Docuams Of The World Bank FOR OFFICIAL USE ONLY Report No. P-4368-TUN REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN IN AN AMOUNT EQUIVALENT TO USt150.0 MILLION TO THE REPUBLIC OF TUNISIA FOR AN ASRICULTURAL SECTOR ADJUSTMENT LOAN September 3, 1986 I This document has a restricted distribution and may be used by recipients only in the performance of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. CURRENCY EQUIVALENIS Currency Unit - Tunisian Dinar (D) First Semester CY1985 CY1986 US$1.00 = D 0.757 D 0.770 D 1.00 = US$1 321 US$1.299 FISCAL YEAR January I to December 31 WEIGHTS AND MEASURES 1 kilometer (km) = 0.6214 mile (mi) I hectare (ha) = 2.4711 acres (ac) 1 liter (1) = 1.0567 quarts (qt) 1 metric ton (ton) = 2,204.6226 pounds (lb) I quintal (qt) = 220.46226 pounds lb) GLOSSARY OF ABBREVIATIONS AI :Artificial Insemination (Ins6mination artificielle) ASAL ;Agricultural Sector Adjustment Loan (Pr&t sectoriel d'ajustement agricole) BNT :National Bank of Tunisia (Banque nationale de Tunisie) BNDA :National Bank for Agricultural Development (Banque nationale pour le developpement agricole) CCGC :Central Cooperative for Field Crops (Cooperative centrale des grandes cultures) CRDA :Regional Agricultural Development Commission (Commissariat regional de developpement agricole) COCEBLE :Central Cooperative for Wheat (Cooperative centrale du ble) CTV :Local Extension Center (Cellule territoriale de vulgarisation) DERV :Department of Training, Research and Extension (Direction de 1'enseignement, de la recherche et de la vulgarisation) FOR OMCIAL USE ONLY DGR : Department of Rural Engineering (Direction du genie rural) DPA : Department of Animal Production (Direction de la production animale) DPSAE : Department of Planning, Statistics and Economic Analyses (Direction de la planification, des statistiques et des analyses 6conomiques) DPV : Department of Crop Production (Direction de la production vegetale) DRGR : Center for Rural Engineering Research (Centre de recherche du genie rural) FOSDA : Agricultural Development Funds (Fonds sp6ciaux de developpement agricole) IFAD : International Fund for Agricultural Development (Fonds international pour le d6veloppement agricole) IFPRI : International Food Policy Research Institute (Institut international de recherche sur la politique alimentaire) INRAT : National Institute of Agricultural Research (Institut national de recherche agronomique tunisien) ISNAR :International Service for National Agricultural Research (Service international pour la recherche agricole nationale) MOA :Ministry of Agriculture (Ministere de l'agriculture) MOE :Ministry of Public Works (Ministere de 1'equipement) MOPF :Ministry of Planning and Finance (Ministere du plan et des finances) MTASAP :Medium-Term Agricultural Sector Adjustment Program (Programme d'ajustement du secteur agricole a moyen-terme) OC :National Cereal Board (Office des c6r6ales) OEP :National Livestock and Range Agency (office d'elevage et du pa turage) 3MV :Irrigation Development Office (Office de mise en valeur) ONH :National Oil Board (Office national des huiles) PDRI :Integrated Rural Development Program (Programme de d6veloppement rural int6gre) PPI :Public Irrigation Perimeters (Perimetres publics irriguks) SMS :Subject-Matter Specialist (Conseiller sp4cialisi) SONAM :National Farm Mechanization Company (Soci6t6 nationale de motoculture) STEC :National Fertilizer Company (Soci6t& tunisienne des engrais chimiques) UCe :Production Cooperative (Unitk cooperative de production) USAID :United States Agency for Internatioral Development (Agence des Etats-Unis pour le d6veloppement international) This document has a restricted distribution and may be used by recipients only in the performance Of their official duties. Its contents may not otherwise be disclosed without World Bank authorization. REPIMLIC OF TUfNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN Loan SuurX Borrower The Republic of Tunisia Amount: US$150.0 million equivalent Tems: 17 years. including 4 years of grace, at the standard variable Interest rate Loan Description: The proposed Loan would support the first phase or implementation of the Governnent's program of agricultural sector reforms, within the framework of a general macro-economic restructuring program. The principal objectives of the sector adjustment program are to maintain the growth rate In agriculture in order to reduce the sector trade deficit. within the overall macro-economic constraints on public resources. To achieve this objecttve, actions would be taken, in both the short and medium term, to: (i) improve the prices and incentives framework; (ii) re-orient the public investment program in agriculture: (iii) strengthen agricultural support services including rationalizing the role of the private sector; (iv) improve management of natural resources of land, forests and fisheries: and (v) build up institutional capacity for sector performance monitoring and policy analysis. The Government's macro-economic restructuring program Is focusing on measures to limit growth of domestic demand (wage and salary, budget and monetary policies), to stimulate growth of non-traditional exports (exchange rate policies, export promotion), and to improve the allocation and use of scarce economic resources (interest rate policies, gradual liberalization of domestic prices, investments and imports); it should also result in a more rapid creation of new employment and reduced underemployment. The foreign exchange provided by the Loan would be used to finance general imports based on a negative list and agricultural inputs needed to stimulate agricultural production, including fertilizer and raw materials for its manufacture. insecticides and herbicides, animal feed, diesel fuel, spare parts, tractors and pumps, veterinary supplies, raw materials for the manufacture of irrigation pipes and fisheries inputs. Benefits and Risks: The reforms agreed under the Loan are expected to create a more favorable environment for overall economic and sectoral growth In a time of resource constraints. In particular, changes in the agricultural pricing and incentives framework and publitc expenditure priorities are expected to make the sector a more efficient producer of import substitutes and export products. Risks relate to the length and difficulty of the process, possible social and political pressures. unpredictable developments in the external environrment and uncertainties in the response of the private sector. These risks are limited by the Government's strong commitment to objectives of the macro and sector adjustment programs, and by the inherent flexibility of the phased medium-tern approach. Estimated Disbursements: The proceeds of the Loan would be disbursed in two tranches: US$100 million equivalent soon after effectiveness; US$50 million equivalent after implementation of specific actions, including an overall review of the implementation of the macro-economic and sectoral reform programs. Aooraisal Report: This is a conbined President's and Staff Appraisal Report. A detailed Medium-Term Agricultural Sector Adjustment Program (HTASAP) is available on request. Hbos No. IBRD 19855 No. IBRD 19856 No. TBRD 19857 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN Table of Contents Page No. LOAN SUMMARY PART I : THE ECONOMY 1 PART II :THE GOVERNMENT'S ECONOMIC ADJUSTMENT PROGRAM 4 A. Structural Problems and the Need for Structural Change 4 B. Recent Policy Measures Taken by the Government 6 C. The Short- and Medium-Term Adjustment Program 7 D. Medium-Term Projections 11 E. Social Impact of the Adjustment Program 15 PART III :BANK GROUP OPERATIONS IN TUNISIA 16 PART IV :THE MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM 19 A. The Need for Adjustment 19 B. The Sector Adjustment Program 22 - Origin and Objectives 22 - Improving the Prices and Incentives Framework 23 - Reorienting Public Expenditures 28 Strengthening and Privatizing Support Services 34 Improving Management of Natural Resources 43 - Building Up Sector Performance Monitoring and Policy Analysis Capabilities 46 PART V THE LOAN 47 A. Origin and Objectives 47 B. Action Program Under the Loan 47 C. Loan Administration 52 D. Management, Coordination, Monitoring and Evaluation 55 E. Justification and Risk 56 PART VI : RECOMMENDATION 59 Table of Contents (cont'd) ANNEXES r. 'ountry Data II. Status of Bank Operations III. Supplemental Loan Data Sheet IV(a). Government Letter of Economic Development Policy IV(b). Government Letter of Agricultural Development Policy V. Sector Adjustment Matrix VI. Table of Contents of Medium-Term Agricultural Sector Adjustment Program (MTASAP) VII. Production Levels and Growth Rates of Key Agricultural Products VIII. Agricultural Balance of Trade MAPS IBRD 19855 - Rainfall and Irrigated Areas IBRD 19856 - Soil Suitability for Crops IBRD 19857 - Location of Main Crops INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE JBRD TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN TO THE REPUBLIC OF TUNISIA FOR AN AGRICULTURAL SECTOR ADJUSTMENT LOAN L. I submit the following report and recommendation on a proposed loan for the equivalent of US$150 million to the Republic of Tunisia to help finance an agricultural sector adjustment program. The loan would have a term of 17 years, including 4 years of grace, at the standard variable interest rate. PART I - THE ECONOMY 2. An economic report entitled "Tuni3ia - Country Economic Memorandum: Mid-term Review of the Sixth Development Plan ([982-86)", in two volumes (No. 5328-TUN), was distributed to the Executive Directors in October 1985. An economic mission to review the macro-economic framework of the VIIth Plan (1987-91) visited Tunisia in January 1986; its findings, as well as updated information obtained at the time of appraisal of the proposed Agricultural Sector Adjustment Loan in April 1986, and by a mission in June/July 1986, are reflected in this part and the country data sheets attached in Annex I. 3. Tunisia is a medium-size, middle-income country with a population of 7.5 million and a per capita income of about US$1,100.1' Much of Tunisia is arid or semi-arid. Only 3% of arable land is irrigated, and areas where rainfed agriculture is possible are subject to severe year-to-year fluctuations in rainfall. Nevertheless, agriculture still occupies nearly one out of every three Tunisians in the labor force. Tunisia's most important raw materials are phosphates, petroleum and natural gas. Known exploitable reserves of oil and gas are approaching depletion, and the limited new reserves require costly off-shore drilling. Barring large new oil and gas discoveries, and given the rise in domestic energy demand, Tunisia is expected to turn into a net oil importer in the early 1990s. The low quality al phosphate deposits constrains the expansion of the highly efficient Tunisian phosphate processing industry. The country also has considerable tourism potential. 4. Tunisia has undertaken a massive effort to develop its human resources, paying special attention to family welfare, education, and technical and vocational training. As a result, between the early 1960s and the early 1980s, the infant mortality rate declined from almost 160 to 79, life expectancy at birth rose from 48 to 62 years, the adult literacy rate increased from about 151 to about 621, and average caloric intake per capita increased from 95% to 1211 of minimum standard requirements. An active family planning policy pursued by the Government led to a decrease in fertility and birth rates. Even though mortality rates also decreased, the gross reproduction rate decreased markedly from 3.5% to 2.4% over the same period. However, since net emigration of Tunisians abroad was sharply reduced by restrictive measures taken in the EEC countries and Libya, the growth rate of the labor force accelerated, a main reason for the rapidly growing, serious LI 1985 figure at current prices and 1985 exchange rates. - 2 - unemployment problem. Open unemployment reached 141 in 1963 and under- employment is extensive. These problems are particularly serious among young school dropouts. 5. Recent economic developments. During the 1970s, the Tunisian economy did well. Rapid growth in the range of 7-8Z was accompanied by substantial structural transformation as manufacturing and tourism became more important and their share in total exports increased. Economic performance benefitted from substantial terms of trade gains due to the rapid price increase of oil, allowing both consumption and domestic savings to increase and investment to remain high (over 30% of CDP). It also benefitted from improved economic management with a cautious shift toward a more liberal, market-oriented economy. The inflation rate remained modest, averaging 6.1% over the decade. The balance of payments current account deficit, averaging 51 to 6% of GDP over the period, was easily financed, much of it by direct foreign investment, and the debt service ratio was a low 10.7% in 1979. The only major problem was a persistently high rate of unemployment/underemployment. 6. The VIth Plan (1982-86) proposed a number of policy reforms to face the consequence of rising unemployment and the progressive decline in net energy exports. Its main objectives were employment generation, export promotion, regional development and public sector efficiency. Investment priority was given to agriculture, engineering industries and tourism. The overall rate of investment was projected to decline during the Plan period. To minimize the effects on economic growth and employment, measures were proposed to increase the efficiency of exi0ting investments and to encourage a shift to labor-intensive activities. They were to be accompanied by a substantially tightened income policy, in particular cautious wage and salary policies, and a considerable slowdown in the growth of recurrent budget expenditures. 7. Economic performance, however, deteriorated during the Plan period. Oil production virtually stagnated; in 1982, a prolonged drought depressed agricultural output and agro-industrial production; technical problems plagued the phosphate and cement industries; and tourism and exports of manufactured goods were adversely affected by the recession in Europe, high domestic prices and a sizable appreciation of the Tunisian dinar vis-h-vis the currencies of most competitor countries as well as the US dollar. The economy recovered in 1983 and 1984 due to buoyant growth in manufacturing output, stimulated by rapidly expanding local demand. Growth was further stimulated in 1985 by an exceptionally good agricultural crop and resumed growth in tourism, bringing the average annual GDP growth in the first four years of the Plan to 3.7%, compared to 6.3% targeted. This performance was nonetheless favorable in view of the world recession and as compared with other countries. 8. The Government was slow, however, in adjusting domestic demand to the decelerated economic growth. Ir, contrast to the Plan's macro-economic objectives, the investment rate remained high rather than declined, mainly due to higb public enterprise investments in energy and transportation, while domestic consumption expanded rapidly, fuelled by sharp increases in wages and salaries in 1982 and early 1983. This strong demand pressure, facilitated by rather liberal credit policies, was reflected in rising inflation which averaged nearly 10.51 in 1981-84, compared to 8.01 over 1977-81. It also contributed substantially towards the marked worsening of the current account deficit of the balance of payments which rose to 11% of GDP in 1984. The - 3 - Government's overall budget deficit also increased slightly from Ln average of 2.7% of GDP in 1981-82 to 3.2% in 1983-84, excluding deot amortization. This reflected increases in recurrent expenditures due to higher wage and salary outlays; higher subsidy payments to households and public enterprises; and higher public investments. 9. While the situation had not reached crisis proportions, the trend observed during 1981-i4 clearly could not be sustained. Faced with this deterioration, the Government started to implement a package of policy measures aimed at stabilizing the economy as described in some detail in Part 11 below. These measures together with the imposition of drastic foreign exchange and import restrictions, brought the balance of payments current account deficit back to about 7% of GDP in 1985, despite reduced exports of oil, phosphate, and manufactured goods to Libya. While this improved the immediate situation, the underlying disequilibrium has not been resolved, and problems usually associated with controls, such as growing shortages of raw materials, semi- finished products and spare parts, have appeared. Meanwhile, the budget deficit rose to 5% of GDP in 1985 because of a slow growth in revenues, despite a slight decline of capital expenditures in real terms. The authorities prepared a restrictive budget for 1986, as discussed below (para. 21). 10. Over recent years, the Government had consulted informally with the IMF on a wide variety of economic and financial issues, but had not asked for financial support. Before and during the July 1986 Article IV consultation mission, however, there were discussions with the IMF on a possible stand-by agreement cum compensatory financing facility, which will be formalized during a mission, scheduled for early September. II. Social issues. Since Independence, the country has gone a long way towards meeting the basic needs of its population. Over 16% of GDP is now devoted to social programs, and the number of absolute poor declined from 17% of total population in 1975 to 12.8% in 1980 (para. 48). This improvement was largely concentrated, however, in urban areas. Since 1981, social issues have faced a different context than in the 1970s, when an easy financial situation allowed a relatively unconstrained expansion of social services. On one hand, the Tunisian population has become increasingly aware of and sensitive to income distribution issues, and the beneficial effects of past rapid expansion in social services have created a demand for improved standards in social services delivery. On the other hand, the provision of adequate social services - education, health, urban infrastructure, housing - is being increasingly hampered by budgetary constraints. To reduce the financial burden of social services, the administration is reviewing the cost structure of the various types of social services, including free or below-cost delivery, the possible introduction of some user fees, and improved social infrastructure management, in particular as regards hospitals. Also, decentralization of social facilities to deprived zones will have to be assessed carefully because costs for servicing and maintaining them could become prohibitive. 12. To reduce socio-economic differences, in particular between rural and urban areas, and between workers in the modern sector and those precariously employed in informal activities, the Government is channelling more resources into regional development and youth employment. Integrated rural programs are being developed to stimulate creation of productive jobs and grassroots participation Subsidies and credit facilities are granted for young - 4 - technicians to create their own enterprises and for entrepreneurs to create new projects in underdeveloped regions. More efforts are needed, however, to strengthen the coordination of vocational and on-the-j'b training with market demand and to ensure that rural programs create economically viable and sustainable assets and activities. 13. External assistance and foreign debt. During the second half of the 1970s, foreign borrowing was modest and a large share of foreign funds was provided by public sources at relatively soft terms. At the end of 1979, debt outstanding and disbursed was estimated at US$3.0 billion, or 42% of GDP; debt service was less than 11 of export revenues. For reasons mentioned earlier (para. 8), the balance of payments deficit has increased substantially since then, as has foreign indebtedness. According to preliminary estimates, total public foreign debt outstanding and disbursed reached nearly US$4.4 billion (about 50% ot GDP) at the end of 1985 and the debt service ratio rose to about 22%. However, the Tunisian authorities bave always followed cautious debt management policies; while the share of short-term borrowings has increased slightly since 1980, Tunisia's overall foreign debt remains predominantly long and medium-term, and debt service requirements are projected to increase only slowly. During 1980-84, 60% of foreign loan disbursements were from official sources, and nearly 31% on concessional terms. Over 70% of official disbursements came from bilateral sources (mainly Arab oil-producing countries, France, Japan, the Federal Republic of Germany), about 20% from the Bank Group, and 10% from other multilateral sources. Overall borrowing terms were favorable, averaging 8% interest and 15.3 years maturity. 14. The balance of payments and foreign debt outlook, including Tunisia's creditworthiness, are assessed in paragraphs 43-45 below. PART H - THE GOVERNMENT'S ECONOMIC ADJUSTMENT PROGRAM A. Structural Problems and the Need for Structural Change 15. The brief description of recent economic trends and present situation as presented above highlights three major problems facing the Tunisian economy today, one rather immediate, two somewhat longer term. The immediate problem is the high and persistent deficit o( the balance of payments current account, and the consequent rapid increase in the country's foreign debt. In 1986, the decline in oil prices, lower tourism revenues as a result of political uncertainties around the Mediterranean, and lower workers' remittances have put further pressure on the balance of payments. While there is no danger of an immediate crisis, the situation cannot be allowed to continue much longer. The two l1:jger term, but equally important, problems are the progressive decline in net hydrocarbon exports, requiring the development of other sources of export revenues and import substitution (non-traditional exports, tourism, agriculture), as well as the high and growing unemployment and underemployment rate and the danger of an even worse trend given the high rate of growth of the active population, at a time of lower overall economic growth. 16. No single policy instrument can deal successfully with all three problem areas; only a carefully balanced and timed package of different policy measures can do so. Such a comprehensive policy package should be based on three n.ain considerations: (a) A return to an export driven growth strategy, as was pursued quite successfully until 1981, is a key to the success of any future development program aiming to achieve satisfactory economic growth and employment creation, given Tunisia's limited domestic market1' and the fact that most obvious import substitution industries are already well developed. With petroleum production ceasing to be a major engine of export growth, and export possibilities in agriculture limited by market constraints in the EEC, manufacturing will have to become much more export oriented than in the past, when it catered primarily to domestic demand fueled by high petroleum revenues. This requires fundamental changes in industrial policies so as to increase incentives to export. Such changes are also necessary to revitalize existing export oriented economic activities, such as tourism. Emphasis in agriculture will be to promote efficient import substitution in commodities such as grains, milk and meat, for which Tunisia has a comparative advantage. (b) A major improvement in the efficiency of resource use and allocation is required. With the highly profitable production and export of petroleum declining progressively, economic resources in Tunisia, domestic as well as foreign and private as well as public, will become increasingly scarce. Under these circumstances, the country can only achieve a satisfactory rate of overall economic growth and an acceptable level of new employment creation if it uses and allocates these resources with the utmost efficiency. The liberalization measures covering prices, investments and imports, included in the Government's economic adjustment program, serve primarily to improve efficiency in the private sector by gradually introducing more competition, while proposed changes in lbudget policies, public investments and public enterprise management would improve efficiency in the public sector. (c) Last but not least, economic development must become much more labor intensive in order to create more employment in spite of lower overall economic growth. Future increases in production should be achieved mostly through increasing the number of employed workers and new investments should serve mostly to create new employment. This would be achieved through a marked change in relative factor costs, making labor less expensive relative to capital. Macro-economic projections indicate clearly that if real salaries had continued to increase by 4.5-5 per year, as was the case during the 1970s, and if interest rates had continued to be largely negative in real terms, one could not expect the creation of even half as many new jobs as necessary to absorb the rising number of new job seekers during the period of the VIlth Plan (1987-91). Furthermore, priority must be given to the development of labor-intensive sectors with relativeLy low investment costs such as small and medium enterprises, electrical and mechanical industries, and agriculture. There is in fact a substantial potential for employment creation in this latter sector particularly through stimulating import substitution. 1/ Less than 10% that of Switzerland and about 5% that of Spain. - 6 - B. Recent Polioy Measures Taken bY the Government 17. The Government of Tunisia already recognized the importance of such economic adjustments during preparation of the VIth Development Plan (1982-86) and a substantial number of concrete policy changes have been implemented over the last few years, as detailed in this section, some of them bold and often unpopular. These efforts need to be pursued and expanded over the coming years, along the lines presented in Section C below. 18. For the last three nnd half years, the Government has pursued strict wage and salary policies. Since Jonuary 1983, when wage increases were delinked from the cost oE living index, no general salary increases have been granted. As a result, average real salaries have declined by more than 15%. This decline has eliminated the main source of the rapid increase in domestic consumption experienced during 1980-83. While the Covernment raised the minimum salary by 10% irT July 1986, it does not plan to grant a general salary increase this year. 19. Exchange rate policies have become more flexible since mid-1985, resulting in a gradual downward adjustment of the exchange rate by over 18% vis-A-vis a basket of seven currencies between mid-1985 and mid-1986. Together with the formal devaluation of 10% announced in mid-Aagust 1986, this has reduced by 28% the nominal exchange rate on a trade weighted average, more vis-i-vis the major European currencies (DM, FF), less vis-a-vis the U.S. dollar. While the real effective exchange rate has depreciated somewhat less, these changes nevertheless made it possible to more than offset the rise in the value of the dinar in relation to competitor country currencies observed over the last couple of years, and so to improve the competitiveness of Tunisia's non-traditional exports. 