impressive performance. Among other major issues discussed at the meeting were the pace o f future reforms, challenges o f sustaining the development progress and related vulnerabilities o f the Tunisian economy, the cost o f doing business in Tunisia in the context o f Bank lending to the middle income countries, and the lessons to be drawn fkom the joint evaluations with other development partners. The following points were raised: 6. Lessons learned. Many members were interested in the positive lessons fi-om the Tunisian experience, and whether they could be replicated in other countries. Management noted that Tunisian experience i s very relevant, especially for the MENA and Afkica Regons, and that it i s being currently utilized through a series o f regional seminars and workshops. Some members asked for more details on Attachment 2 (continued) 76 the impact o f and the differences in views on the “mise a niveau” program o f enterprise restructuring and upgrading. Management noted that in i t s view the main factor in supporting enterprise restructuring should be the investment climate rather than providing a small amount o f subsidy, which i s the essence o f the “mise a niveau” program 7. Looking forward. Members concurred with the report’s conclusion that the Bank should continue to support improving the investment climate and enhancing competitiveness. They stressed the importance o f developing a results-based approach in the areas o f trade openness, the business environment, enterprise and financial sector privatization and land and rural finance. Members expressed concern about the size o f the public banks’ portfolio and potentially heavy burden o f non- performing loans on the economy. Some members concurred with OED’s observation that further structural reforms are needed in light o f an increasingly more competitive regional and global trade environment, but noted the importance o f simultaneously sustaining full ownership o f the reform process and broad political consensus. Management noted that there i s interest on behalf o f the authorities to take advantage o f the Bank’s assistance o n debt management and doing an investment climate assessment. Some members asked about the reasons o f IFC’s lack o f activity in the country. Management replied that IFC’s limited involvement i s due to the availability o f alternative and cheaper financing for Tunisian companies. At the same time, management confirmed that I F C i s interested in exploring new opportunities in Tunisia. Members praised the country’s success in achieving the MDGs, but had questions about the consistently high levels o f unemployment. Management agreed, that despite meeting the target on unemployment, j o b creation and private investment remain issues o f concern for the Tunisian authorities, given the rapid growth o f the labor force. Management noted that those issues are discussed extensively in the country strategy through the prism o f creating more flexibility in public financial management and improving the investment climate. Some members asked management to elaborate o n the absence o f a full-fledged Bank office in the country. Management replied that gwen the presence o f very strong and competent public administration, the Tunisian authorities at this point do not see the need for the same kind o f implementation assistance as in other countries. 8. Cost of doing business. Some members echoed the concern expressed by the Tunisian chair about the cost o f doing business with the Bank vis-a-vis other MDBs, and stressed the importance o f that issue in the overall context o f lending to the middle income countries. OED noted that these issues will be addressed in the OED study on lending to middle income countries. Management added that Tunisia could clearly be a case where the Bank can quickly adopt national systems in order to dnve down the costs, and that the future work on core ESW (CFAA, CPAR) i s designed to address fiduciary issues so as to move towards using national systems. 9. Donor coordination. Members welcomed OED’s cooperation with IDB, consistent with the Bank’s broader agenda o f harmonization and reducing the cost o f assistance to the clients, and urged OED to continue that practice in future. Some members were interested to know whether joint work was an important factor in the overall success o f the evaluation and what were the lessons learned. OED replied that the partnership arrangement with IDB led to significant capacity development, laying the groundwork for further collaboration. This was the second joint report with IDB, and OED had found those exercises very useful in terms o f raising the efficiency o f the evaluation function, capacity building and sharing o f ideas. Management noted that the high level o f competence o f the Tunisian authorities allows for a sufficient level o f dialogue with donors to be maintained bilaterally, but encouraged the authorities to do it in a more coordinated manner in the future. 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