20. The Government has also started to use interest rate policies as a more active instrument of economic policy making. For the first time in four years, general interest rates were raised by 1-2 points in April 1985 and by 3-4 points for the particularly low special rates in Spring of 1986. Together with the 1.7 point decline in the inflation rate in 1985, itself a very satisfactory achievement (from 8.2 to 6.5%), these nominal interest rate increases raised real interest rates by 3-5 points in 1985; most rates are now positive in real terms, in line with the recommendations of the Bank's Financial Sector Report (No. 5263-TUN of December 16, 1985). In agriculture. however, interest rates are not yet high enough to cover financial and operating costs and risks. 21. Budgetary outlays. As mentioned above (para. 9), 1985 ended with a markedly worse overall budget deficit (5% of GDP) in spite of a nearly 2% decline in development outlays, as Government revenues from oil and import taxes declined even more substantially. In 1986, the situation is expected to improve gradually, in spite of a likely further decline in revenues, reflecting lower oil prices and depressed imports. Through a number of tough measures, the Government intends to reduce total budget outlays (net of debt service) by some 9% in real terms. Sales taxes on alcoholic beverages and tobacco were raised; recurrent expenditures (net of interest payments) will be reduced by 2.5% in real terms, and subsidies to households and public enterprises as well as development outlays (net of debt amortization) will be reduced by 22% in real terms. As a result, the overall deficit is expected to decline to 3.9% of GDP. The substantial reductions in subsidy outlays reflect the Government's policies of gradually adjusting the prices of goods subsidized by the budget and the tariffs charged by public enterprises for their services. - 7 - 22. For several years, agricultural producer prices have gradually been decontrolled and the ones still controlled (particularly cereals and milk) have been raised more rapidly than inflation. As a result, by end-1985, nearly 75% of domestic agricultural production was sold freely in the domestic market and/or exported. While producer prices in general are not aligned with border prices, producer incentives have improved progressively. 23. Investment controls, while not reduced, have been streamlined, and focused more sharply on new investment priorities. Among others, renewal investments and investments in tourism (other than hotels) receive priority and incentives similar to those of investments in other sectors. 24. Export promotion. A number of measures have been taken to stimulate exports, streamline export procedures, establish export credit and insurance, develop export marketing, and facilitate re-exports, in line with the reconiendations of the Bank's Industrial Policy Mission of January 1985. The liberalization of all necessary imports for exporting enterprises, as announced in mid-August 1986, will provide an additional powerful stimulus to exports. C. The Short- and Medium-Term Adjustment Program 25. As indicated in paragraph 9 above, the package of policy changes implemented by the Government over the last years has shown some positive results, particularly concerning private domestic demand and the budget deficit; however, its restrictive elements have also created a number of "tblems, such as the lack of essential imports for directly productive activities. Over the coming years, two kinds of measures are of vital importance: (a) to maintain and strengther. the positive measures already taken; and (b) to complement these measures through changes in other fields destined to reinforce the effectiveness of the program and minimize its adverse effects. Included in this second group are measures to restructure the economy through a progressive liberalization including prices, investments and imports. This program of macro-economic adjustment measures provides the policy base for the proposed Agricultural Sector Adjustment Loan (ASAL), as well as the proposed Industrial and Trade Policy Adjustment Loan currently under preparation (para. 53). It is described below, as well as in the c,overnment's Letter of Economic Development Policy [Annex IV(a)]. 26. Wage and salary policy. Maintaining cautious wage and salary policies may weLl be the single most important policy measure to achieve a long-term sustainable balance of payments equilibrium and more rapid employment creation; it can also contribute significantly to achieving a rapid improvement in the present balance of payments deficit. Wages and salaries are an important determinant of (a) domestic demand and in consequence of import demand; (b) the cost of production of manufactured goods and services, and consequently of the competitiveness of Tanisia's manufactured exports and tourism; and (c) relative factor costs and, thus, the labor intensity of future economic activities and growth of employment. The Government is determined to maintain the restrictive wage and salary policies started in 1983, and limit the growth of the total wage bill to that of GDP during 1988-91, while keeping it below that in 1986-87 (limiting it to less than the increase of the CPI), when only the minimum wage is raised. While such measures will slow down the improvement in the standard of living of the labor force already employed, they are necessary and adequate to speed up the creation of new employment and, thus, reduce unemployment and improve income distribution. - 8 - 27. Exchange rate policy. An appropriate exchange rate, allowing for competitive exports of non-oil/non-phosphate goods and services is a vital precondition for the success of an export-oriented growth strategy in Tunisia. The measures taken since mid-1985 have achieved this goal. The Government has committed itself to pursuing a flexible exchange rate policy with the objective of maintaining a competitive rate vis-i-vis its main competitor countries. It is in active discussions with the IMF on this issue. Any adjustments in the exchange rate will be reflected, among others, in domestic producer prices for agricultural products. 28. As regards interest rates, as a result of measures taken recently, most rates are now positive. In order to maintain this situation, the Government intends to pursue more flexible interest rate policies than in the past, changing interest rates in line not only with the inflation rate but also with financial and operating costs and risks. 29. As mentioned above (para. 21), budget outlays have been cut considerably in 1986. In the context of the VlIth Development Plan, the Government plans further reductions in the overall budget deficit over the coming years; in order to achieve its balance of payments and foreign debt targets during the VIIth Plan and beyond (paras. 43-44), the Government intends to eliminate the overall budget deficit by 1991 (see Table 1). This objective would be achieved largely through cuts in expenditures, since budgetary revenue is already high (nearly 31X of GDP) and likely to increase less rapidly than GDP given declining oil incomes, low growth of imports and the proposed reduction in many customs tariffs (para. 36), as well as the tax incentives given for exports and regional development. Even given the planned major Government effort to mobilize new sources of revenues (improved collection ot direct taxes, full introduction of the VAT, introduction of additional sales taxes on luxury goods), a gradual decline in total budget revenues as a percentage of GDP is virtually unavoidable. Table 1: OVERALL BUDGET DEFICIT (In percentage of GDP, net of debt amortization) 1986 Average Annual 1985 Revised 1987 1988 1991 Growth 86-91 Actual Budget ----- Projected ---- In Real Terms Revenues 31.8 30.6 30.0 29.0 27.0 0.2 Recurrent ex;enditures 25.2 25.2 24.0 23.0 21.0 -1.3 Capital expenditures 11.6 9.3 8.0 7.5 6.0 -2.3 Total Expenditures 36.8 34.5 32.0 30.5 27.0 -1.6 Overall deficit 5.0 3.9 2.0 1.5 - - 9 - 30. Under these circumstances, gradual achievement of a balanced overall budget requires substantial reductions of expenditures in real terms as well as in relation to GDP. These can be achieved without impairing the provision of appropriate social and economic services by the Government, through careful setting of priorities among budgetary outlays. The recommendations of the Bank's Public Expenditure mission will provide an important input into this task. For recurrent expenditures, it will be achieved primarily through two measures: (a) a considerable slow-down in the growth of salary outlays as the hiring of civil servants will be limited to a maximum of 2% p.a., and salary increases will be as limited as in the private sector; and (b) a systematic reduction in subsidies of 52 p.a. in nominal terms. Among others, the latter is possible as a result of the public enterprise reform that the Government started in 1985 and plans to pursue more vigorously over the coming years; this reform will reduce the number of public enterprises and the deficits of the ones retained. In addition, the Government is in the process of devising new policies to focus consumer subsidies more strongly on the really needy and do away with the present across-the-board subsidization of the entire population (para. 49). For capital expenditures the reductions will be achieved by reducing Government subsidies and capital contributions to the remaining public enterprises, whose capital requirements will be progressively covered by the development banks. Direct Government investments in sociaL and other infrastructure would be maintained at about the present level. 31. Money and credit policies have been quite expansionary over recent years, with growth of money circulation (M2) exceeding that of GDP by a substantial margin (17% p.a. vs. 14X p.a. on average during 1981-85) in spite of comprehensive Central Bank controls. The Government intends to prevent growth of money circulation during 1986-91 from exceeding that of GDP, and will keep it below that under normal circumstances. Given the projected considerable decline in the Government's overall budget deficit and, thus, in its need for new borrowing, tighter monetary and credit policies can be followed without hampering productive investments in the private sector. 32. The liberalization program. As mentioned above (para. 16), a major improvement in the allocation and use of economic resources, as well as in the relative incentives for export production compared to production for the domestic market, are key preconditions for Tunisia to achieve satisfactory economic growth and employment creation at a time of tightening balance of payments constraints. Progressive liberalization of the economy and introduction of more competition - domestic as well as foreign - is th.e only effective way to achieve this. Given the fact that Tunisia's modern sector has operated for decades in a highly controlled and well protected environment, the necessary phasing out of controls on prices, investments and imports can only be attained gradually. The Government is determined, nevertheless, to complete the phasing out of controls largely by the end of the VlIth Plan (1991). 33. Price controls. In addition to the ongoing gradual decontrol of agricultural producer prices, the Government intends to abolish price controls for all manufactured goods by 1991, with the exception of a small number of key staples suach as bread and edible oils. In a first phase (1986-88), controls will be abolished in well-established industries where the number of domestic producers is sufficiently large to ensure appropriate competition. The list of such industries, which account for about 601 of total manufacturing output, and a schedule for the decontrol of their prices is included in the Letter of Economic Development Policy. In a second phase (1989-91), the controls will be abolished in all other industries. With - 10 - respect to those products for which price controls will continue for an interim period, a new more flexible price control system will be introduced at the beginning of 1987, which avoids the major shortcomings of the present cost-plus system, such as over-investment, low use of installed capacities, and lack of incentives to control production costs, including energy use. 34. Investment controls. At present, all new investments need Government approval, including replacement investments and expansions of existing installations. At the same time, investment incentives are provided to virtually all approved investment projects. The Government intends (a) to introduce a much more selective system of investment incentives, limiting them to high priority projects (export industries, regional development, technology transfer); and (b) to phase out by 1991 at the latest investment approval procedures for all projects which do not receive special incentives. 35. For this second category of projects and in line with the planned phasing out of quanititaLive restrictions on imports of capital goods (para. 36), the Government intends, by the beginning of 1987, to abolish investment controls on all investments below D 200,000 and on replacement investments not requiring a specific authorization to import capital equipment. It will continue the abolition of investment controls during 1987-88 for other well-established industries for which the number of domestic producers is sufficiently large to ensure appropriate competition. As mentioned above (para. 33), those sectors account for about 60% of total manufacturing production. Finally, investment controls in all remaining sectors, except for investments for which special investment incentives are requested, will be abolished during 1989-91. 36. Import liberalization is the third essential liberalization measure without which the effects of price and investment liberalization would remain very limited. It is also essential to improve incentives for export production, by making production for the local market less attractive. The Government intends to take two sets of measures in this respect: (a) to phase out all quantitative restrictions on imports before the end of 1991. In line with the country's import priorities, liberalization will start with spare parts for use in industry, agriculture, hotels, hospitals and other services, raw materials and semi-finished products for enterprises that export at least 25% of their output, and capital goods for investmnat projects approved by the Industrial Investment Promotion Agency (API), the Agricultural Investment Promotion Agency (APIA) and the Tourism Investment Board after October 1, L986; the first two of these were announced in August 1986, and liberalization of capital goods for newly-approved investment projects is expected in September 1986. Confirmation of all of the above issues will be a condition of effectiveness of the proposed Loan. These measures would be followed by liberalization of semi-finished products for firms that are well integrated or that export at least 15% of their output, as well as all other raw materials and spare parts by January 1987; and of capital goods and the remaining semi-finished products by January 1988. As a result of the above measures, about 75% of all imports would be liberalized by the end of 1.988. During 1989-91, all remaining quantitative restrictions, essentially on consumer goods imports, would be phased out; - 11 - (b) to reform the tariff system by reducing high import tariffs and the disparities in the levels of effective protection between the different sectors of the economy with the aim of achieving a lower and reasonably uniform effective protection rate of about 25% by the end of the VlIth Plan. To achieve this objective, the Government intends to prepare a program of gradual tariff reductions for impLementation over the 1989-91 period. As an interim measure, it wilL amend the present tariff system no later than January 1, 1987 so that there is a universal minimum tariff of 15%, all existing tariffs between 25% and 31% are reduced to 25% and all tariffs presently between 32% and 56% are reduced by 6 percentage points, and all higher tariffs are reduced to a maximum of 50%. Not later than January 1. 1988 all tariffs then being between 25% and 34% will be reduced to 252 and all tariffs between 35% and 50% will be reduced by 9 percentage points. The Government intends to replace some of these reduced import tariffs by domestic sales taxes covering imports as well as domestically produced goods. 37. The entire macro development program, as described above and in the Government's Letter of Economic Development Policy [Annex IV(a)] would be monitored by a Coordinating Committee (para. 160) and by Bank missions. Bank confirmation of satisfactory progress in implementation of the overall program would be a condition of second tranche release. D. Medium-Term Proiections 38. As mentioned above, the economic adjustment program is aimed at addressing three major areas. First, the direct export promotion measures together with the exchange rate adjustments and reduced import protection would stimulate the growth of non-oil exports to over 6% p.a., compared to 3.3% achieved so far during the VIth Plan. Second, the pricing and investment incentive policies aimed at raising the efficiency of resource utilization and allocation would reduce the investment rate from 28% of GDP in the last five years to 22% during the Vlith Plan without seriously affecting output growth, and would 'educe the incremental capital-output ratio from the present high level of 10 to 6.4 between 1986-91. Third, the substantial changes in relative factor costs would stimulate the creation of new employment, expected to average close to 50,000 new jobs p.a. or a 2.5-3% p.a. increase over the Plan period. Even this nearly 162 increase over the VIth Plan actual figures, however, will only permit absorption of about 70% of new job seekers. 39. Concerning growth of GDP (Table 2), the decline in the production and export of oil tends to overshadow at first glance the projected substantial improvements in the non-oil sectors, particularly when compared with historical performance. Such improvement is vital for Tunisia to achieve a satisfactory overall growth over the coming years. Table 2 shows that even though the average GDP growth of the VIIth Plan is slightly lower than the VIth, the growth of non-oil industries is substantially higher (5.5% compared to 4.4% p.a.). Agriculture's decline (from 4.0% to 3.6% p.a.) is a reflection of the exceptionally good agricultural output in 1985; the projected 3.6% p.a. growth of the sector is significantly better than the 1.6% achieved during the 1976-81 period. Output of the non-oil productive sectors is expected to increase rapidly, as a result of direct measures stimulating the agricultural and industrial sectors (improving productivity and efficiency of rainfed agriculture, making more efficient use of irrigation, improving land use - 12 - policy, strengthening export promotion institutions) and indirect measures affecting the incentive framework. Developments in the oil sector are heavily influenced by world oil prices, as the production of small oil fields would only become attractive if oil prices increase again substantially. The present outlook is for production of crude to decline to 4.4 million tons by the end of the VIIth Plan, compared to 5.2 million tons in 1985/86. Production of associated gas would decline in parallel. Table 2: GROWTH OF OUTPUT AND EXPENDITURES -i (Annual growth rates in percentage) 1976-81 1981-86 1986-91 (Actuals) (Preliminary) (Projected) CDP (mp) 6.1 3.6 3.4 Agriculture 1.6 4.0 'b 3.6 Industry 8.9 3.0 3.6 Hydrocarbon (8.3) (-0.5) (-3.0) Non hydrocarbon (9.2) (4.4) (5.5) Services 6.5 3.9 3.3 Consumption 7.4 4.4 2.5 Private (7.8) (4.5) (2.7) Public (5.8) (4.3) (2.0) Gross Investment 6.6 -4.2 3.5 Imports GNFS 10.8 -1.8 0.2 '' Exports GNFS 8.5 1.1 1.9 /a Constant 1980 prices and calculated by least squares. lb Growth rate is affected by exceptional weather conditions. ic Due to reduction in oil imports on account of the new refinery. 40. The two major exports of goods, oil and phosphate derivatives, are affected by two factors in addition to a depressed price outlook- . The coming on stream of the refinery extension at Bizerte will reduce crude oil exports by 1.5 million tons, as more Tunisian crude wi'll be processed locally. While recently-completed fertilizer plants could increase exports of phosphate derivatives by over 7% p.a., it is likely that this capacity cannot be fully utilized in view of the projected glut in world supply, and of the poor quality of indigenous phosphate rocks. These exports are thus expected to grow by no more than 6% p.a. during 1986-91. 41. In consequence, manufacturing industries, tourism and agriculture will have to become the major engines of future export growth. Assuming that the policy measures concerning the agricultural sector discussed in Part IV below are implemented in a timely fashion, there should be a significant reduction in the agricultural trade deficit. Potential export growth lies in olives, vegetables, dates, wine and fishery products. Overall, manufactured LI The medium-term projections assume an oil price of US$13-14 per barrel in 1986, gradually increasing to US$22 in current prices in 1990, while the price of TSP, the major fertilizer product of Tunisia, is expected to increase from the present level of US$120 to US$160 per metric ton. - 13 - exports excluding phosphate derivatives are expected to grow at 7.8% p.a., with the greatest potential in electrical and mechanical, textile and other manufacturing industries. Tourism is expected to resume a more satisfactory growth, albeit not at the rate experienced during the late 1970s. Average annual growth of exports, both historical and projected, is shown in Table 3. Table 3: GROWTH OF EXPORTS AND COMPONENTS (Annual growth rates in percentage, constant 1980 prices and calculated by least squares) 1976-81 1981-86 1986-91 (Actual) (Preliminary) (Projected) Agricultural Products 2.4 -1.1 4.7 Crude Petroleum 7.4 -4.2 -19.8 Phosphate + Derivates 2.7 4.5 6.0 Processed Food -3.4 6.6 4.9 Textiles 23.7 3.2 7.2 Electrical/Mechanical 23.9 9.0 11.9 Other Goods 6.8 2.5 20.3 NFS 9.2 2.8 5.0 Total Exports, GNFS 8.5 1.1 1.9 Total, excluding petroleum 9.0 3.3 6.5 42. Concerning imports, the pivotal role of exports in generating economic growth will require corres.ponding increases in imports, particularly of raw materials and intermediate goods needed for industrial growth; growth of these imports is assumed to be at par with industrial growth, allowance being made for the expected improvement in efficiency. The elasticity of energy consumption would decline to 1 during the VlIth Plan, compared to 1.3 at the present time, reflecting a continued energy conservation effort being supported, in part, by a recent Bank loan. Total energy imports are expected to decline by 17 p.a. throughout the period, also partly as a result of the refinery extension mentioned above. In addition to stimulating exports, the policy measures proposed by the Government are expected to substantially stimulate import substitution of agricultural products. The growth rate of food imports is expected to be more than halved from 4.8% p.a. during 1977-86 to about 1.7% during the VlIth Plan, despite a rapid growth of the population (2.5% p.a.) and of food processing industries (42 o.a.). The greatest potential in this category includes durum and bread wheat, barley, milk and beef. Imports of other consumer goods are likely to remain low between 1986-88, due to the impact of short-term stabilization measures, which are expected to keep growth of domestic consumption below that of total GDP; they are expected to pick up rapidly thereafter as growth resumes and the impact of the liberalization program begins to be felt. - 14 - 43. Balance of Payments and external debt. Emigration has slowed down in the face of weakening demand for foreign workers in Europe, in Libya and in the countries of the Arab peninsula, and therefore inflows of workers' remittances are expected to decline slightly in real terms. Over the past five years, these remittances have averaged over 161 of commodity exports, equivalent to about 4% of CDP. Given this and the above-discussed export and import outlook, the current account deficit is expected to decline from an average of about US$707.0 million, or 9% of GDP in 1984/85, to about US$536.0 million, or 3.9% of GDP in 1991. In view of the depressed oil price outlook and assuming no major new oil field discoveries, direct foreign investment is expected to remain at the current level in real terms. Table 4: TUNISIA - PROJECTED BALANCE OF PAYMENTS (Millions of current dollars) (With adjustment)" Actual Projected 1985 1986 1988 1991 Exports of Goods and NFS 2,678.3 2,579 3,306 4,448 Imports of Goods and NFS 3,175.6 3,354 3,922 4,918 Net Factor Services -52.6 -56 -80 -82 Current Account Deficit 539.2 819 682 536 Net Foreign Investment 130.6 176 197 231 Public M & LT Borrowing (gross) 653.1 1,139 1,131 1,219 Amortization on M & LT Debt 388.3 520 629 889 Public M & LT Borrowing (net) 264.8 619 502 330 Selected Financial Indicators Debt Service Ratio (X of exports of goods and services) 22.7 27.6 26.2 26.1 Current Account Deficit (X of GDP) 6.6 8.7 6.2 3.9 /a This includes the effects of the Government's adjustment program described herein. 44. Gross foreign loan disbursements required to finance such a current account deficit, to repay maturing debt and to maintain reserves at a level equivalent to I month of imports would average slightly above US$1.0 billion annually during 1987-91. About two-thirds of this would come from official sources, compared to 60% in the last three years. Debt outstanding and disbursed as a percentage of GDP would increase slightly, from 50% in 1984/85 to about 52% in 1991, while the debt service ratio would be 26.1%. Average borrowing terms are not expected to harden much. The average interest rates would remain in the 6-7% range between 1987-91, while the average maturity would be slightly shortened to about 13 years from the current level of 15-17 years. - 15 - 45. This scenario obviously depends on the policy changes to be initiated during the next few years, in particular on a timely implementation of policy measures to accelerate exports, reduce public investments, slow down growth of domestic demand and liberalize the economy by phasing out regulations and controls. As mentioned in Section B above, the Government lhas already taken several steps in implementing such a strategy. Considering its long record of prudent external debt management, there are good grounds to assume that Tunisia will implement the necessary policy changes along the lines discussed above and remain creditworthy for a continuled high volume of Bank lending. 46. Domestic resource mobilization. With exports growing Easter than imports, the resource gap is expected to decline to less than 3.5% of GDP by the end of the V]Ith Plan. This still rather high overall gap, however, disguises a strenuous effort in savings mobilization in the non-oil sectors. Indeed, the non-oil resource gap declines from an average of 14% of GDP in 1984185 to about 3.9% in 1991. The marginal propensity to save over the period 1987-91 is estimated at a high 26% (in current prices), assuming successful implementation of the structural reforms to control domestic demand. Limiting Central Government current budget expenditures to below 21% of GDP and capital expenditures net of debt repayment to about 6% of CDP by the end of the VIIth Plan period should allow Government savings to finance over 70% of public sector investment (including public enterprises), up from 43% in 1984/85, and should increase the percentage of overall investment financing by domestic savings to over 80% on average over the period. While this would help to reduce the pressure on the balance of payments, it also gives a clear signal to the private sector that the public sector investment program will not lead to a crowding out of private investments but rather will supplement it by providing the necessary infrastructure. 47. The medium-term framework discussed above corresponds largely with the Government's own planning scenario for the VEIth Plan. While there are clearly downside risks involving such exogenous factors as the growth of the world economy, in particular in the EEC countries, and movements in international prices, it is clear from the analysis of the recent past that there is no alternative to the proposed export-oriented strategy. Slower export growth would lead rapidly to sLower GDP growth, in order to keep the balance of payments manageable. Such a situation would greatly worsen the unemployment rate. As mentioned above, even implementation of the full structural adjustment program will not allow absorption of more than 70% of new job seekers during 1987-91; any lesser effort would further worsen the unemployment situation with serious political and social consequences. E. Social Impact of the Adjustment Program 48. According to the latest household survey, almost 12.8% of the total Tunisian population (823,000 persons) was living below the absolute poverty level in 19B0.1' Most of the poor and lower income groups are located in rural areas, followed by smaller towns; these groups account for about 14% of the total rural population, and 12% of the total urban population. They are largely employed in agriculture (43%) and construction (16%), where significant underemployment exists. Over 18% of the total work force in construction, 16% in agriculture, 14% in mining and 10% in transport are considered to be poor. They spent almost 85% of their budget on fulfiLling their basic needs for food, housing and clothing. I/ In 1980, the absolute poverty level was D 60/person/year in rural areas and D 120/person/year in urban areas. - 16 - 49. The Government's program of economic adjustment could worsen the situation of the absolutely poor in two major ways: (i) through the gradual reduction of budget subsidies; and (ii) through increases in consumer prices triggered by changes in the exchange rate and increases in agricultural producer prices. The present system of consumer subsidies is clearly important to the well-being of the poorest segment of the population, as such subsidies account for nearly 19% of their total expenditures - 20% for the urbarn poor and 17% for the rural poor. However, the subsidies overwhelmingly profit the better-off segments of the population, with over 60% of all consumer subsidies going to the highest income groups, and only less than 10% going to the absolute poor, particularly to the urban poor (6X). This situation means that while it would appear socially and politically impossible and undesirable to deprive the absolutely poor from the support they currently receive, there is ample room to reduce consumer subsidies by as much as 90% without taking away anything from the really poor. This requires that ways and means be found to target this assistance more directly to the realLy needy. The Government is clearly aware of this situation; it recently established a Special Commission to study how to target and efficiently distribute consumer subsidies, so as to gradually introduce a more focussed and less expensive system of support for the poor as overall subsidy outlays are reduced. 50. The adjustment program also includes a number of important measures designed to improve the situation of the poor: (a) the rural poor, particularly in rainfed areas, will profit from increased agricultural producer prices as well as from increases in agricultural production for import substitution and exports; (b) the urban poor will profit from the increase in the minimum wage introduced in mid-1986; and (c) both groups will profit from the stimulating effects of the adjustment measures on employment creation, as export industries, agriculture and tourism are all relatively labor-intensive sectors. As the bulk of the absolute poor are employed in sectors with a high underemployment rate, the expected more rapid creation of new employment and decline in underemployment ought to have a sizable effect on the standard of living of the poor labor force employed in the modern sector. Given the fact that the informal sector will benefit little from minimum wage changes and the other measures mentioned above, the Government has initiated several specific programs for the support and development of this sector (para. 12). PART mI - BANK GROUP OPERATIONS DIN TUNISKA 51. Since 1962, the Bank has committed to Tunisia seventy-one loans and ten IDA credits amounting respectively to US$1,515.0 million and US$75.2 million (net of cancellations) of which forty-four loans and credits have been fully disbursed. Annex II contains a summary statement of Bank loans, IDA credits and IFC investments as of March 31, 1986. Project implementation is generaLly satisfactory. As of March 31, 1986, overall disbursements amounted to 57.7% of appraisal estimates, which is in line with experience in other countries in the region. Disbursement performance for agriculture, energy, water supply and sewerage, highway and port projects has generally been above the country average, while longer than average disbursement delays have been experienced for education, health, technical assistance and urban projects, due to project-specific problems that are being addressed tbrough supervision missions and sector discussions. In a number of sectors, important policy changes and institutional improvements have been achieved, and autonomous - 17 - agencies have been created or strengthened to ensure the efficient management of the related sectors or sub-sectors. 52. The Bank's lending strategy in Tunisia aims at supporting the country's transition from a situation of reliance on petroleum exports to a sectorally-balanced post-hydrocarbon era through appropriate changes in economic policies and programs as described in Part II above, while taking measures to increase employment and target development to low-income groups. In support of the above, the overall objective of Bank lending is to emphasize projects which have a direct and rapid impact on production, employment and exports (or import savings) and which minimize Government net contributions. The focus of lending for agriculture and industry meets this objective. In addition to the above, proposed Bank lending would focus on improvement of public enterprise performance, conservation and development of energy resources, and continued support to the social sectors and operations targeted to low-income groups. For the latter, attention would be given to increased efficiency and cost-effectiveness of institutions and investments, and to linkages with directly productive sectors (e.g., education reforms stressing vocational training). We envisage only marginal lending for basic economic infrastructure, focussed in areas where Bank guidance would still be useful, such as rural water supply and highways maintenance. 53. Past Bank lending emphasized support for long-term investments in infrastructure and social development, with increasing support in recent years for agriculture and industrial financing. Bank/IDA commitments to date are distributed as follows: urban, water supply and sewerage, 23%; agriculture and industry. 21% each; transport, 17Z; energy, 111; education, 5%; and health and technical assistance, 1S each. Within the broad framework noted in para. 52, we expect increasing emphasis on agriculture and industry, which shouLd represent over half of our lending. In addition to recent loans for energy conservation demonstration and urban development, and the proposed Agricultural Sector Adjustment Loan, programued lending in the next couple of years would include an Industrial and Trade Policy Adjustment Loan as well as projects for highways maintenance, grain storage and credit lines for small-scale industries and agriculture. 54. Bank group lending for agriculture in Tunisia started in 1967, and to date 17 projects have been approved for a total of US$407.9 million of Bank/IDA funds. Of these, eight are ongoing. Performance under these projects has been mixed reflecting the institutional constraints in the sector. The First Fisheries Project (Cr. 270-TUN) was completed at the end of 1979, and the Project Performance Audit Report (PPAR) identified cost overruns and low loan recoveries for boats as major problems. These problems were addressed under the Second Fisheries Proiect (Ln. 1746-TUN), but recoveries remain a problem. The First and Second Agricultural Credit Projects (Ln./Cr. 7791263-TUN and Ln. 1340-TUN) financed lending by the National Bank of Tunisia (BNT) for on-farm development. While the projects achieved good rates of return, the continuing problem of higher interest rates on Bank funds than on Government- supplied credit and the lack of profitability of agricultural credit operations, as highlighted in the PPAR's for these projects, caused disbursements to be slower than anticipated. The Third Agricultural Credit Project (Ln. 1885-TUN) is addressing priority credit problems including the level of interest rates and recoveries. Action has been taken to decentralize BNT's operations, raise interest rates, and encourage improved recoveries. The physical implementation of the poverty-oriented Northwest Rural Development - 18 - Project (Ln. 1997-TUN) is proceeding satisfactorily. The Grain Storage Project (Ln. 2052-TUN) is also progressing well after inital delays and the recruitment of new consulting engineers. Under the Technical Assistance Project (Ln. 2197-TUN), strategies have been or are being developed for sevural sub-sectors including farm input distribution, farm mechanization, produce marketing, research and extension, and improved operation and manLtenance of existing irrigation infrastructure. These strategies have contributed to the design of the proposed operation. Implementation of the irrigation projects - First Irrigation Rehabilitation Project (ln. 1068-TUN), Sidi Salem Project (Ln. 1431-TUN), Southern Irrigation Project (Ln. 1796-TUN), Medjerda/Nebhana Irrigation Project (Ln. 2157-TUN), Central Tunisia Irrigation Project (Ln. 2234-TUN), and the recently started Gabes Irrigation Project (Ln. 2605-TUN) - has generally been satisfactory and on schedule. The PPAR for the First Irrigation Rehabilitation Project also found that the increased reliability of water supply brought about by rehabilitation works carried out under the project had a major impact on farm production and incomes in the project area by increasing farmers' willingness to take higher risks by planting higher value crops. Partly to avoid the need for future rehabili- tation projects caused by lack of maintenance, the Irrigation Management Improvement Project (Ln. 2573-TUN) is designed to support nationwide improvements of the operation and maintenance of existing irrigation systems as well as policy and institutional reforms to increase the efficiency and self-financing of the Irrigation Development Offices (OMVs). The Northwest Agricultural Production Project (Ln. 2502-TUN) will help alleviate the constraints to increased production of cereals and livestock products in Northwest Tunisia, inter alia by introducing an extension system based on the Training and Visit (T&V) system. 55. The Bank's economic and sector work will address the increasing complexity of the macro-economic and sector problems that Tunisia will face in the medium term, and continue to focus on strengthening the macro-economic and sector base for our lending ptogram. However, while in the past it was mainly devoted to the study of major structural problems, it is focussed on implement- ing the policy recommendations of these studies through sector lending in agri- culture, industry and trade, public enterprises and transport; it will there- fore concentrate on the following main tasks: (a) preparation and monitoring of the macro-economic framework of the VlIth Plan, which provides the policy base of sector lending; (b) review of public expenditures under the Plan to provide guidance for the neressary reductions in budget outlays; (c) assessment of public enterprise reforms prepared by the Government to reduce their drain on the State budget; and (d) monitoring of the agreed macro-economic and sector policy changes. The program also includes studies on education administration and finance, municipal finance and development, energy pricing, and the impact of the adjustment program on various income groups. 56. The Bank and IDA accounted for about 27.81 of total commitments from official sources to Tunisia during 1982-1984. Their share in total debt outstanding and disbursed at the end of 1984 (including loans from private sources) was an estimated 14.5%, and their share in debt service during 1984 was 11.7%. The share of the Bank and IDA in Tunisia's disbursed external debt is expected to increase to about 14.7% and their share in the debt service to about 15.7% in 1986. 57. As of March 31, 1986, IEC's net commitments in Tunisia totalled about US$7.5 million. IFC has supported the Economic Development Bank of Tunisia (BDET) to foster development projects, and the National Bank for Tourism - 19 - Development (BNDT) to promote and invest in tourism projects. It has Jlso ;isisted the Soci6t6 Touristique et H6teli6re (RYM), a large hotel development; tthe Industries Chimiques du Fluor (ICF), a producer of aluminum fluoride frmn local fluorspar for export; and the Societ6 d'Etudcs et de D6veloppement de Sou:4s,s-Nnrd for an integrated tourism development project. In FY85, IFC aiiproved an equity investment in Fluobar, a project to privatize, rehabil i telt ;iiid eIxIlpand an existing fluorspar mine. Two investments in Tunisia Ienas Ilg Csi'!'jyinY, Llte first Leasing company in Tuniisia to provide financing to tile irndti,strinl sector, were approved in FY85 and 86. In FY86, IFC approved tin -uitiy inivestment in Soclet6 Industrielle de Textiles (SITEX) which wotild lithlp pr,-ivittize an existing state-owned textile mill, and an equity inlvestment ill AdjWYD SA., a company which will produce pharmaceutical products from imported ;mrtivi' ingredients. I'AitT IV - THE MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM A. The Need for Adjustment In trodtLcLion "8. Like many other middle-inicome countries, Tunisia has experienced a decline in the relative importance of agriculture in its economy over the past 25 years. Today, agriculture in Tunisia accounts for about 13% of GDP, 35X of employment and 8% of export earnings, which represent sharp drops from 1960 levels of 24% of GDP, 56X of employment, and 601 of export earnings, due mainly to the more rapid growth of other sectors, principally petroleum, manufacturing and tourism. The performance of the sector has also deteriorated recently. After a period of rapid growth in the late 1960s and first half of the 1970s, when agricultural GDP grew at 8.81 p.a. (1967-76), growth slowed down to 3.3% in the late 1970s and first half of the 1980s (1977-86). 59. The reduced growth of the past decade has meant that Tunisia has also experienced a widening "food gap" which has placed an increasing strain on the balance of payments. Domestic food production has failed to keep pace with increased demand generated by a combination of rapid population growth (2.6X), a high rate of urbaniization (4.4%) and domestic consumer price subsidies (US$300.0 million per year in recent years). The ready availability of cheap food imports, subsidized both by the exporting countries and through the overvalued exchange rate, has diverted attention from the underlying problems. Food imports have increased by about 3.81 per annum (1977-86) and the rate of self-sufficiency for key items has declined over the last decade (e.g., for cereals from about 75% to 50%). Meat imports more than doubled from 1982 to 1984. If present trends continue unchecked, recent projections done by the International Food Policy Research Institute (IFPRI) indicate that by the year 2000 Tunisia will have a cereal deficit of almost 1.3 million tons per year (compared to the current 0.9 million tons), a milk deficit of about 800,000 tons per year (compared to the present 244,000 tons) and a meat deficit of abotut 200,000 tons per year (compared to the existing 57,000 tons). 60. Agricultural exports, consisting principally of olive oil (481), dates (14%), citrus (5%) and wine (4%), have stagnated with the result that the proportion of sector imports covered by sector exports has fallen from 81% in 1976 to 49% in 1985. As a result, the agricultural sector has accounted for a rising share of the overall trade deficit (from 5% in 1976 to 20% in - 20 - 1985). Based on current trends, without policy correction, the agricuJtural trade deficit, currently about D 185 million per year, could, under the IFPRI assumptions, rise to over D 565 million (in 1986 constant terms), exerting unsustainable pressure on the already difficult balance of payments situation. 61. The sector's overall performance has also not matched the growth of 6% p.a. in gross fixed investment in agriculture during the decade 1975 to 1985, a rate about twice as high as for the economy as a whole. During the recent Vith Plan period too, investment in the sector was 16% of the total, somewhat in excess of the sector's contribution to the GDP. The proportion of total sector investment by the private sector was only 31%, significantly below Plan projections. Investments by the public sector were concentrated in Irrigation (42% compared to 22% in the early 1970s). As a result, most of Tunisia's irrigation potential is now harnessed, but downstream investments and activities to ensure optimal utilization are lagging behind. Similarly, investment in fishing port infrastructure and processing remain largely underutilized, and agro-industry operates at well below capacity (see para. 80). This capital-intensive nature of investments and low utilization of installed capacity is not sustainable in the new macro-economic situation of fiscal resource constraints and need to rapidly create employment opportunities. The VIIth Plan, recognizing the uncertainty in the resource base, calls for the proportion of sector investment to shift towards the private sector from a ratio of 31% to 501. These shifts require not only a prioritization and adjustrment of public expenditures to focus on improved utilization of established capacity, but also a selective reduction in the public sector role to create the room for private sector participation, and a shift in sector policies to provide greater incentives to private investments. Resource Base and Structure 62. Growth in the sector has been concentrated in the predominantly modern irrigated sector, which covers less than 5% of the cultivated land, but accounts for 38% of agricultural CDP. Not only has the Government concentrated its investment resources in the irrigated areas, but approximately one tIird of the input subsidies on fertilizer, seed and herbicide has also been consumed in irrigated areas. Moreover, the crops produced in these areas, consisting largely of fruits and vegetables, have not been subject to any Government output price intervention. This combination of subsidized, capital-intensive development and free market pricing has been very successful, and irrigated output has expanded by 4-6% per year. Sustaining such growth under a more demanding regime concerning fiscal resources is the major challenge facing the Tunisian Government. Potential for Increased Production 63. Tunisia's agricultural potential is far from being fully realized. The levels of inputs used to increase yields could be increased substantially in rainfed as well as irrigated areas. In rainfed areas, especially where rainfall exceeds 350 mm, major productivity improvements could be obtained from widespread introduction of improved farming techniques such as shallower land preparation using tined implements, increased use of inputs and more intensive cropping patterns including pulses and, in some areas and for certain - 21 - farm sizes, integration of crop and livestock production.1' In the irrigated areas, there is also considerable scope for yield increases-Z and production growtht through greater intensification in the existing schemes. Cropping intensity iFl the areas already equipped for irrigation through public financing averages anly 70% while it could be in excess of 100%. Over the next decade, the impact of such measures could represent the equivalent of a doubling of the currently irrigated areas. Considerable room for improvement remains to be achieved for the citrus growing areas of the northeast (Cap Bon), where use of additional water from the rivers further west could enable citrus production to double. Constraints 64. The pace of achievement of this potential is geared to the speed at which adjustments are made in macro-economic and sector policies to maintain agricultural growth under a constrained external and fiscal environment (paras. 8-9). Past macro-economic policies have not favored the sector's development. The past policy of overvalued exchange rates has handicapped the sector's growth, since it has simultaneously discouraged exports and artificially cheapened food imports to the detriment of locaL food production. 1/ The scope for increasing yields in rainfed areas is evident from the following estimates of present and potential yields for rainfed crops iu, the high and low rainfall zones of northern Tunisia made by the FAO/CP during preparation of the Northwest Agricultural Production Project (higher yields on larger farms being mainly due to better resource endowment): High Rainfall Zone Low Rainfall Zone Present Potential Present Potential ---------------- (tons/ha) ---------------- 10-50 ha Farms Barley 1.2 2.0 0.8 1.5 Wheat 1.1 1.8 0.8 1.5 Feed Pulses 0.5 1.3 0.3 0.6 Forage (hay equivalent) 2.8 3.8 2.0 2.5 Over 50 ha Farms Barley 1.5 2.5 1.2 2.0 Wheat 1.3 2.1 1.0 1.7 Feed Pulses 0.9 1.7 0.7 1.6 Forage, (hay equivalent) 3.5 5.0 2.5 3.0 2/ In the irrigated areas. average yields obtained compare with the best areas as follows: Irrigation Dev. Offices Results Crop (OMVs) Average in Better OMVs -- (tons/ha) ------------ Cucurbits 8 20 Potatoes 12 18-20 Field Tomatoes 25-30 40-45 Greenhouse Tomatoes 60 80 Apricots 12 20 Forage (green matter) 30 50 - 22 - The pollcy of subsLdlzing domestic food consumption has reinforced the import bias, particularly when faced with fiscal contraints. Both the processing Industries and the Government have found it to their short-term advantage to purchase imports at the expense of providing markets to local food production. Finally, the higher relative incentives to other sectors compared to agriculture, notabLy industry, has made agriculture an unattractive place for new private direct investment or in support services. Restrictions on inmports of spares and new equipment to encourage domestic industry has led to reduced levels of maintenance services and inefficiency in operations. Tunisin's macro-economic adjustment program (Part II) aims to ensure that this bias against agricultural growth is steadily eliminated. Actions compLementary to the macro-econcmic adjustment program are needed in order to overcome those constrrints to efflcient growth which are sector specific. The Government's medium-term agricuLtural sector adjustment program (MTASAP), discussed in Section B below, aims to identify these constraints and launch an action program to resolve them. B. The Sector Adjustment Pogtram Origin and Objectives 65. The main objectives of the Government's MTASAP described below were developed in late 1985 and earLy 1986 as part of Tunisia's efforts to adjust its economy to a more constrained macro-economic situation. For this, Bank assistance was made available to the Government in the form of macro-economic st:ategy discussions and assessments of sector poteatLal and policy and institutional constraints. Consistent with the macro-economic objective of improving the balance of payments situation and alleviating the burden on the Government's budget, the main objective of the MTASAP is to promote greater efficiency and economy in the increased production of agricultural products, which can substitute for increasing imports and lead to increasing exports, and in the use of public resources in the .ector, including enhancing the role of the private sector in the provision of commercially-viable sector support services. The MTASAP includes specific actions to address the identified constraints over a six-year period (1986-91) and aims to achieve its objectives by: (a) improving the prices and incentives framework so that prices and price formation mechanisms are further deregulated or linked to world market prices and incentives made more effective. This involves achievement within a reasonable time frame of alignment of producer prices with world market prices and elimination of input subsidies, and will result in better farmer response for those crops and livestock production activities for which Tunisia has a medium-term comparative advantage; (b) reorienting the public investment and expenditure program towards lnw cost, high priority, quick maturing projects and programs with lower budgetary demands while assuring adequate funding for maintenance of past investments; (c) strengthening basic services in support of farmers, while privatizing those Government services which are commercially viable, and improving cost recovery in others; (d) improving productivity of land use and management of the country's forest and fisheries resources; and - 23 - (e) building up the sector performance monitoring and policy analysis capabilities of the Ministry of Agriculture. Details of the above actions and the analyses behind them are presented in a separate Medium-Term Agricultural Sector Adjustment Program (MTASAP) available on request. An outline of the MTASAP is contained in Annex VI, and a summary is given below. I. proving the Prices and Incentives Framework (Chapter I of MTASAF) 66. Even though the prices of -'n estimated 751 of agricultural production are market-determined, Government intervention in agriculEure through taxes, subsidies and price controls has a major impact on the incentives to producers, processors and providers of services in the sector, especially on resource allocation within the sector, among farming systems and products. Main instruments which have been used are fixed producer and consumer prices for basic products, marketing controls, and input and investment subsidies. In brief, producer prices of cereals, milk and industrial crops are administered through a variety of public and quasi-public agencies. Prices of fertilizers and herbicides, improved seed, irrigation water and feed concentrates are regulated, and price formation in agro-processing and marketing is subject to a system of fixed margins. 67. Based on available data in Tunisia and in the Bank, a preliminary analysis has been made to assess the general effect of these interventions. This analysis shows that: (a) the high value of the dinar in recent years has been an important disincentive to export development and increased agricultural production; (b) the sector compared to other sectors such as industry (which have benefitted from cost plus pricing and high tariffs) has suffered from high relative net taxation, and input subsidies have been far from adequate to compensate for this; (c) within the agricultural sector, the incentive patterns vary signifi- cantly between rainfed farming, particularly cereals which are import substitutes, suffering from low or negative protection, and irrigated farming, especially fruits and vegetables and other exportables, which have enjoyed relatively high positive effective protection; and (d) price formation processes in the farm to retail market chain, particularly in agro-industrial processing, represent significant inefficiency and avoidable fiscal cost to the Government. 68. Currency valuation. The high value of the dinar in recent years has had two major consequences for the agricultural sector: (a) it has depressed sector exports by artificially reducing the dinar proceeds from export sales; and (b) it has artificially stimulated food imports by making them cheaper in relation to domestic food production. When combined with other factors such aa reduced export markets, subsidized food exports on the world market and domestic consumer price subsidies, it is not surprising that the sector has experienced an increasing trade deficit (para. 60), but more importantly overall agricultural production has been depressed by the adverse effects of the overvalued currency. - 24 - 69. The value of agricultural exports (Chapter IX of MTASAP), including processed food, declined by 1.42 per year over the 1977-85 period (Annex VIII). Prospects for Tunisia's leading agricultural export, olive oil, are not bright on the traditional European market due to the enlargement of the EEC to include the world's largest olive oil producer, Spain. As a cushion, Tunisia has negotiated a 46,000-ton p.a. quota for its olive oil exports to the EEC, representing about 80% of the present export level. Efforts are now needed to diversify to other markets and these efforts would require improving the competitiveness of Tunisian exports and better incentives to exporters. On the other hand, exports of marine products have grown rapidly in recent years, and are now the second most important agricultural export. Although traditional marine exports (shrimp, squid and sponges) have reached their maximum sustainable yield, there is considerable untapped production potential for swordfish and lobster, exports of which could generate an additional D 8.0 million per year by 1991. Strong export growth is still possible in dates where Tunisia already accounts for 25% of the world's production of the highly prized "Deglet-Nour" variety, the export price of which commands a 100% premium over common varieties. However, the rapid increase in domestic consumption has reduced the exportable surplus to only 30X of production. As supplies increase in response to recent investments in replanting, additional earnings from dates are estimated at D 15 million per year by 1991. Export prospects for Tunisian citrus are also better than often thought due to the unique quality characteristics of the "Maltaise" orange which account for virtually all exports. Incremental citrus exports could generate an additional D 2.0 million p.a. in foreign exchange by 1991, provided export profitability is improved to overcome the increased trading costs, 40% of which are in transport and handling in the importing country. Tunisian wine exports, used mainly in blending, face a difficult future because of increasing surpluses on the EEC market. Nevertheless, encouraging exporters to shift into higher quality wine production, Tunisia could expect to earn an additional D 1.0 million per year by 1991. Incentives for the expansion of off-season vegetables could bring in another D 3.0 million per year by 1991. It is estimated that total agricultural exports could increase by about D 34.0 million per year by 1991, enough to reduce the agricultural trade deficit by 18%. Achieving the above export potential, however, will require the development of better incentives for export and of new, product-specific marketing strategies and channels. To bring this about, the Government's MTASAP relies on a flexible competitive exchange rate policy (para. 27) and the application to the sector of temporary measures to keep exporters from paying the high promotional costs of developing new markets. Product-specific export strategies targeted to particular markets would be developed through a sector export promotion action program, to be developed based on a study, draft terms of reference for which (in the MTASAP) were discussed at negotiations. Specific measures, the appropriateness of which would be evaluated in the study, are, among others: (a) extending export company benefits to agricultural export enterprises; (b) reducing wholesale market taxes for export products; (c) eliminating taxes on processing of export products; (d) giving agricultural import licenses to agricultural exporters; and (e) renegotiating air and sea transport routes to increase frequency of appropriate services for agricultural exports. 70. The effect of exchange rate policy has also been important regarding food imports which have increased by 5.9% p.a. These imports have always entered Tunisia tariff-free, in consideration of the Government's policy of low consumer prices. Two other factors combining with this policy and leading to depressed domestic production incentives are: (a) the availability of - 25 - imports often subsidized significantly in the country of origin and available in Tunisia 30-40% below world market prices; and (b) the fiscal constraints on the Government. As a result, producer prices have been depressed below world market prices, particularly for cereals, milk and meat. 71. Inter-sectoral terms of trade. The industriaL sector has been cushioned from the effect of exchange rate policies through high tariff barriers and favorable price formation mechanisms, whiLe agricultural products were allowed to enter the country virtually duty-free. More recently, restrictions have had to be imposed on imports of many industrial products produced Locally. As a result, relative incentives between agriculture and industry have remained strongly against agriculture, which has faced depressed output prices, and also higher costs for inputs, often products of protected and still inefficient domestic industries. In 1981, the Quantitative Economics Institute of the Ministry of Planning (Institut Ali Bach Hamba) estimated that effective protection of agriculture was about 25%, compared to 75% for industry and 35% for the economy as a whole. More recent analysis has put the average protection level for agriculture at a low 5% in 1984. 72. The consequences of these high inter-sectoral variations in relative incentives for allocation of resources in agriculture have been quite serious. Not only have the Plan's objectives of achieving a 50% share of private investment not been attained, but also most fixed investment in the sector has either had to be made by the Government (e.g., 60% of cold storage is publicly owned) or had to be dependent on special investment subsidy programs covering virtually all on-farm and marketing investments (farm machinery, buildings, animals, pasture establishment and storage) costing D 8 million in 1985. The administrative inertia associated with Government-financed programs is now compounded by fiscal constraints facing the Government, and correction of the low relative incentives in the sector is needed to ensure the adequate flow of private resources. The Government's MTASAP relies on shifts in macro-economic and industrial policies, particularly the reduction in high industrial tariffs, the liberalization of prices and the price formation process, and the introduction of a 15% minimum tariff (para. 36) to start a process of correcting these large imbalances in relative protection. The latter would affect the producer prices for key food imports directly. 73. Intra-sectoral incentives. Within the sector, production incentives vary widely among farming systems and crops as a result of Government interventions. Despite the generally free market environment, the Government fixes the prices of the three major cereals, durum wheat, bread wheat and barley, as well as of milk and some other crops. Cereal prices have consistently been set below world market price levels even at the official exchange rate. The Government, through the Office of Cereals, purchases 30-40% of the cereal harvest at the officially fixed producer prices: official purchases vary from a low of 10-20% of production in the case of barley to 60-701 in the case of bread wheat. However, prices in free markets, particularly at harvest time in major production areas, are not always at official prices, since, due to an active price intervention at the consumer level, parallel markets have tended to disappear and farmers have limited themselves to subsistence production only. PotenLial for producer price distortion is the highest in the case of wheat, which attracts the bulk (60% or D 160.0 million) of direct Government subsidies for food, and the least in barley, which is virtually free from active intervention (D 2.0 million p.a.). Although influenced by the good crop year in 1985, the 15-year growth pattern (5% p.a. for barley, 1.4% for durum wheat, and 0.7% for bread wheat) suggests the effects of these price interventions. - 26 - 74. Even at the official exchange rate, official prices are below world market prices: in cereals, nominal protection in 1984/85 was -15% to -20% for the wheats and -7% for barley. Despite a premium on world markets of 30-40% tnr duirwu wheat over bread wheat, the Tunisian policy of self-sufficienicy has led to the establishment of identical offical producer prices. Given roughly equal yields for the two wheats in the Tunisian North, the extra fiscal and fozeign exchange cost of this policy (roughly D 1.4 million and 7.5 million, respectively) needs to be reviewed against the psychological benefits ot self-sufficiency. Citrus and potatoes, both exportables, are free from G;overnment price interventions and their domestic prices have been 25-45% above world market prices at the official exchange rate. In the case of milk and beef,' official prices have been close to their world market eqtuivalents, but the Government, due to its fiscal constraints and availability of often subsidized imports, has offered little incentive to agro-industry to buy domestic production: only 20% of the milk and 5% of the beef enter official channels, and producer prices remain depressed (see also paras. L07- 110). Poultry production is free from output price interventions and has grown at 20% p.a., but has been supported by strong input subsidies. 75. On the input side, subsidies to agriculture amounted to a total of D 69.0 million (US$95.8 million) in 1985, of which about 33% was for irrigation water (both capital and O&M), 24% for fertilizers (superphosphate, triple superphiosphate and ammoniwn nitrate), 23% for animal feed (maize, soybean meal and barley), 14% for on-farm investments, 4% for seed and 2% for herbicide (2-4-D and multipurpose). ' Unit subsidies for fertilizer have ranged from 55-70%, and those for animal feed from 15-26%; herbicides and cereal seed subsidies have been 50% and 25%, respectively. These subsidies have been introduced partly to compensate for the low producer prices, but in case of products manufactured locally (e.g., fertilizers and animal feed concentrates) part of the subsidies have often been absorbed by domestic industry since ex-factory prices are often higher than world market prices. The subsidization of itrigation water has strongly favored commodities like milk and vegetables which dominate irrigated production. Animal feed subsidies have given a stimulus to the imported concentrate-based poultry industry, but has had adverse consequences for barley producers and mutton/lamb producers since it constitutes a major disincentive to the increased use of forage, larger qulantitLies of which could be efficiently produced in conjunction with cereal production. Cereal seed subsidies have stimulated use of improved seed, butL by their system of administration may be hampering wider distribution (paras. 99-101). 1/ The producer price of which has been recently liberalized. 2/ 1985 Subsidy Amount Input (D million) % of Total Irrigation Water 23.0 33 Fertilizers 16.5 24 Animal Feed 15.9 23 On-farm Investments 9.9 14 Seeds 2.5 4 Herbicides 1.2 2 69.0 100 - 27 - 76. As a result of these Government interventions in product and factor markets, preliminary estimates of relative incentives for cereals under different rainfed production systems give a range of effective protection from -301 to +10%, which, An view of the average protection oF the agricultural sector as a whole of 5%, implies a net relative protection for cereals in the range of +5% to -351. In irrigated farming, on the other hand, levels of effective protection are well above the sectoral average with particularly high levels for irrigated citrus and potatoes. 77. As a prime feature of its MTASAP, the Government recognizes that its macro-economic policies must be consistent with and supportive of the objective of fully developing the untapped potential of the agricultural sector and suitable adjustments are being made (para. 64). Since an important factor in increasing production in the higher rainfall areas is greater integration of cereals, livestock, forage crops and pulses, and in irrigated areas, a more intensive use of irrigated land, the primary objective of the MTASAP is to progressively improve the prices and incentives framework in the sector so as to encourage rainfed production of cereals, milk and meat under efficient production systems while promoting shifts toward more efficient cropping patterns and input utilization patterns in irrigated areas. 78. The Government's MTASAP aims to eliminate the distortionary effect of its input subsidy program and to rationalize its output price interventions in order to allow world market price trends to be reflected in its sector pricing structure. Combined with macro-economic adjustments. the relative incentives between industry and agriculture would be brought closer to reduce current intersectora! distortions and the large differences between incentives for various commodities would be narrowed. The Government's ultimate objectives are an across-the-board alignment of producer prices with world market prices and elimination of input subsidies. In order to give farmers and consumers time to adjust to the new price signals, these actions are beir.g phased in over a reasonable time frame. Over three years, the system of administered producer prices for the wheats and barley would be reshaped progressively to reflect world market price levels plus the 15% tariff. This would specifically involve an upward adjustment of the durum wheat price to restore the 30-40Z differential that exists between the two wheats on international markets. The use of this formula for setting domestic producer prices would not preclude Tunisia from continuing to take advantage of cheap imports. 79. For inputs, the Government's MTASAP aims to elimate current subsidies while allowing for the temporary need to promote the adoption of new technology among small and medium-size farmers in order to accelerate production growth. The adjustments, spelled out in the Government's Letter of Agricultural Devel- opment Policy (Annex IV(b)], would involve: (a) in accordance with agreement already reached in the context of the Irrigation Management Improvement Project, full recovery of the O&M costs of irrigation water over a period of 10 years including full O&M cost recovery on 65% of th. -rrigated area by 1991; (b) elimination of input subsidies on fertilizer, animal feed, 2-4-D herbicide and improved cereal seed over a period of three to five years, depending on the input; and (c) charging the full cost of support services which continue to be provided by the Government until they are fully transferred to the private sector. The Government's objective is to completely eliminate the fertiliier subsidy by the 1990/91 crop season. In view of the input-output price relationships prevailing in Tunisia, the elimination of the fertilizer subsidy is not expected to adversely affect production. Crop fertilizer price ratios in Tunisia are high and value-cost ratios reflecting crop responsiveness are higher than the threshold levels considered necessary to induce fertilizer use. - 28 - As regards animal feed subsidies, the Government's program calls for their complete elimination by the 1989/90 season. This would encourage forage production and storage as well as more efficient use of Tunisia's extensive rangelands in the Center and South of the country. Improved cereal seed subsidies would also be phased out by the 1989/90 crop season (see para. 138 for details), and the justification for those to be continued beyond that date on potatoes and other crops would be reviewed. The subsidy on 2-4-D herbicide would be phased out by the l9B8/8s crop season, and that on multipurpose herbicide, whose use the Government is currently promoting over 2-4-D, thereafter. As for the commercial services provided by the public sector in the large irrigated areas, the Government's objectives are to reach full costing of the commercial services in Government's hands, and to progressively transfer them to the private and cooperative sectors (see para. 95). 80. The price formation process in agro-industry is essentially a cost plus system and is therefore subject to extensive administrative controls. Preliminary analysis of the reasons for low capacity utilization rates in agro-industry leads to the conclusion that it is the price formation process that primarily causes inefficiencies and high costs and eliminates competitive pressure in domestic marketing. The animal feed industry has expanded from 18 plants in 1973 to 146 in 1983, but the industry is operating on 801 imported raw materials which are subsidized by 15-26%, at only 301 of its installed capacity. The canning industry, mostly in the private sector, has also grown rapidly at 8.51 p.a., but demonstrates signs of inefficiency: the tomato processing industry has a processing season of only 35 days against an international norm of 100 and operates only at 431 capacity. Rigidity in pricing policy which contributes to peak arrivals had led to installation of increased daily capacity, while low plant utilization has been absorbed in the cost plus pricing system. Similar trends are apparent in other vegetable products (e.g., harissa at 201 utilization and fish canning at 401). The resulting high production costs make Tunisian products expensive for the local consumer and uncompetitive in the export market. The small sugar industry, mostly in the private sector, supplies only 101 of the demand. The newer plants are still operating at 20-351 of installed capacity due to inadequate raw materials, and cube making at 35% of capacity, protected by a guaranteed profit pricing formula. Only the export segment of the olive oil industry, which has been influenced by the competitive pressure of export markets and cheaper alternatives, is basically competitive, able to produce at about half the price of EEC producers (prior to the accession of Spain and Portugal). The Government's MTASAP recognizes the need for a review of the price formation mechanisms from the producer to the retail level through the agro-industry. The progressive move towards price liberalization and gradually subjecting the local industry to competitive pressure from imports (paras. 33 and 36) should create incentives for higher capacity utilization and efficiency, and allow sector growth to be achieved under a situation of reduced availability of investment resources. The price policy review (para. 131), to be executed under TORs agreed with the Bank, would include a detailed analysis of the effect of the policy environment on efficiency in selected key agro-industrial activities. Reorienting Public Expenditures (Chapter I1 of MTASAP) 81. Public investment. The allocations of investment resources to the sector in the 1970s were generally below the sector's share in GDP, as other sectors such as petroleum and manufacturing were growing more rapidly. Under the about-to-be-completed VIth Plan, actual investments in the sector at 161 of the total have been below the original Plan estimates of 191. While total - 29 - public agriculture expenditures have been maintained at levels envisaged, the decline reflects a level of private investment much below Plan projections: only 31% of the total as opposed to 50% anticipated in the Plan. 82. Within the sector, as the following table indicates, in the 1970s there was an increasin2 emphasis on fully developing the limited irrigation potential and irrigation investment reached 441 of total investment in the late 1970s. Investment in livestock and fisheries also increased. In the livestock sector, the shift in emphasis has been from poultry towards dairy, and 472 of these investments were financed by the private sector. Public investments have emphasized a rather doubtful but rapid program of importing exotic production animals at the expense of a slower but more cost effective cross-breeding effort. The increase in the fisheries sub-sectoral investments, mostly in infrastructure and processing facilities, have been fruitful since the sub-sectoral growth and exports (131) have exceeded all Plan projections. However, capacity utilization remains low. On the other hand, investments in forestry and soil conservation, fruit trees, research and extension, which were seen to have only longer-term benefits, were progressively de-emphasized: a neglect which is now beginning to constrain sectoral growth, since 401 of extension expenditures are in irrigated areas which cover only 5Z of the cultivable area. Investment in farm machinery increased in the 1960s and 1970s, as the newLy developed irrigated areas needed mechanization, but utilization rates are low (para. 112). Tunisian research expenditures are about 1.42 of agricultural GDP - much higher than other developing countries like China, India or in Latin America. However, this expenditure is spread out thinly over a large number of un-coordinated institutes and agencies, and almost 601 of those expenditures are devoted to fruits, vegetables. and industrial crops. Table 5: INVESTMENT IN AGRICULTURE BY SUB-SECTORS, 1962-86 (In percentage of total) 1962-71 1972-76 1977-81 1982-86 Irrigation 27.0 22.2 43.6 42.4 Livestock 3.9 11.5 12.0 11.0 Forestry and Soil Crnservation 25.3 9.5 7.5 8.5 Fruit Trees 15.4 13.4 5.0 6.3 Farm Machinery 15.8 29.1 17.5 13.4 Fishing 4.2 9.2 7.0 8.6 Research, Extension, Studies 8.4 4.5 4.1 3.6 Cereal Storage - - - 1.5 PDRI - - - 1.5 Others _ _ 3.3 3.2 Total 100.0 100.0 100.0 100.0 Total Amount (D million) 272.0 235.1 584.0 1,382.2 Note: Irrigation investment includes the full cost of construction of dams, which is carried out by the Ministry of Equipment. The Integrated Rural Development Program (PDRI) is administered by the Ministry of Planning and Finance. - 30 - 83. In view of the country's increasingly strained financial situation, the Government's MTASAP calls for the implementation of a sector expenditure strategy in which investments are designed to: (a) boost the efficiency of resource use by maximizing returns on past investment; (b) increase efficient production of cereals, meat, milk and wood for import substitution and dates, citrus,- fish and off-season vegetables for export; (c) privatize all commercially viable services and ensure a policy framework encouraging private investments; and (d) bring about greater labor intensity in investment (also to be tackled by wage policy and interest rates). This requires first the development of appropriate sub-sectoral investment/ expenditure strategies; second, the identification and preparation of specific project pr.tDosals able to meet the above strategy and rigorous economic rate of return and other criteria; third, to prepare for uncertain developments in resource availability, to establish a "core" program of high priority expenditures which would be preferentially protected in case of resource shortfalls. B4. Sub-sectoral investment strategies. Specific sub-sector strategies consistent with this overall sectoral strategy have been developed and are described in the Government's Letter of Agricultural Development Policy [Annex IV(b)]. These strategies will guide project identification and preparation for the VIIth Plan, and their main features are as follows: (a) in grain storage, focus on rehabilitation to increase capacity and improve the domestic collection network, and on modernization, including bulk handling, to improve cost effectiveness; (b) in livestock, concentrate on the development of local forage resources to substitute for imported concentrates by developing forage reserves throughout the country, focussing extension efforts on the integration of Livestock with cereal production, promoting systematic use of crop by-products such as feed (straw, bran and by-products of the olive oil industry); strengthen the genetic improvement program through greater reliance on cross-breeding versus imports of purebred stock; encourage wider participation of private individuals and cooperatives in providing artificial insemination services; and encourage the privatization of veterinary services; (c) in research, emphasize better coordination of expenditures on research and focus research on priority import substitution or export products such as cereals, livestock products, dates, citrus and off-season vegetables; in extension, without substantially increasing the present level of total expenditures, reorganization of multiple commodity-specific, extension programs would permit increased efficiency in use of operating funds, while first ensuring adequate staffing and funding for the transportation, operation and maintenance of existing centers; new centers would be built in rainfed areas, with housing close to field areas; - 31 - (d) in forestry, increase the financial resources available for development to arrest the loss of forest cover in order to better mobilize the sub-sector's productive potential and reduce imports; priority needs to be given to establishment of nurseries, to improved means of guarding and protecting the natural regeneration areas, to mechanized exploitation and reforestation and improved inventories and studies; (e) in fruit trees, encourage maintenance of existing plantations; in the center of the country, promote the establishment of pasture within the framework of a balanced system of livestock and fruit trees; and favor the development of export crops such as citrus in the north, pistachios and almonds in the center and date palms in the south; (f) in fisheries, optimize utilization of existing infrastructure, while holding back additional expenditure on ports, fish processing facilities and the coastal motorized fleet; encourage the development of strategically located inland cold storage and ice plants to develop and exploit domestic markets for under-exploited bluefish; and (g) in irrigation, finish downstream investments under existing projects in order to rapidly increase the availability of water at farm level; promote rehabilitation and maintenance of existing irrigation infrastructure; and encourage investments designed to increase water use efficiency. 85. Project selection criteria. A part (12Z) of the sector expenditure program consists of general activities of a program nal -e which do not fall into a project format, and those that do, except for son.e externally funded projects, are not routinely subjected to critical evaluation of investment strategy and economic impact. To strengthen its investment planning and monitoring process, the MTASAP calls for the widespread application of an improved project/program evaluation methodology to all new investments for the VIIth Plan, improving the capacity of the DPSAE in project evaluation and establishing a system of project monitoring and budget surveillance. 86. All projects to be continued or started during the period of the MTASAP will be first tested for their consistency with the above sub-sectoral development strategies, followed by evaluation according to the following project selection criteria. In order of priority, these criteria are: (a) economic rate of return above 10% (based on economic pricing of inputs and outputs, including labor and foreign exchange); (b) positive impact on the agricultural trade balance; (c) productive employment creation at low cost per job created (norms to be established); and (d) low Government contribution to investment and operating costs. Some trade-off between criteria may be necessary, but the minimum rate of return would guide all project selections. - 32 - 87. "Core" program. In the VIIth Plan period, which coincides with the MTASAP, a planning figure of 22% has been established by the Ministry of Planning and Finance for the proportion of total investments to be allocated to the agricultural sector. An underlying assumption is of increased private sector participation (from 31% to 502) in sector investment. This assumption also reflects the uncertainty in the overall resource base and thus the need to limit public investments, which are programmed to decline by at least 7-10% in real terms. To ensure that in the event of an unexpected shortfall in public investment funds or lack of response from the private sector, the available resources are devoted to a coherent set of high priority and strategically appropriate projects, the Government's MTASAP aims to have a system of a pre-screened program of "core" projects which would be assured of funding on a priority basis; as an indicative target, this set of "core" projects would represent 651 of the initial indicative allocation to the sector under the VIIth Plan. The criteria to be applied to put projects in the "core" program would be: (a) short gestation or remaining completion periods; (b) small reliance on Government budgetary resources (e.g., through greater private sector involvement); and (c) high priority in the overall sectoral development strategy. 88. An analysis of the projects under implementation at the end of the Vlth Plan confirms that completion of ongoing viable projects would account for roughly 75% of the indicative si7e of the "core" program. The room for introducing new projects could thus be quite limited. The Government plans to have ready a draft list of projects and project ideas for the VlIth Plan by December 1986, including those earmarked for inclusion in the "core" program. The project list and the "core" would be subject to review and amendment as feasibility and evaluation work are completed. However, the establishment of this systematic approach to project selection and pruning of programs in case of resource constraints would help to significantly improve the efficiency of sector investments. 89. Expenditures monitoring system. Close monitoring of public expenditure patterns during the resource constrained VIIth Plan would be critical to ensure that available resources are used most efficiently. This will involve monitoring sub-sectoral distribution, project-wise expenditures and the adequacy of OhM expenditures as well as the focus of resources on the "core" program. 90. Recurrent expenditures. Reduced allocations of budgetary resources for maintenance of existing investments has been evident in the recent past. This is especially true of the irrigation sub-sector where the burden on the Government has increased rapidly as the network has expanded and cost recovery from farmers amounts to only 40% of the O&M costs. 91. As agreed under the Irrigation Management Improvement Project (Ln. 2573-TUN), the Government's MTASAP calls for a ten-year action program to achieve full O&M cost recovery in the Irrigation Offices (OMVs) which would generate incremental revenue over the next ten years with a view to bringing the 11 OMVs to a break-even self-financing level. Under the agreed program, 65% of the irrigated area would reach 1002 of O&M cost recovery before 1991 and the balance during the program period (except in a few areas in the center - 33 - part of the country where farmers' ability to pay may be a constraint). In addition the Government is establishing a set of norms for the maintenance of equipment and civil works which would serve as guidelines for ensuring adequate funding. The list of maintenance coefficients for various types of existitig irrigation inivestments is contained in Chapter II of the MTASAP. The allocationi of adequate 06M budgets in relation to these norms and actual expenditures would be monitored with the aid of the computerized expenditure tracking system being developed (pora. 85). 92. Private investment and credit (ChapterIV of MTASAPJ. Creotrr reliance on private investment as opposed to direct public investment is a key clement of the Government's MTASAP (para. 61). Private activity in the sector is guided by the Agricultural Investment Code which created a package of incentives for private investment. Typically, farmers finance 201 of the cost of these investments, with about 801 coming from budgetary resources in the form of low interest loans or outright subsidies. Private investment now accourts for about one-third of total investment in agriculture, a figure unchanged from the Vth Plan. Apart from the tree crops and farm machinery sub-sectors, private sector participation is the highest in the livestock sector (562), followed by fisheries (302), and by private irrigation (131 of the total). Most private investments are associated with lending by the National Bank of Tunisia (BNT), a multipurpose commercial bank which accounts for about 75X of total banking system credit to agriculture. Most of the remaining 251 is accounted for by short-term lending by commerciaL banks. The National Agricultural Development Bank (BNDA) handles less than It of total banking system credit to the sector. 93. Agricultural credit in Tunisia is financed largely by Government subsidized special funds (FOSDA, FOSEP, FODERI) which not only are becoming a heavy burden on the budget (a total of D 19.5 million now budgeted for 1986 including both loans and subsidies), but also by undercutting the participation of the commercial banking sector, they create serious problems for the overall credit system. These funds also need annual replenishment from the budget since recoveries average less than 50% as the Government (not the BNT which handles them) bears the risk of default.-' Liberal eligibility criteria allow 901 of Tunisian farmers access to those special but progressively limited amounts of funds; this, combined with the lack of development of other credit systems, seriously affects the overall flow of institutional credit to promote private investment. 94. The Government's MTASAP aims to use the agricultural credit system as a primary tool to promote greater private sector participation in agricultural development and at the same time to reduce the budgetary burden on the Government. Specifically, the MTASAP aims to: (a) improve the incentives for banks to apply their own resources to agricultural Lending, notably through a policy of interest rates which cover the financial and operating costs at reasonable efficiency and risks of agricultural lending, thereby enabling the shift from public to private sector lending to take place; in the medium-term, the Bank's preliminary estimate is that this would imply interest rate increases of 2-4X, up to 9-12%; (b) reduce progressively (in light of the mobilization of other resources to support a Larger program of agricultural credit) the budgetary 1/ BNT recoveries on loans made from its own resources are above 92Z, and those in which it shares a part of the default risk are above 751. - 34 - allocations to FOSDA, FOSEP and other special funds (FOSDA loans granted rose to D 21.8 million in 1985) which have the potential to undercut commercial credit, with the ultimate objective of better targetting these funds to the poorest farmers; (c) transfer progressively to BNT and to the banking sector a larger part of the risk assumed by the State in association with the higher interest rates under (a) above; and (d) apply better recovery measures, notably the "Privilege d'Etat:" reschedule certain debts when justified by natural disaster, for example, and stop taxing bad debt provisions made to cover the risk of a non-repayment. Strengthening and Privatizing Support Services 95. The pattern followed in Tunisia has been one of strong and active involvement of the Government and its agencies in the entire range of marketing and support services in Tunisia. Partly because they are often not charged at their full cost, but also because of the limitations imposed by the financial constraints on the expansion of these services in line with demand, the Government has reassessed the need for its continued involvement in provision of these services. The MTASAP recognizes the benefits from private sector involvement in the provision of commercial services, and the adverse consequences of strong Government involvement in providing subsidized services which discourage the private sector from participating in providing poten- tially viable commercial services. However, in some areas such as research, extension, disease control, and management of irrigation infrastructure, the MTASAP recognizes the need to strengthen the quality of continued Government involvement. Action programs have thus been devised under the MTASAP to increase cost recovery in public services, to stimulate private sector partici- pation in commercially viable activities like input marketing, farm mechani- zation and some livestock services, while strengthening essential support services such as research, extension and irrigation management which will remain in the public domain. 96. Input marketing: Fertilizer (Chapter VII of KTASAP). Tunisia is a major producer of fertilizer, chiefly of triple superphosphate and ammonium nitrate. Only 181 of triple superphosphate, 421 of ammonium nitrate and 83% of single superphosphate production are consumed by domestic agriculture, the remainder being exported. The only major imported fertl.izer is potassium. Since 1985. when domestic production of nitrogenous fertilizer commenced, the public sector Tunisian Chemical Fertilizer Company (STEE' has had the wholesale monopoly for phosphate anid nitrogen fertilizers. It is at the wholesale level through STEC that the Government subsidizes the three most widely used fertilizers (superphosphate, triple superphosphate and ammonium nitrate). The Office of Cereals (OC) is the main retail agency handling about 50% of phosphate and 40% of nitrogen fertilizer distribution. The OC has played a useful role in linking marketing of inputs with domestic procurement of cereals, and has thus helped in developing the domestic fertilizer market from 34,000 tons in 1964 to 230,000 tons in 1984. In this period, nitrogen fertilizer use increased about tenfold, and phosphate fertilizer by about 4 112 times, while use of potassium fertilizer, which is not subsidized and is imported by the private sector, has remained relatively stable at 6,000 - 10,000 tons/year. - 35 - 97. Retail marketing, in addiLion to OC, is done by cooperatives and the private sector. During the VIth Plan, there has been an expansion of the OC's network of retail outlets and this combined with absorption of OC's losses by the Government and the controls on private sector retail margins, particularly for the subsidized products, has led to a retail trade which has become dominated by the OC. In 1982, only 37% of the retail outlets were in the cooperative or private sector. In addition, the private sector has concen- trated 70% of its outlets in the citrus growing northeast, where the major market is for potassium, a fertilizer market relatively free from Government involvement. As a result, many smaller farmers, not linked with OC through grain narketing and in Lemote areas, have been without assured and timely access to fertilizer. The growth of private retailing has been constrained by the lower prices permitted to the public sector. For example, in the 1985/86 crop season: Product Public Sector Mark-up Private Sector Margin …(D/ton) ---------------…- Triple Superphosphate 2.25 7.00 Ammonium Nitrate 3.13 9.73 Single Superphosphate 1.25 2.95 Diammonium Phosphate 2.25 7.00 98. The Government's MTASAP strategy is to improve the conditions necessary for the private sector and service cooperatives to continually increase their participation in fertilizer retail marketing, thereby increasing farmer access to fertilizer and enabling the Government to concentrate its effort to the promotion of fertilizer use in low demand areas not likely to be of interest to the private sector. The Government's MTASAP aims to equalize the retail mark-ups charged by the public sector with those of the private dealers and to liberalize retail margins. In parallel, agricultural credit institutions would introduce short-term credit programs which permit advance purchases of fertilizer to reduce delays in delivery and a seasonal differential in wholesale/retail pricing would encourage more downstream storage and early purchase. 99. Input marketing: Certified seeds (Chapter VII of MTASAP). Production or imports of non-cereal seeds including vegetables, industrial crops, pulses and fruit tree seedlings are handled predominantly by the private sector. Adequate amounts of seed potatoes and forage seeds are imported. Overall quantity and quality of cereal seed is adequate with genetically improved plant material having been available since the early 1970s, as a result of national and international research efforts. Use of certified cereal seeds has stabilized at about 15,000 tons, after fast growth during the 1960s and 1970s. Certified cereal seed multiplication is handled by cooperatives, which contract out the multiplication of basic seed produced by the National Agricultural Research Institute (INRAT) to private farmers and cooperatives. The Office of Cereals distributes certified seed through its network of 119 retail outlets, many of which also serve as collection centers for the harvest. Roughly 61% and 82% of the land under durlum and bread wheat in the north are now sown with improved varieties. In case of barley this figure is only 20% although varieties suitable for the north are available. While production and control of certified seed are adequate, the pricing and distribution system are deficient with, on the one hand, wasteful use by larger a;irms and, orn the other, insufficient use partly due to poor accessibility for - 36 - small farmers. The practice of too frequent seed renewal is encouraged by an out-moded but once useful "seed-exchange" type distribution system still used by OC. Under the system, farmers exchange their own grain for certified seed on a one to one basis, up to a maximum of 2.5 tons; above this level, and up to eight tons, it is exchanged on the basis of 115 kg grain for 100 kg certified seed. Requiremenits over 8 tons (about 80 ha) have to be paid at full cost. Although nominaLly the pricing is set to favor the small farmer, this system effectively limoits the access of certified seed only to those farmers selling their grain through OC. Total expenditure on seed subsidies rose from D 0.6 million in 1981/82 to D 0.9 million in L985/86. The low cost of certi- fied seed has led to its higher than necessary use, since technical require- ments are that farmers only renew 10-15% of their seed on an annual basis. 100. The Government's MTASAP aims to ensure that public resources are devoted to the expanded production of barley seed and the apparent over- consumption of cereal seed is controlled. To this end, the seed subsidy is to be eliminated over 3 years. To ensure better access of smaller farmers to improved seed, the Government aims to strengthen the distribution system by introducing a system of private retailing of seed, along with other inputs. For this purpose, the additional inspection requirements to ensure quality, the requirements [or labelling, and other legal aspects are being studied. A special study (draft terms of reference in MTASAP, Appendix II) is to be launched to review the cereal and other seed distribution system including an enhanced role in its distribution by private retailers of other agricultural inputs. 101. The thrust of the adjustment program for seed marketing is to phase out the seed subsidy which only accounts for 2-3% of production costs and to stimulate greater private sector involvement in seed marketing together with other inputs. Measures are planned to reduce seed subsidies by about 33% per year over the next three crop seasons. The exchange program will also be gradually converted into a straightforward sales program. 102. Output_marketing: Cereals. Production of cereals, consisting of about 601 durum wheat, 25% barley and 15% bread wheat, has increased from an average of around 1.0 million tons under the Vth Plan (1977-81) to 1.3 million tons under the current VIth Plan (1982-86). Meanwhile imports have averaged around 900,000 tons which means that the production increase has been absorbed entirely by growing internal denmnd. For the future, unless consumption can be curbed, cereal production must continue to grow or the country will face increasing imports. 103. The OC is the national grain supply agency which over the decade of the 1970s has been forced to meet rapidly growing demand for industrially processed grain with an infrastructure and institutional practices that have changed little since the 1950s. Efforts to improve the grain supply were launched under the Grain Distribution and Storage Project (Ln. 2052-TUN) and have been focused on improving cost effectiveness in three major areas: physi- cal facilities, financial management, and the management of supply operations. 104. The completion in late 1986 of two port silos and several redistribution silos designed to reduce heavy demurrage and port costs will break a major bottleneck in the distribution circuit for imports, and transform this circuit from largely bag to primarily bulk handling with attendant cost savings. As a result of a study of OC's financial management system, OC's financial functions have been reorganized, and reforms in accounting practices have been started. - 37 - 105. With the recent creation last year of a Logistics and Transport Directorate in OC, immediate improvement in practices and substantial reduction in losses were evident in handling the peak crop of 1985/86. 106. Completed studies have shown that the diagnosis of problems in OC's operations management is complex. Further reforms in the management of supply operations are clearly needed and the Government has confirmed in the context of the Letter of Agricultural Development Policy that cereal marketing problems will be addressed as part of the MTASAP. In support of this, action programs are being prepared and implemented in the context of the ongoing Grain Storage and Distribution Project financed by the Bank (Ln. 2052-TUN) and preparation of a possible second project: (a) Management Df buying and selling. The buying and selling of imported grain has long been handled by OC as a completely separate operation from the buying and selling of local grain, which has resulted in costly inefficiencies in the transport and storage of both. A reorganization plan has been prepared for these marketing functions to achieve over the coming months unified direction within a single marketing directorate. To improve import operations, OC is working on improved tender and contract documents to provide for better protection and improved quality control. Similarly, the system of local purchases is to be improved by simplifying the present system of quality premiums and penalties. (b) Management of domestic harvest purchases. At present in many localities OC and the two grain cooperatives1' each has its own collection center operating in conditions that are sub-optimal both for storage and for loading and maneuvering of trains and trucks. OC and the cooperatives plan to achieve economies of scale in both investment and operational costs in the domestic procurement network in the mediium term by implementing a rationalization program. (c) Maintenance of facilities. To overcome the absence of a tradition of maintenance and the lack of a maintenance management structure and technical skills, OC has decided to introduce an improved silo maintenance system, initially by recruiting a firm, on a turn-key basis, with gradual transfer of responsibility to OC and/or the cooperatives. (d) Reimbursement of storage costs. The present system of Government reimbursement of storage costs does not provide adequate incentives either to the OC and the cooperatives for the improvement of maintenance or to large farms and processing mills for the instal- lation or expansion of bulk storage facilities at their enterprises to reduce congestion in the collection center network during and after the harvest. Proposed revisions in the reimbursement system that are designed to reverse these incentives have been developed as part of the cereal marketing improvement program. (e) Reimbursemnent of transport costs. The method currently used by the Government and OC for implementing the Government's program of reimbursement of transport costs for processed grain in support of the Government's policy of a unitary national price for cereal 1/ OC has delegated to the two cooperatives the authority to participate in harvest collection on behalf of OC. - 38 - products is costly. In essence, reimbursement is paid to processors by the ton-kilometer of transport irrespective of origin and destination. As a result, there is considerable criss-crossing of the country in unnecessary transport from deficit regions to surplus regions and vice-versa, the cost of which appears to be well over US$L million per year. Alternative formulas for carrying out transport reimbursement are now under consideration with a view to eliminating these losses. 107. Milk marketing (Chapter X of MTASAP). The dairy industry has grown rapidly (by about 22% p.a. during the 1970s) and milk production reached 293,000 tons in 1985. However, imports account for nearly 45% of consumption and have almost trebled over the same period. 108. The Government currently intervenes in almost every stage of milk production and marketing. Although it subsidizes milk collection by the processing industry, only an estimated 20% of the national production is actually collected for processing; the remainder is consumed on farm or sold directly to consumers. The Government also fixes the consumer prices of different milk products sold by the organized industry. This controlled system has a number of adverse consequences for domestic production and an adverse impact on the sector trade balance. Since the margin between the price at which processors must buy fresh milk and sell finished products is narrow (20-30%), only the parastatal milk plants (STIL and TUNISIELAIT) with access to Government subsidies collect milk while a vast number of milk producers dispersed over the countryside do not have any assured market outlets. More recently, imports which are often subsidized and enter tariff- free, have become the cheapest source of supply. Given the Government's fiscal constraints, the demand for dairy products is not met, and incentive for domestic collection is declining. 109. The MTASAP builds on recent Government efforts to alleviate some of these constraints. Specifically, it aims to create a more favorable policy environment which, by raising the import price through exchange rate adjustment and the minimum tariff, and progressively liberalizing the pricing and marketing of domestic fresh pasteurized milk, leaving the import-based subsidized reconstituted milk for vulnerable groups, would keep improving producer prices and increase the incentives for collection and processing of domestic fresh milk production. 110. Beef marketing (Chapter X of MTASAP). Production of sheep, in which Tunisia has a distinct comparative advantage, especially in lower rainfall areas, has risen sharply in recent years in response to the liberalization of prices in 1978. In contrast, beef production, for which certain high rainfall areas of Northern Tunisia have a comparative advantage, has fallen from an average of 62,000 tons in the Vth Plan (1977-81) to 57,000 tons, the same level achieved under the lVth Plan (1972-76). Until 1985, the Government fixed an official producer price of beef at incentive levels, but fixed low consumer prices and imported often subsidized imports of refrigerated beef. Given the Government's tight financial situtation and the high value of the dinar, buyer's incentives shifted towards imports: imports of beef virtually trebled in Eive years, rising to over 13,000 tons per year in 1985. Under the MTASAP, the Government intends to continue the policy introduced in 1985 to stop subsidizing the parastatal meat company El Louhoum, and to maintain the liberalization of the producer and consumer prices for beef. A further action - 39 - taken by Government is to induce higher producer prices by applying temporary tariffs as needed against imports of refrigerated beef below world market prices. ill. Farm mechanization (Chapter VIII of MTASAP). During the 1970s, farm mechanization progressed rapidly with the area covered per tractor dropping from 213 ha to 151 ha by 1980. This has resulted in a high proportion of older tractors in the country (50% over six years old) and their consequent greater need for parts and service. From a situation in 1982 of poor after-sales service due to an excessive number of makes (13 makes imported and 33 others), the situation in 1985 is one of a total ban on imports of tractors in the horsepower range produced in Tunisia. Deprived of any prospect of new sales, importers have stopped stocking spare parts, especially of the slow moving variety, and the local tractor manufacturer (CMT), enjoying a monopoly position in its horsepower range (45-110 hp), has so far failed to work out adequate after-sales arrangements with its dealers. 112. Besides poor after sales service, the Farm Mechanization Master Plan, prepared under Bank-financing, identified several other major issues: (a) at 1,000 hours per year, the average annual number of hours worked per tractor in Tunisia is low, implying considerable scope for more intensive use of farm machinery; (b) the lack of specialized private farm machinery contractors who, with a wider range of equipment, could make more intensive use of machinery; this is related to the below cost pricing by public farm mechanization services; (c) there is a lack of farm mechanization subject-matter specialists to assist extension workers in organizing field demonstrations, especially in the use of sub-surface tillage equipment to increase moisture conservation; and (d) insufficient machinery repair facilities in rural areas. 113. The Government's MTASAP calls Eor the following actions: (a) liberalization of tractor imports in the 45-110 hp range and a reasonable temporary tariff for the newly established domestic tractor plant to promote greater competition among dealers and better after-sales service and spare parts supply; (b) more effective contractual arrangements between CMT and local dealers to provide after-sales service and spare parts supplies, including computerization of spare parts inventories by CMT; (c) elimination of Government control of margins on spare parts; (d) development of a program broken down by geographical areas and types of machinery for progressiv?ly reducing public sector contracting and, in the meanwhile, increasing charges to reflect the real cost of services to avoid under-cutting of potential private contractors; and (e) assignment of Agricultural Machinery Subject-Matter Specialists (AMSMs) to assist extension work on agriculture (see also para. 120). 114. Livestock services (Chapter X of MTASAP). Most livestock services in Tunisia are provided by the Government, through the Animal Production Department (DPA), the Office of Livestock and Pasture Development (OEP), and 11 other "Offices". Services include preventive vaccination campaigns, which - 40 - are free of charge, veterinary care which is partly paid for by the users and genetic improvement, where the cost recovery performance and quality of service are mixed. Due to fiscal and foreign exchange constraints, the import of exotic production animals has been substituted by a more cost effective cross- breeding program. Past policies have resulted in the large part of the pure- bred herd being with the large cooperatives, and about 60% of the artificial insemination (AI) services are focussed on these large pure-bred herds; only 8% of the remaining herd with private fanrers is provided such services. To support the new strategy towards expanded cross-breeding programs, and given continued fiscal constraints, the Government policy is to ensure better cost recovery in these services. 115. The MTASAP focuses on the transfer of full responsiblity (and thus achieve full cost recovery) for Al services from the Government to those cooperatives which have large pure-bred herds. The DPA would help to train inseminators and provide them with the necessary equipment and materials. Public resources would in future be concentrated on a promotional campaign of cross-breeding of the local herd, most of which is dispersed in remote locations not viable for commercial operations. 116. Agricultural research (Chapter V of MTASAP). Although at 1.4% of agricultural GDP, total expenditures on research are high compared to other countries 1, their effectiveness in generating relevant and timely results could be improved. Eight research institutes, 11 OMVs, 4 other offices, 1 university and six agricultural schools are involved in agricultural research in Tunisia with the result that the national research effort has often been poorly focused, duplicative and insufficiently coordinated. In many research institutes, selection of research subjects is determined more by the individual researcher's preferences, often in connection with university degree work, than by national priorities. Notable exceptions are the cereal research program and research by the irrigation and regional development agencies which have benefitted from more than 70% of the total external assistance. To prepare the framework of a stronger national agricultural research system, the Government, in 1985, commissioned a study by ISNAR with Bank-financing. ISNAR's recommen- dations, which are now being reviewed by the Government, identified five major constraints on the low producti-ity of research expenditures: (a) a lack of clear research priorities, focussed on national needs and incorporating economic priorities; the OMVs have devoted 80% of their resources to livestock and vegetable research, while cereals/pulses have been neglected; (b) the research institutes suffer from inadequate professional staff salaries and career opportunities compared to other similar agencies, such as universities and irrigation authorities. As a result, professional staff turnover is high (INRAT had a turn-over of 28% in the last two years); (c) certain field stations are not necessary and many have excessive land resulting in the budgetary resources being spread too thinly; and 1/ China/India, 0,5%; Middle East and North Africa, 1.1%; and Latin America, 0.9%. - 41 - (d) not only are the linkages with extension weak, but research workers do not benefit from enough contact with other research institutes, higher education institutes, and development agencies performing research functions. Tunisian research also has much to gain from research findings in neighboring Mediterranean countries such as Italy, after adaptation to local conditions. 117. The Government's MTASAP for agricultural research thus calls for: (a) restructurini of the research system based on one of the seven alternatives- proposed in the ISNAR master plan study as a means to improve the programming and budgeting for the national research efforts focussed on national priorities; (b) improvement of research worker remuneration and career prospects; (c) a decision on progressive leasing out of the excessive land held by substations to private farmers and cooperatives; (d) strengthening animal production, farm management economics, and farm machinery research; and (e) strengthening of the links between research and extension and with other research entitites, both in and outside Tunisia. By June 1987, the Government will decide which of the seven restructuring options it will adopt and prepare with Bank assistance a detailed action program covering the above points for implementation during the VIIth Plan period (1987-91). 118. Agricultural extension (Chapter VI of MTASAP). A number of public sector entities have grown up in Tunisia alongside the main Extension Department of the Ministry of Agriculture to provide advice to farmers on the technical, managerial and economic aspects of farming. Tunisia's 1,000 odd extension agents operate under a total of about 25 entities, some focussing on specific commodities (e.g., olive oil, cereals, meat, milk, wine or tobacco), or a particular region (e.g., Northwest Rural Development Office) or for one factor of production (e.g., OMVs in the case of irrigation water). Roughly 50 work in irrigated areas, which represent only 5 of the cultivable area. Extension workers in Tunisia provide multiple services ranging from input distribution, credit applications, authorization for fuel subsidies and statistical work. Farmers are subject to multiple sources of extension advice. Extension services operate out of CTVs, amounting to 508, which have office and housing as well as storage space. Sixty percent of the CTVs cover less than 1,000 farms and the distance of a CTV from a village is about 3-30 km. Density of extension services varies significantly from 50 farms per CTV in the predominantly high season vegetable areas, 150 in the OMVs, and 1,000 in the cereal-dominated North. 1/ The alternatives range from a single, unified research institute to a coordinating committee on research. The latter is not a feasible solution given the experience with a similar committee which has met only once since 1978. The former would represent a change too major to manage success- fully. An intermediate system for coordinated progranming and centralized budgeting for high priority national programs supplemented by individual work programs for the agencies would probably be more successful. - 42 - 119. Tunisia's agriculture needs a clearly defined extension system and methodology suited to its particular situation. In order to develop a plan for strengthening the extension services, the Government has completed an Extension Master Plan study financed under the Technical Assistance Project. The Master Plan has identified a number of problems with the present system: (a) multiplicity of agencies providing extension services; (b) scarcity of updated technological messages and insufficient feedback from farmers to the research system; (c) ineffectiveness of extension agents who perform multiple administra- tive functions, but have insufficient training in extension and communications methodology; and (d) inadequate preparation of work programs, lack of accountability for their execution, and insufficient quality advice by subject-matter specialists who are insufficient in numbers. 120. Under the MTAbAP, the Government aims to implement a strengthened extension system embodying the basic features of the Training and Visit (T&V) System by: (a) restructuring of extension services to follow a single line of command from a central unit (responsible for policy, training, use of mass media and methodology) down to the CTV level field extension worker. In the near term, the irrigation agencies (OMVs) would continue their separate extension programs following a uniform methodology, and restructuring efforts would be focussed on rainfed areas; (b) separation of other support functions from the extension function, including, as necessary, and where feasible, appointing two agents, one for support functions other than extension; where stationing two agents per CTV is not justified by the level of agricultural activities, special work programs would be established whereby certain days of the week would be reserved for extension; (c) changes in the function of the commodity-specific agencies to provide subject-matter specialists (SMS) to support extension agents; (d) introduction of a regular pattern of program development, execution, monitoring and evaluation, including farm visits, and training; (e) establiahment of regional research/extension commissions to provide extension and research services with the opportunity for periodic exchanges of updated research information and research requirements; and (f) encouragement to private enterprises (such as dealers in agricultural implements and plant protection chemicals) to play a larger role in extending tectnical and economic information. An action plan to implement the Government's MTASAP for extension will be prepared with Bank assistance and approved by the Government by June 1987. - 43 - 121. Irrigation management (Chapter III of MTASAP). Tunisia's 235,000 ha of land equipped for irrigation are managed by 11 OMVs created by the Government to: (a) operate and maintain the public Irrigation system; (b) provide extension services for irrigated crops; (c) promote agricultural production by offering a wide range of support services (including input distribution, tractor services, product marketing and credit) when not available from other sources; and (d) promote the creation of farmer groups or cooperatives to assure responsibility for the operation and maintenance (O&M) of irrigation systems and for commercial activities. Often located downstream of the large dams, the OMVs have played a crucial role in the development of irrigated production which today accounts for 38% of agricultural value added. As their operations have expanded. however, operational inefficiencies have become apparent and the OMVs have become increasingly dependent on Government budgetary resources: OMVs' own resources have grown at 6% p.a. while Government support has increased at 24% p.a. over 1980-85, and now 65% of the operating funds come from the Government. If the OMVs are to continue to provide even basic services, they will have to improve their efficiency and become more financially self-supporting. 122. One indicator of the OMVs' operational inefficiency is that the overall average irrigation intensity (defined as the annual irrigated cropped area over the equipped area) is only 78% (160,000 ha over 205,000 ha in 1984). In the public irrigation perimeters (PPIs), the average intensity is 68%, while in the private perimeters it is 86%. These low utilization rates, coupled with low water charges and low rates for other OMV services (input distribution, mechanization, etc.) account for the high financial dependence of OMUs on the Government budget. The cost of services, many of which could be provided by the private sector, is often unknown, since the OMVs also lack clear accounting and management information systems. 123. To improve overall OMV operations, the Government has in recent years raised water charges by 3-241 annually in real terms between 1981 and 1985. In 1986, it has launched the Irrigation Management Improvement Project with Bank assistance (Ln. 2573-TUN) which includes a comprehensive package of measures which form an essential part of the MTASAP. Specifically, the project will introduce a binomial water charge formula comprising a fixed contribution on a per irrigable hectare basis charged to every farmer whether he uses the water or not, and a volumetric charge based on actual water use. Water charges will be increased by 9% per year in real terms during the project period. The OMVs will also establish acounting systems and begin charging beneficiaries the full cost of services rendered. The OMVs will also divest themselves of commercial activities in favor of the private sector, and hold new recruitments to a strict minimum necessary for efficient operations. Funds for maintenance will be clearly identified in OMV annual budgets, and the quality of maintenance will be monitored through performance indicators. Incentives will be introduced for farmer groups to undertake certain O&M activities, contractual relationships with the Government will be introduced for selected OMVs, and the Ministry of Agriculture's monitoring capabilities will be strengthened. Improving Management of Natural Resources 124. Land resources (Chapter XI of MTASAP). Fundamental to achieving Tunisia's full agricultural potential is better utilization of the country's land resources. Currently land tenure patterns constrain the adoption of more intensive farming practices in several ways: - 44 - (a) With 42% of the farms having less than 5 ha and 11 having more than 100 ha, accounting for 61 ard 241 of the cultivable land, respectively, land distribution is highly skewed. This results in under-utilization of land on some of the larger, often absentee-owned farms, while many of the smaller farms are not viable economically, and there is no land tax to encourage more efficient holdings; (b) There is increasing fragmentation of holdings, often due to inheritance, into small, frequently dispersed plots which are difficult to manage intensively: an average farm consists of 4.2 plots, and about 22X of farms have 6 or more plots; only in the irrigated areas does a system for consolidation of holdings backed up by legislation exist; (c) While titles have been issued for about 3.0 million ha, the pace of registration for the remaining 1.5 million ha is so slow that it will take another 60 years to complete this: lack of clear title has its adverse consequences for access to credit and incentives to invest; a high land transfer tax also discourages land registration; (d) With one third of the holdings in the productive North not operated by owners, land tenure is a critical aspect: however, land leases are mostly verbal and cover only 1-2 years. Land leases are not registered, and a system for cost sharing for permanent improvements does not exist; and (e) About 72 of the total arable area, including some of the best land in the North of the country, is managed by publicly owned production cooperatives (4%) or state farms (3%) where financial results in some cases indicate room for efficiency improvements. 125. While some measures, including issuing certificates of possession pending full titling, have been taken to facilitate access to institutional credit, the Government's MTASAP recognizes that more needs to be done to achieve more intensive land use. A basic element, on which the success of other measures depends, is the acceleration of the national cadastre. The Bank is assisting with this effort through the preparation of a National Cadastre and Cartography Program. Another key component is the preparation of legislation comparable to that existing in irrigated areas to keep the operational size of farms in rainfed areas above certain minimum sizes through contractual or management arrangements without affecting inheritance rights, and to extend the period of rural land leases to 3-9 years. The Government also plans to continue its program of transferring State-owned lands to private parties, including leasing to private companies. A more active market in agricultural land would be facilitated by the reduction by 50% of the 15.6% tax on land transfers, which would also improve the extent of land registration. 126. Forestry resources (Chapter XII of MTASAP). Tunisia's 0.9 million ha of forests provide an estimated 15% of the agricultural CDP, but it is estimated that at least 10,000 ha are being lost annually. A forestry sector strategy paper, prepared for the Tunisian Government by FAO, has established that the most serious threat to forests is from over-grazing by domestic stock of the 120,000 families who live in and around the forest and have grazing rights therein. Poor cover and growth rates result from this pressure and - 45 - unfavorable soil/rainfall conditions, and thus 95% of Tunisia's industrial wood needs are imported. Fuelwood provides 75% of domestic energy and overcutting to meet demand is further reducing the cover. In the absence of a clear strategy to deal with this situation, the resource allocation for forestry has diminished sharply, and annual planting for wood production was reduced from around 15,000 to 3,000 ha since 1978. In combination wiLh low survival rates (60%), future production is threatened, and the consequences of this neglect on soil/water conservation is likely to be severe since 802 of Tunisian land is already subject to erosion. A new strategy to protect and enlarge this resource, while at the same time protecting animal feed requirements, has been developed. This strategy calls for changes in the law to limit grazing rights to those who live actually within the forests, development of the forest grass lands which can increase their carrying capacity ten-fold, selective emphasis on natural regeneration techniques in the majority of the exploitable forest area, limiting the more costly replanting techniques to clearly favorable areas, and use of mechanical (deep ploughing) planting for better growth rates. Under the MTASAP, a multiple component program of action, built around thinning and closely monitored and regulated natural regeneration in 3,000 ha increments each year for five years, is being prepared. This would be ready for evaluation in December 1986 for later adoption as a national plan, since other Government agencies would play a critical role in its success. Modest increases in sub-sector expendi- tures would be fully justified in the context of the overall expenditure priorities. This MTASAP strategy would not only provide a modest positive contribution (about D 1.7 million annually) to reducing the sector trade deficit in the 3-5 year period, but would play an essential role in protecting this critical resource base. The Government would prepare a program of actions to implement the new forestry strategy including an amendment of the law to regulate grazing rights, develop forest grass lands, protect and monitor the natural regeneration of a designated 3,000 ha per year of forest, introduce mechanical planting and other activities. It is expected that the financing for the implementation of the evaluated program would be provided under the VIIth Plan, since criteria (para. 86) are expected to be met. 127. Fisheries resources (Chapter XIII of MTASAP). Tunisia's fisheries resources fall into two broad categories, each with their own development opportunities and constraints. Growth of fisheries production during the last five years has been 10.5% p.a. compared to only 6.5% annually during the 1970s. As a result, high-value, predominantly white, demersal fish, consumed mainly in Tunis and other coastal cities, or exported, as well as Tunisia's traditional marine exports of shrimp, octopus, shellfish and sponges, are being exploited at about 85% of their potential. On the other hand, only an estimated 39% of coastal pelagic species are being exploited, and the catch has remained static. Price controls on domestic fish marketing margins have been the main obstacle to developing the internal market and better exploit the fisheries resources. Some high-value pelagic fish, including swordfish, as well as some high-value demersal species, including Mediterranean lobster, are also exportable, but are under-exploited for lack of efficient marketing links with importers abroad. 128. In maintaining a harmonious development of this resource, an early change in the emphasis is needed that will give priority to utilization of coastal pelagic species, and better exploitation of exportable high value fish. In conjunction with its commodity specific, target market-oriented export promotion strategy (para. 69), the Government's MTASAP plans to liberalize - 46 - investment and pricing controls to attract foreign investments in joint ventures, and fully exploit fish export markets. Other measures, such as the elimination of export taxes, would also be considered. As a well-known source of Mediterranean species, Tunisia is in a good position to exploit particularly the French and Italian markets, provided it can establish the necessary marketing chatnels. Meanwhile, the Government recently liberalized domestic fislh marketing marginis, whichl should stimulate internal marketing and fuller exploitation of the abundanit coastal pelagic species. The Government plans to launch a pilot project for encouraging domestic fish marketing with the private sector involving the establishment of transport and cold storage facilities initially along two main transport arteries leading into the interior. Subject to meeting the project selection criteria, a full-scale project would be included in the VIlth Plan. Building Up Sector Performance Monitoring and Policy Analysis Capabilities (Chapter XIV of MTASAP) 129. One critical factor for successful adjustment in the sector is that policy instruments and expenditure allocations adjust to changing economic circumstances, so that the agricultural economy stays fully in line with emerging macro-economic objectives. Within the Ministry of Agriculture, the unit responsible for monitoring sector performance and proposing appropriate policy responses is the Department of Planning, Statistics and Economic Analyses (DPSAE). As the name implies, the DPSAE has basically three functions: (a) to prepare five-year development plans for the agricultural sector and annual budgets; (b) to collect agricultural statistics; and (c) to carry out economic analyses of sectoral performance and special topics of interest to the Ministry and the Government. 130. Although plan and budget preparation are necessary activities of the DPSAE, the often tight schedules for their tasks together with staff constraints, both quantitative and qualitative, have led to a situation where few economic analyses are done. The DPSAE does maintain certain performance data, including time series on the volume and value of agricultural production, the sectoral balance of trade and the producer prices of key commodities. However, there has been little, if any, work done on the efficiency of different production systems, nor has there been a systematic effort to monitor incentive patterns or the effectiveness of input subsidies. There also needs to be an attempt to simulate the impact of alternative price policies on production, the balance of trade and the Government budget. A systematic system for monitoring actual vs. planned investment and recurrent expenditures is also needed. 131. To strengthen the DPSAE's sector performance monitoring and policy analysis capabilities, the first item in the Government's MTASAP is to establish an adequate data base including not only data on agricultural production, but also detailed cost of production data for at least the major products under the main production systems. Data would also need to be collected on actual CIF and FOB prices of inputs and outputs imported into and exported from Tunisia, as well as the port handling, storage and transport charges applied to these commodities between the border and farmgate. The second item in the Government's MTASAP, which is also dependent on an adequate data base, is to develop and maintain quantitative indicators of economic efficiency and incentives for the most important crops. This analysis should also include the principal agro-industries where there seems to be considerable - 47 - scope for efficiency improvements, notably through higher capacity utilization. Thirdly, an adequate data base would enable the DPSAE to construct a simple analytical model to simulate the effects of alternative price policy environments on agricultural production, the balance of trade and budget. Draft terms of reference for the design and installation of a price policy review capability in the DPSAE were discussed with the Government at negotiations. Another major activity of the DPSAE would be the export promotion study (para. 144) for whiclh draft terms of reference (in MTASAP) were also discussed at negotiations. In addition to the studies listed in paragraph 161, the DPSAE has aLso included in its work program the identifi- cation of areas where the Government could withdraw from input distribution and an analysis of the profitability of agricultural credit operations. PART V - THE LOAN A. Origin and Objectives 132. During the 1984 Annual Meetings, the Government requested that the Bank consider financing of sector adjustment loans, including one in agriculture, to help support continued reforms to improve the performance of the economy. In June 1985, the Government completed with the Bank an implementation review of ongoing Bank-financed projects in the agricultural sector which revealed a number of unresolved policy issues which were constraining their development impact and overall sector performance. The Government as a result decided to pursue with the Bank a broad-based policy dialogue with the objective of establishing a medium-term economic and sector policy framework to seek financing for the proposed loan. An inter- ministerial coordinating committee and various sub-sectoral groups working with Bank staff designed the sector adjustment program by systematically analyzing constraints, exploring solutions, scheduling reform action and identifying those areas where further study was required. 133. The purpose of the Loan is to provide the necessary financial and technical support to the Government's program for macro-economic reform described in Part II and the MTASAP described in Part IV. The Government's macro-economic and MTASAP frameworks have been provided to the Bank in Letters of Economic and Agricultural Development Policy from the Minister of Finance and Planning [Annex IV(a) and (b)]. The MTASAP, including the immediate policy reform actions described in this part, were appraised by a mission in April/May 1986, and negotiations took place in Washington from August 19 to 29, 1986; the Tunisian delegation was led by Mr. Zein Mestiri, Director General of International Cooperation. Ministry of Planning and Finance. A Loan Summary is given at the beginning of this report, and a Supplementary Project Data Sheet appears as Annex III. Maps illustrating rainfall and irrigated areas, soil suitability for crops and location of main crops are attached. B. Action Program Under the Loan 134. Selected key policy reform actions to be taken during the first 18 months of the MTASAP would be monitored as conditions for the release of the two tranches of the Loan. A review of the overall progress of the MTASAP would be undertaken close to the time when the first tranche is fully disbursed and Bank confirmation of the satisfactory implementation of the overall Program would be a condition for the release of the second tranche of the Loan. The - 48 - key selected policy reform actions to be monitored as formal conditlions of tranehe release or as dated actions are discussed below; they mainly include iniitial adjustments in the prices and incentives framework, chlanges in expenditure priorities and improvements in support services. rrires r ind Incentives Framework 11%. Specific actions for further deregulating or adjustinig the prices and inhcentives framework Lo be taken within the time frame of the Loun woul(I aim to acrelerate a-ind chalininel agricultural growth towards those commodities and pro(tlction systems where TunisLa has a distinct medium-term coinparative advantage, and mainltain this growth under the new economic environment of budgetary constraints. These adjustments (combined with macro-economic reforms of Part 11) would aim to reduce the agricultural trade deficit and improve incentives for more efficient inLer-sectoral allocation of resources. This medium-term policy objective is fully elaborated in Part IV where the MTASAP is described. 136. It would begin with upward adjustment of the Government's procurement prices for the predominantly rainfed cereal crops. As the first step in a three-year program designed to implement the new pricing formula for cereals and bring producer prices into line with world market prices, for which agreement was obtained at negotiations, the Government has increased the administered producer prices of durum wheat, bread wheat and barley for the coming 1986/87 crop season as follows: the price of durum wheat from D 16 to D 18.50qt, the price of bread wheat from D 16 to D 17/qt and the price of barley from D 11 to D 12/qt. These increases represent well over one-third of the increase required to reach world market prices. A second adjustment, to reach 67% of the required increase, would be made in advance of the 1987/88 crop season as a condition of the release of the second tranche. These actions would also restore the historical premium of durum wheat over bread wheat, thereby reflecting world market relationships. Using this formula to fix domestic producer prices would not prevent Tunisia from continuing to take advantage of cheap imports. Other traded agricultural products, mainly beef, prices of which are not controlled, would also benefit from the currency adjustment and the minimum 15% import tariff included in the macro-economic adjustment program [para. 36(b)]. These actions, combined with the reduction in tariffs on industrial goods (para. 36(b)J would start the process of reducing the large inter-sectoral differences in incentives, and improve the currently adverse terms of trade for rainfed vs. irrigated production, particularly in association with the phasing out of input subsidies. 137. As regards the input subsidy reduction program, the medium-term objectives of which are described in detail in Part IV (para. 79) where the KTASAF is presented, specific actions to be taken within the time frame of the Loan would include increases in the administered prices of fertilizer, animal feed, herbicides and improved cereal seed. For fertilizers, as part of its program to eliminate the fertilizer subsidy by the start of the 1990/9L crop season (i.e., over five years), for which agreement was obtained at negotiations, the Government has recently increased the ex-factory unit prices of the three subsidized fertilizers"' by the amounts needed to eliminate 11% on average of the total subsidy in a normal consumption year. Together with the increases in fertilizer retail margins (para. 142), this has led to a 17-27% increase in the retail price of fertilizer sold by public sector I/ The three subsidized fertilizers are ammonium nitrate, triple superphosphate and superphosphate. - 49 - agencies which account for 80% of fertilizer sales, i.e. from D 71,950 to D 84,055/qt for ammonium nitrate, from D 57,650 to D 73,480/qt for triple superphosphate and from D 33,520 to D 41,670/qt for superphosphate. A second round increase designed to bring the total amount of subsidy eliminated to 33% would be implemented as a condition for the release of the second tranche. Larger subsidy reductions in later years would be implemented to reach the goal of full subsidy elimination in five years. 138. The objective of eLiminating animal feed,t' 2-4-D herbicide and improved cereal seed subsidles by the beginning of the 1989/90 season was confirmed at negotiations. The Governnent has recently increased the unit prices of maize and soybean meal by the amounts needed to eliminate at least one third of the total subsidy (in practice 52% and 371, respectively). The price of maize was thus increased from D 101 to D 116 per ton, while the price of soybean meal was raised from D 180 to D 200/ton. A second round increase to reduce the subsidy on these animal feeds by 671 and an increase reflecting the elimination of one-third of the subsidy on barley would be implemented as a condition of second tranche release. Action on barley was not taken this year, since it is a substitute for forage which was badly affected by the recent drought. Siuilarly, the Government has delayed first actions to reduce subsidies on herbicides and improved seeds to next year, since it did nat want to reduce incentives for their use following the drought. For 2-4-D herbicide, there would be a 50% reduction in the subsidy as a condition of second tranche release, with a view to complete elimination by 1988/89. The Government also plans to begin phasing out the subsidy on multipurpose herbicide beginning in the 1989/90 crop season, after the elimination of the subsidy on 2-4-D. The terms of the cereal seed exchange program will also be revised to phase out the total subsidy by the 1989/90 crop season; implementation of one-third of the necessary action would be a condition of second tranche release. With respect to irrigation water charges. the Government has developed and agreed with the Bank on a ten-year program for fully recovering O&M costs, including the recovery of 100% of the costs on 65% of the irrigated areas by 1991, in conjunction with the Bank-financed Irrigation Management Improvement Project (Ln. 2573-TUN). This program would raise water charges by approximately 15-171 for the 1986/87 season. 139. Public expenditures. The key objectives of actions in this area, fully discussed in Chapter IV where the MTASAP is elaborated (para. 83), are to increase the efficiency of resource use by maximizing returns on past investments, and selective reduction of public expenditures in commercially viable activities to create the room for private initiatives. The Letter of Agricultural Development Policy confirms that the Government will follow the sub-sector investment strategies (para. 84) and project selection criteria (para. 86) and the "core" program approach in the selection of projects/ programs for funding in the VIIth Plan. Specifically, the Government's Letter of Agricultural Development Policy states that an initial list of projects and investment programs and project ideas consistent with Lhe above approach will be made available to the Bank by December 1986, and that additions or deletions of projects from this list during the VlIth Plan would be based on the agreed criteria (para. 88). 140. Budgetary resources devoted to subsidized agricultural credit programs which undercut commercial bank activities in the sector would be progressively reduced, thereby reversing the upward trend of recent years (para. 94). At negotiations, the Government confirmed its intention that the 1/ The three subsidized animal feeds are maize, soybean meal and barley. - 50 - lanii part of FOSDA budget allocations for 1987 wouLd be not more than the 1986 level (D 13 million) in nominal terms and that these resources would be better targetted La Lhe poorest farmers. Confirmation that the agreed level of lDan allocations for 1987 is reflected in the 1987 budget would be a condition of second tranche release. The Governiment has Indicated that allocations would be reduced by a furthier 15Z in nominal terms for 1988. In additioni, to 'nicourage the commercial banks to participate more aggressively in financinig the activities of private farmers and service enterprises, the Government woulld, 116 a condition of second troLnche release, take action satisfactory to the Bank to start implementing its pollcy to establislh by 1991 interest rates which cover the financial costs, operating costs at reasonable efficiency and a reasonable share of the risks of agricultural lending (para. 94). Compared to 1986 levels, preliminary Bank estimates are that this would iiamply interest rate increases ranging between 0.75-1.752, up to 7.5? to 12%. Sector Support Services 141. The main medium-term objectives of policy reforms in this area, discussed fully in Part IV (para. 95) where the MTASAP is presented in detail, are to encourage privatization of potentially commercially viable activities, now performed by Government ageacies, while strengthening "core" services, such as research and extension for which there is no viable alternative to the Government in the medium term. 142. Input marketing. To stimulate greater private sector participation in retail distribution, the Government recently increased the mark-up charged for fertilizer retaiLing by Government agencies to align their retail level prices with those allowed to the private sector retailers, at levels considered adequate to interest the private sector. Agreement was obtained at negotia- LioIls in the context of the Government's Letter of Agricultural Development Policy that the Government would also complete the identification of zones where the volume of activity is such that the Government could withdraw from the distribution of inputs, including seeds, so that private retailing of all key agricultural inputs in at least two zones could be launched before June 1987, without prejudice to the objective of privatizing and liberalizing input marketing throughout the country as soon as subsidies are removed. Finally, prior to the release of the second tranche, the Government would update the fertilizer retail margins for inflation, ensure that public sector agencies charge the full costs of purchasing and distributing fertilizer, and announce fertilizer margin liberalization to take effect as of January 1, 1988. The Government has also indicated that it would remove remaining obstacles to multiple input marketing by dealers as of that date. The Government's role would then be limited to determining ex-factory prices based on FOB prices and reduced subsidy levcls. 143. The Government's agreement was obtained in the context of the Letter of Agricultural DeveLopment Policy (draft terms of refcrence are included in the MTASAP) that the cereal seed exchange program, which limits the distribution of seed to farmers in contact with OC, would be reviewed, and a study to replace this by a private retailer-oriented distribution system would be launched before June 1987. 144. Export marketing. Ti, realize Tunisia's untapped potentiaL for increased agricultural exports (para. 69), draft terms of reference for a sectoi export promotion strategy, including product-specific export strategies targetted to particular markets, were discussed at negotiations; the Government's Letter of Agricultural Development Policy indicates that an - 51 - action plan to ensure the implementation of the strategy would be developed and discussed with the Bank by June 1987. The draft terms of reference for this exercise are included in the MTASAP. 145. Agricultural research. With the ISNAR master plan completed and its findings scheduled to be reviewed by December 1986, the stage is now prepared for setting in motion a series of actions to improve the effectiveness of the resources devoted to agricultural research. Agreement was obtained at negotiations in the context of the Government's Letter of Agricultural Development Policy that the key decisions which await the Government (for details, see para. 116; briefly, choice of the institutional structure, definition of priority research themes, reform of the station network, and preparation of national work programs and budgets) would be accomplished before June 1987. As an essential first step toward strengthening the research system, and as a condition of second tranche reLease, the Government would increase the remuneration of agricultural researchers to an adequate level following guidelines acceptable to the Bank. 146. Agricultural extension. Similar to the research master plan, the agricultural extension master plan is scheduled to be reviewed by the Government by December 1986. Implementation of a comprehensive reform program would thus follow beginning in 1987; measures likely to figure in it it.clude new organization struLtures, clear allocation of subject-matter specialist (SMS) functions, training of extension workers in communications methodology, and strengthening the link between extension, research, the farming community and agro-industry (see para. 120 for details). 147. Agreement was obtained at negotiations in the context of the Letter of Agricultural Development Policy that an action plan, including financial aspects, to implement the master plan would be prepared and approved for implementation before June 1987. An essential feature of the reform program would be the unification of extension services starting with rainfed areas, and prior to the release of the second tranche the Government would designate the lead extension agency with appropriate responsibilities and personnel in rainfed areas to achieve this. 148. Farm mechanization. Purchase of mechanization equipment by public sector agencies for servicing farmers has been reduced; however, cost recovery remains poor, and the supply of spares and of the full range of tractors to meet needs is constrained (see para. 111). The Government recently required the OMVs and other public agencies still renting agricultural equipment to charge the real costs of their mechanization services, in order to ensure an appropriate environment for private initiatives. The minimum rates are the same as those charged by SONAM, which has recently set new rates after cost accounting studies. The Government has also indicated, in the context of its Letter of Agricultural Development Policy, that it intends to withdraw from mechanization services in those regions and for those services where the private sector can adequately take over, and that this policy would be put in motion by June 1987 after the identification of such regions and services. 149. In addition, imports of spare parts for the agricultural sector have recently been liberalized, and as a condition of second tranche release, the Government would authorize the import of 5X of the annual needs of tractors in the horsepower range manufactured in Tunisia (currently 45-110 hp); by introducing an element of competition, this should lead to some immediate improvement in after-sales service and spare parts availability, pending full liberalization of tractor imports by January 1, 1988 as part of the macro - 52 - program. In practice, the Government plans to implement the initial 5S liberalization by January L, 1987. In preparation for the full liberalization, tractor importers would be required to meet certain criteria which the Government would define in a proposal to be submitted to the Bank by September 1987. The criteria should include: (a) the existence and operation of an adequate number of retail-Level agencies with trained staff to offer after-sales maintenance services; (b) availability of an essential stock of spares to keep the tractor fleet they represent in working condition; and (c) demonstration of availability of adequate financial resources for working capital needs to operate the after-sales service facilities; at a minimum, availability of a commercial bank line of credit to finance the maximum estimated working capital needs. Both spare parts and tractor imports would be financed under the Loan. Improving Management of Natural Resources 150. Forestry. Agreement was obtained at negotiations in the context of the Government's Letter of Agricultural Development Policy that, by December 31, 1986, the Government would prepare an action program to implement its new forestry development strategy. 151. Fisheries. The Government recently liberalized domestic fish marketing margins, thus paving the way for increased internal marketing. Sector Performance Monitoring and Policy Analysis 152. To strengthen the capacity of MOA to analyze the impact of the changing macro-economic environment on the sector, especially in the critical areas of pricing policies and expenditure priorities, the Government would strengthen the capacity of the DPSAE by upgrading its analytical tools and skills to keep agricultural prices, subsidies and expenditure patterns under continuous review. Agreement was obtained at negotiations in the context of the Government's Letter of Agricultural Development Policy that a price poLicy review would be undertaken before June 1987, aimed at better quantification of the effects of proposed price policy changes on such key aggregates as agricultural growth, fiscal balance, the sector trade balance and rural incomes and employment. In addition, the export promotion study (para. 144) would be carried out and the expenditure monitoring system (para. 89) would be set up by that date (June 1987). The technical assistance needed for effective execution of these tasks and others is being sought from bilateral sources. Draft terms of reference (in the MTASAP) were discussed at negotiations. C. Loan Administration Eligible Goods 153. The proposed Loan of US$150.0 milLion would finance the foreign exchange cost of imported goods, of which US$60.0 million (40% of the total) would be allocated for general imports using a negative list,1' while US$90.0 million (60 of the total) would finance a list of priority imported inputs and raw materials for domestically manufactured inputs needed for the agricultural sector, as follows: 1/ The items not to be financed include goods financed by other sources and a specific list of excluded items, such as military or para-military items and luxury goods such as tobacco, precious stones and jewelry, gold and nuclear reactors and parts. - 53 - Item Indicative Amount (US$ million) (a) General Imports [not including those under (b)J 60.0 (b) Imports for the Agricultural Sector: (M) Fertilizer Raw Materials and Potassium Fertilizer 25.0 (ii) Spare Parts, Tractors and Pumps (not transferable) 15.0 (iii) Diesel Fuel (maximum allocation for petroleum products under the Loan: US$30.0 million) 15.0 (iv) Animal Feed 20.0 (v) Insecticides and Herbicides 3.0 (vi) Fisheries Inputs 6.0 (vii) Veterinary Supplies 4.0 (viii) Raw Materials for the Manufacture of Irrigation Pipes 2.0 Sub-total: 90.0 TOTAL: Procurement 154. Procurement of imports by the private sector, including both general imports and imports for the agricultural sector, would be made following regular commercial practices, except when any one contract is US$5.0 million or more, in which case international competitive bidding (ICB) in accordance with World Bank guidelines would be used. Procurement of imports by the public sector, including both general imports and imports for the agricultural sector, would be done by ICB except in the case of contracts costing below US$2.0 million each, up to an aggregate of US$15.0 million, which would be awarded on the basis of comparison of written quotations solicited from a list of three suppliers eligible under Bank guidelines. Procurement of fertilizer raw materials and potassium fertilizer, tractors, animal feed, petroleum products, pumps and raw materials for the manufacture of irrigation pipes would be grouped whenever possible into packages suitable for ICB. Items which the Bank considers of a proprietary nature, expected to total no more than US$5 million, would be procured by negotiated contract, following procedures satisfactory to the Bank. Bidding documents, bid evaluation reports and proposed awards of contracts procured through ICB would be subject to the prior approval of the Bank. For the rest, the Borrower would furnish to the Bank, prior to the submission of the related withdrawal application, such documentation and information as the Bank may reasonably request to support the withdrawal of funds from the Loan account in respect of such contracts. In view of the Bank's policy on the procurement of hazardous materials, assurances were obtained at negotiations that the Government would prepare and start implementing a program of measures acceptable to the Bank designed to ensure safe handling and storage of potentially hazardous agricultural chemicals used for plant protection and weed control. - 54 - Disbursement 155. The Central Bank of Tunisia would have primary responsibility for administering the proposed loan. Disbursements from the Loan account for both general imports and agricultural inputs and raw materials would be made against 100l of the foreign cost of eligible imports. Disbursements for contracts procured through ICB would be made against fully documented withdrawal applications. Disbursements for other items would be made on the basis of statements of expenditures (SOE) from the Central Bank detailing individual transactions in a given period, together with a certification of payment of the amounts involved. and of their eligibility under the Loan. Supporting documentation for SOEs would be retained by the Bank of Tunisia and made available for review to Bank supervision missions. Applications for withdrawal would be consolidated and submitted in amounts not less than US$1.0 million. The allocations for spare parts, pumps and tractors would not be transferable and there would be a US$30.0 million maximum on financing of petroleum products. In order to accelerate disbursements, a revolving fund (special account) with an initial deposit of US$35.0 million (corresponding to four months' payments expected to be made through the revolving fund) would be established at the Central Bank. Replenishments would be made either once a month or when half of the revolving fund has been utilized. The Loan is expected to be fully disbursed within 18 months of effectiveness. The Closing Date would be June 30, 1988. In order to ensure a smooth flow of necessary imports, retroactive financing of up to US$15.0 million for eligible expenditures made after May 1, 1986 would be included. No disbursements would be made for potentially hazardous agricultural chemicals until the program of measures mentioned in paragraph 154 is put into effect. Accounts and Audits 156. The Central Bank would maintain records of all transactions under the Loan in accordance with sound accounting practices. Not later than six months after the end of each fiscal year of the Borrower, all accounts, including the special account (revolving fund), would be audited by independent auditors acceptable to the Bank. Audit reports would include a separate opinion with regard to the claims submitted to the Bank on the basis of SOE and state whether such claims have been effected in accordance with the Loan Agreement. Release of Funds and Tranching 157. The proceeds of the Loan would be made available for withdrawal in tvo tranches, the first of US$100.0 million upon Loan effectiveness, the second of US$50.0 million when the conditions for its release have been met. Disbursement would be made for either general or agricultural imports on a "first-come first-served" basis. The conditions for the release of each tranche would relate to the implementation of specific measures which are crucial to the execution of the overall macro-economic and sector adjustment programs. Besides these measures, the Government has already demonstrated its conuitment to the objectives of the macro-economic and sector programs by taking key actions in recent months, for example currency adjustment, announcement of a first round of import liberalization, budget cuts, agricultural producer price increases, reductions in input subsidies, full cost charging for Government mechanization services and liberalization of domestic fish marketing margins. - 55 - 158. The macro-economic reform actions which would be supported and monitored under the Loan are as follows: (a) prior to e'ffectiveness: confirmation that the Government has taken all necessary measures to remove restrictions on imports of spare parts for use in industry, agriculture, hotels, hospitals and other services, raw materials and semi-finished products for enterprises that export at least 25% of their output, and capital goods for investment projects approved by API, APIA and the Tourism Investment Board after October 1, 1986 [para. 36(a)]; and (b) prior to second tranche release: Bank confirmation of satisfactory progress in implementation of the overall program 'para. 37). 159. The sector specific actions expected to be supported and monitored under the Loan are: (a) Prior to effectiveness: establishment of the Coordinating Committee (para. 160). (b) Prior to the release of the second tranche: (i) revision of administered producer prices and of input prices to achieve the targeted adjustments and subsidy reductions for the 1987/1988 crop season (para. 136-138); (ii) confirmation that FOSDA loan allocations for the 1987 budget have not exceeded D 13 million, and that action satisfactory to the Bank has been taken to start implementing the Government's policy to establish by 1991 agricultural interest rates which cover the financial costs, operating costs at reasonable efficiency, and a reasonable share of the risks of agricultural lending (para. 140); (iii) updating of fertilizer retail margins for inflation, selling by the public sector of fertilizer at prices adequate to fully cover the costs of purchase and distribution, and announcement of fertilizer retail margin liberalization to take effect as of January 1, 19B8 (para. 142); (iv) designation of a lead extension agency for rainfed areas with appropriate responsibilities and personnel, to achieve gradual unification (para. 147); (v) authorization for the import of 51 of the annual needs of tractors in the range manufactured in Tunisia (para. 149); (vi) increase in the remuneration of agricultural researchers to an adequate level following guidelines acceptable to the Bank (para. 145); and (vii) Bank confirmation of satisfactory progress in implementation of the overall M!TASAP (para. 134). - 56 - D. Management, Coordination. Monitoring and Evaluation 160. Management and coordination of the adjustment program, including both its macro-economic and sectoral components, would be the responsibility of a Coordinating Committee composed of representatives of the key ministries involved in the execution of the overall adjustment program, including the Ministries of Planning and Finance, Agriculture, Industry and Commerce, and the Central Bank. Establishment of the Committee would be a condition oE effectiveness. Analytical and monitoring support for the committee work would be provided by the DPSAE in the Ministry of Agriculture. Assurances were obtained at negotiations that a semi-annual report on the implementation of the macro and sector adjustment programs would be provided to the Bank, and that there would be an exchange of views on the status between the Government and the Bank. The sector program would be monitored on the basis of the key policy performance indicators provided in Appendix III of the MTASAP. 161. Given the short disbursement period of the Loan, the precise impact of the adjustment program would be difficult to measure at the time of final disbursement. Evaluation efforts are thus expected to focus on: (a) ensuring the establishment of an adequate data base to assess the magnitude of the response over the medium term; and (b) undertaking special studies of the initial effect of key adjustment measures to ensure that any necessary corrections are made promptly. Special studies planned, the execution of wbich would be the responsibility of the DPSAE, would include: (a) monthly surveys of regional markets to determine the free market prices for cereals, milk and beef not sold to Government or parastatal marketing agencies, following implementation of the first stage of the Government's new output price policy; (b) analysis of the supply response to higher cereal, milk and meat prices; (c) demand for fertilizers, animal feed, seeds, and herbicides following the implementation of the first phase of the Government's import subsidy phase-out program; and (d) planned vs. actual expenditures by sub-sector using the new computerized expenditure monitoring system. These studies are described in the MTASAP and were discussed at negotiations. E. Justification and RUik 162. The package of macro-economic adjustment measures, which provides the overall economic environment for implementation of the MTASAP, is expected to have a favorable impact on economic growth in general, and on the allocation and use of economic resources, the balance of payments and the public finance situation in particular. It should result in higher exports of goods and services, higher private investments, higher employment creation, a decline in the ICOR, a gradual decline in the balance of payments current account deficit, and in the overall budget deficit. Any comprehensive adjustment program of this size and complexity necessarily entails some element of risk. The strict limits on domestic demand might not be maintainable due to social, political and economic pressures (too rapid increase in salaries, - 57 - too rapid growth in domestic credit and money circulation and less rapid than expected reduction in the budget deficit). The growth of non-oil/non-phosphate exports might be slower than expected for exogenous as well as indigenous reasons (worse than expected world market conditions, political troubles around the Mediterranean, insufficient export incentives, excessive domestic demand). Higher than expected domestic demand combined with lower exports would put heavy pressure on the balance of payments, jeopardizing the program of gradual liberalization, particularly of imports, which is a key element in the overall adjustment process. While these risks are real and unavoidable, they are limited by: (a) the Government's clear commitment to the adjustment program, as expressed in the basic policy documents underpinning preparation of the VIIth Plan and clearly presented to the recent congress of the ruling political party; and (b) the proposed gradual approach to change, which permits the economy to adapt to the new policies steadily, but progressively within a realistic time period. 163. The sector adjustment measures included in the MTASAP are expected to have a favorable impact on sector productivity and on both the balance of payments and fiscal deficits. Some of the benefits will only be realized in the longer term. Although none of them lend themselves to detailed and accurate quantification at this time, all are vital to the process of adjustment and development. 164. The favorable balance of payments impact would stem from increased profitability of efficient import substitution, notably of cereals, milk and meat, and improvement in export incentives and strategy. The availability of higher producer prices for cereals resulting from a better alignment of output prices with world market prices, and from price liberalization in other areas should induce a substantial production response resulting in foreign exchange savings, the magnitude of which will depend on weather conditions and timing of the implementation of the proposed reforms over the next few years. Although the gradual reduction of excessive protection of irrigated areas over 7-10 years would result in somewhat higher production costs for the producers of export crops, these should be fully offset by the impact of the more flexible exchange rate policy on producer prices and efficiency improvements expected in the production of these commodities. Increased efficiency in the processing of agricultural commodities, as a result of changes in price formation processes in agro-industry, would also offset the effects of increase in input prices. Although most of the benefits from actions in the forestry sector would only be felt in the longer term, these would make a small but positive contribution to reducing the sector trade deficit in the medium term too. They would also have a positive effect on the country's resource based on environment. 165. Greater efficiency in the use of budgetary resources as well as direct budgetary economies would be achieved through the adjustment program. A reorientation of public expenditures towards the new sub-sectoral strategies (focussing on lower cost, quicker maturing and less controlled development approaches), and the creation of an environment conducive to private investment, would ensure the maintenance of growth despite public expenditure constraints. Improvement in the low capacity utilization of past investments in irrigation, fisheries, farm mechanization and agro-processing would permit higher production responses with lower incremental investments. Direct budgetary savings would result from the phased reduction in input subsidies. The net fiscal effect of these reductions after allowing for higher producer - 58 - prices for certain commodities, would depend on the pace at which these increases are passed on to consumers. Without consumer price increases, the agricultural input and output price adjustments would be fiscally neutral. Other direct budgetary economies would be achieved through limitations on FOSDA, accompanied by improved loan recoveries. Full charging for farm mechanization and marketing services by parastatals should raise about D 1.5 million annually. Savings in the transfer of the responsibility for AI services to cooperatives would, however, be absorbed in the costs of an expansion of the cross-breeding program. 166. Benefits from the sharper focus of research expenditures on national priorities, from a well organized extension service, from improvement in management of input distribution, and from measures in land, forestry and fisheries, would be somewhat longer term in nature, but no less significant for technology improvement, which is crucial to Tunisia improving on the productivity of its agriculture. Overall, the adjustment program would ensure that Tunisian agriculture can at least sustain the 3-4Z p.a. growth in the years ahead, under the new economic conditions, and maximize its contribution to reducing the balance of payment and fiscal deficits and providing rural employment opportunities. 167. The risks facing the agricultural sector adjustment program relate to the length and difficulty of the process, unpredictable developments in the external environment and uncertainties in the response of the private sector to the program. While Tunisia's record in implementing reforms agreed with the Bank is satisfactory, the magnitude of the adjustments needed and inter- relationships between them create some risk about the pace of implementation and maintaining the integrity of the reform package. Actions on input subsidy reduction have to be coordinated with adjustment, not only on producer prices, but also with the overall reduction in industrial tariffs to maintain sector incentives. In these circumstances, maintaining the fiscal objectives and ensuring reasonable food prices would pose a major challenge to those managing the adjustment program. Weather is another potentially important factor which might affect the pace of implementation of reductions in input subsidies. The response on the export front is contingent on actions by Tunisia's trading partners and competitors, and how the private sector would respond to the changing environment is difficult to predict with precision. 168. The design and management of the adjustment program has built in features to minimize these risks. First, essential linkages with macro- economic actions are an integral part of the design. Second, the specific actions are to be taken over a short 12-18 month period for which uncertainty is less. Third, the phased approach to implementing the MTASAP inherently permits flexibility and adjustments between phases, in light of sectoral and macro-economic developments for which the institutional capacity for policy analysis and monitoring is being strengthened. - 59 - PART VI - RECOMMENDATION 169. 'I am satisfied that the proposed Loan would comply with the Articles of Agreement of the Bank and I recomaend that the Executive Directors approve the proposed Loan. Barber Conable President Attachments September 3, 1986 Washington, D.C. ANNEX I Page 1 of 8 1986 SOCIAL INDICATOR DATA SHEET TUNISIA Reference Groups (MRE) Most Recent Mid-income Mid-income 1961 1973 Estimate NA & ME LAC AREA Total land area (thou eq km) 163.6 163.6 163.6 Agricultural (% of total) 42.1 44.4 47.1 GNP PER CAPITA (US) 1270.0 1136.1 1782.8 POPULATION AND VITAL STATISTICS Total population (thou) 4630.0 5412.0 6981.0 Urban pop. (% of total) 39.5 47.2 54.1 49.3 68.9 Population growth rate(%) Total 2.0 2.4 2.8 2.3 Urban 4.2 328 4.1 3.S Life expect. at birth (yrm) 50.8 55.5 62.2 59.9 65.6 Population projectIons: Pop. in 2000 (mill) 9.9 Stationary pop. (mill) 18.1 Population density per sq km of agricultural land 67.3 74.5 90.7 105.2 53.5 Pop. age structure (%): 0-14 yrs 46.6 45.2 40.5 43.9 38.7 15-64 yra 49.8 51.1 55.6 52.7 57.1 65 and above 3.6 3.6 3.9 3.4 4.3 Crude birth rate (per thou) 44.2 37.0 32.2 39.5 30.1 Crude death rate (per thou) 16.7 12.6 9.1 10.4 7.7 Total fertility rate 7.0 6.1 4.6 5.6 3.9 Infant mort. rate (per thou) 146.5 118.2 79.4 94.0 56.1 Child death rate (per thou) 30.0 23.9 7.6 12.1 4.3 Famfly planning: Acceptors, annual (thou) 15.0 43.8 Users (X of married women) 6.4 41.0 27.2 46.2 FOOD. HEALTH AND NUTRITION Index of food production per capita (1974-76 * 100) 88.8 94.7 82.5 89.1 105.2 Per capita supply of: Calories (% of requirmnts) 96.5 107.7 120.9 117.5 109.3 Proteins (grams per day) 59.2 67.9 74.7 76.2 65.0 Pop. per physician (thou) 8.0 6.4 3.9 4.6 1.3 Pop. per nurse (thou) 1.1 1.0 1.0 1.3 1.2 Pop. per hospital bed (thou) 0.4 0.4 0.5 a 0.7 0-4 Access to safe water (% of population): Total 49.0 63.0 71.3 66.3 Urban 92.0 97.0 94.9 77.0 Rural 17.0 25.0 53.6 44.8 ANNEX I Page 2 of 8 1986 SOCIAL INDICATOR DATA SHEET TUNISIA Reference Groups (MRE) Most Recent Mid-income Mid-income 1965 1973 Estimate NA & ME LAC LABOR FORCE Total Labor Force (thou) 1167.9 1305.6 1781.2 Female (%) 6.5 7.9 8.9 11.4 22.3 Agriculture (%) 49.1 40.1 35.0 a 39.2 31.8 Industry (X) 21.4 28.4 36.4 a 25.7 26.0 Participation rate (7: Total 25.2 24.1 25.5 25.8 32.3 Male 46.2 44.2 45.9 45.3 49.2 Female 3.3 3.8 4.6 5.9 15.4 Age dependency ratio 1.0 1.0 0.8 0.9 0.9 HOUSING Average s1ze of household: Total 5.1 5.5 Urban 5.1 5.5 Rural 5.1 5.6 Percentage of dwellings with electricity: Total 24.0 34.2 Urban 6B.2 Rural 6.0 EDUCATION Enrollment rates: Primary: Total 91.0 100.0 113.0 93.5 107.3 Male 116.0 121.0 125.0 107.1 109.7 Female 65.0 79.0 102.0 79.7 105.8 Secondary: Total 16.0 23.0 33.0 44.7 49.1 Male 23.0 33.0 40.0 52.9 44.5 Female 9.0 13.0 26.0 35.5 46.7 Pupil-Teacher ratio: Primary 55.6 4t.0 36.1 29.4 29.8 Secondary 26.9 24.6 20.3 19.5 16.3 Pupils reaching grade 6 (%) 67.4 96.7 75.9 55.2 INCOME. CONSUMPTION. ANO POVERTY Energy consumption per cap. (kg of oil equivalent) 170.2 295.0 494.6 719.9 999.0 Percentage of private Income received by: Highest 10% of households Highest 207 42.0 Lowest 20% 6 .0 Lowest 40% 15 0 Est. absolute poverty income level (USS per capita): Urban 204D0b Rural 97.0 b Est. pop. below-absolute poverty Income level (%) Urban 20.0 b Rural 15.0 b Passenger cars/thou pop. 11.1 16.7 10.2 45.8 Newspaper circulation (per thousand population) 17.5 22.2 39.0 35.3 94.9 EPO dUly 1986 Not avalloble Not. Group erages are Populatlon wolght.d. Country coverage depends on data avellabillit and la nai unIfrrn. Unless otheawlse noted. 19M rtes to any yar beteen 1062 and 19l6 1073 baeon 1970 and 1976; and moart ment ntimtne between 19t2 and 1955. a 1960. b. 1971. ANNEX I Page 3 of 8 3 Definitions of Social Indicators The definition of a particular social indicator may Turalfrrilitt rate - The average number of children vary among countries or wiLhin one country over thut would be born alivc to a woman during her time. For instance, different countries define "urban lifelime if during her childbearing years she were to area" or "sore water" in different ways. bear childrcn ul euch age in accordance with prcvail- ing uge-specific fertility roles. AREA (thousand square kilometers) lntanr (age 0--1) mortalityv rare * Number ol' infants Totil- Total surface area comprising lund area and per thousand live births who die before reaching one inland waters. year of age. in a given year. Agricultural (percentage of total) - Estimate of agri- C/i/d (age 1-4J morrality rate - Number of deaths cultural area used for crops, pastures. market and of children, age 1-4. per thousand children in the kitchen gardens or to lie fallow. as percentage of same age group in a given year. For most developing total. countries thesc data are derived from models using information on infant mortality rates. GNP PER CAPITA (USS) - GNP per capita esti- Family planning - acceptors. (thousands) - Annual mates at current market prices, calculated by the number of acceptors of' birth-control measures re- conversion method used for the World Bank Atlas, ceived under the auspices of a national family plan- 1986. ning program. Family planning - users (percentage of married worn- POPULATION AND VITAL STATISTICS en) - Percentage of married women or child-bearing Total population - mid-Year (millions) age who are practising. or whose husbands are Urban population (percentage of total) - Different practising, any form of contraception. Women of countries follow different definitions of urban popu- child-bearing age are generally women aged 15-49. lation. Such differences may affect comparability of although for some countries contraceptive usage is data among countries. measured for another age group. Population growth rate (percent) - total and urban - Annual growth rates of total and of urban popula- FOOD, HEALTH AND NUTRITION tions. Index offoodproduction per capita (1974 - 76 = 100) Life expecrancY at birth (years) - Number of years a - Index of per capita annual production of all food newborn infant would live if prevailing patterns of commodities. Production excludes animal feed and mortality for all people at the time of its birth were seed for agriculture. Food commodities include pri- to stay the same throughout its life. mary commodities (for example, sugarcane instead Population projections of sugar) which are edible and which contain nu- Populotion in 2000 - The projection of population trients (for example, tea and coffee are excluded). given total populaLion by age and sex, fertility and Commodities include nuts. fruits. pulses. cercals. the demographic parameters of mortality rates, and vegetables, oil seeds. sugarcane and sugar beets. migration in the base year 1980. until the population livestock, and livestock products. Aggregate produc- reaches a stationary state. tion of each country is based on national average Stationary population - The projected population producer price weights. lcvel when zero population growth is achieved: i.e., Per capita supply of calories (percentage oJ require- the birth rate is constant and equal to the death rate. ments) - Computed from energy equivalent of net the age structure is stable, and the growth rate is food supplies available in country per capita per day. zero_ Available supplies comprisc domestic production, Population density, agricultural land - Population per imports less exports. and changes in stock. Net square kilometer (100 hectares) of agricultural area. supplies exclude animal feed, seeds for use in agri- Population age structure (percent) - Children 0-14 culture. quantities used in food processing. and loss- years. working age 15-64 years, and people of 65 es in distribution. Requirements were estimated for years and over as percentages of population. 1977 by the Food and Agriculture Organization Crude birth rate - Annual livc births per thousand (FAO) based on physiological needs for normal population. activity and health considering body weights. envi- Crude death rate - Annual dcaths per thousand ronmental temperature, age and sex distribution of population. population. ANNEX I Page o4of S Per capira supply aJ /prtilein (gramzs per duy,) - Protein Industry (pereen:i - Labor force in mining. consiruc- contelt of per capita net supply of rood per day. Ner. tion, manuracturing and electricity. walcr and gas as si ipply Lf food is dcfined as above. RcuWrcmenis for a percentage of total labor rorce. ill counlrics established by United States Depart- Particpation rate (percent) - total, male, andJ fruak mcnt of' Agriculture provide for minimum allow- - Participation roles are computed as the percentage ;ances of 601 grams of' total protein per day and 20 of population of all ages in the liabor force. These arc grams ol animail and pulse protein. Thes standards based on International Labour Office (ILO) daia on are lower than those or 75 grams of total protein and the age-sex structure of the population. 23 grams of animal protein as an average for Lhe Age dependency ratio- Ratio of population under IS. world. as proposed by FAO. and 65 and over, to the working uge population (age Population petr physician - Population divided by 154@). number of pract:sing physicians qualified rrom a mcdical school at university level. HOUSING Population per nursing person - PopulaLion divided Average si:e of household (persons per household) - by number of practising graduate nurses. assistant total, urban, and rural - A household consists oF a nurses. practical nurses and nursing auxiliaries. group of individuals who share living quarters and Population per hospital bed - Population divided by nain meals. A boarder or lodger may or may not be number of hospital beds available in public and pri- included in the household for statistical purposes. vale, general and specialized hospitals, and reha- Percernage of dwellings with electricitv - ru/al. urban, bilitation centers. Hospitals are establishments and rural- Conventional dwellings with electricity in pcrnanently staffcd by at least one physician. Es- living quarters as percentage of all dwellings. tablishments principally providing custodial care are not included. EDUCATION Access to safe sater (percentage ofpopulation) - total, Enrollment Rates urban, and rural - People (total, urban, and ural) with Primary School Enrollment - towal, male andJemale reasonable access to safe water supply (includes treat- - Gross cnrollment of all ages at primary level as a ed surface waters or untreated but uncontaminated percentage of primary school-age children. While water such as that from springs, sanitary wells, and many countries consider primary school agc to be protccted boreholes). In an urban area a public foun- 6-l1 years, others have wider age groups. Differ- lain or standpost located not more than 200 meters ences in country practices in the ages and duration from a house may be considered within reasonable or school are reflected in the ratios given. For some access of that house. In rural areas reonable acce countries with universal education, gross enrollment would imply that members of the household do not may exceed 100 percent since some pupils are youn- have to spend a disproportionate part of the day ger or older than the country's standard primary- fetching water. Absent and incomplete responses, and school age. large varialions between countries, may affect the Secondary School Enrollment - roral, male and %alidity of the overall results or the country and female - Computed in a similar manner. but includes regional comparisons. In addition. certain definitions pupils enrolled in vocational. or teacher training and classifications such as urban and rural, reason- secondary schools. for pupils usually of 12 to 17 able access to safe water in rural arcas, safe water years of age. sources (when they are not subject to laboratory Pupil-reacher ratio - primarr. and secondary - Total control) vary considerably from county to country students enrolled in school divided by the total and thus affect comparability of the data. number of teachs. Percenage pupils reaching grade six - The percen- LABOR FORCE tage of a cohort of 1,000 pupils starting primary Total labor force (millions) - Economically active school that persist into grade s.x. persons. including armed forces and uncmployed but excluding housewives and students. Definitions in INCOME, CONSUMPTION, AND POVERTY various countries are not comparable. Energy consumption per capita (kilograms of oil equi- Female (percent) - Female labor force as a percn- alent) - Annual consumption of commercial pri- tage of total labor force. mary energy (coal and lignite. petroleum, natural Agriculture (percent) - Labor force in farming, gas, and hydro, nuclear and geothermal electricity). forestry. hunting and fishing as a percentage of total Private incomw distribution - Income (both in cash labor force. and kind) accruing to percentile groups of housc- ANNEX I holds ranked by total household income. Estimated absolute poverty Income level fUSS per aierof 8 Passenger cars rper thousand pcpulationa Includes capita) - urban and rural - Absolute poverty income molor cars seating rewer than eight perons: ex- level is that below which a minimal nutritionally cludes ambulances, heares and military vehicles. adequate diet plus essential nonfood requirements Newspaper circuaflion (per thousand populaton) - are not lffordable. These estimates are very approx- Average circulation or "daily general intrest news- imate measures or poverty levels. and should be paper." defined ab a periodical publication devoted interpreted with considerable caution. primarily to recording general news. It is considered Estimnated pOpUlaIIon be/oIt abso/ute poverr; ineome to be "daily" if it appears at least four times a week. level (percenf) - Percentages of urban and rural populations who live in 'absolute poverty." TUNISIA - COMI1C IHDICATOlt ANE 61 a'sq. & o hAnuist Growth Rates Amount (at 1930 prices) (million U0 Actual Pp .. Pr@ mted liuJicatur at current prices) _ 19J4. 1979 1960 198a 1962 1953 1-894 1963 19lt 1991 NAI OWAI ACCWUNTS- Croam domestic product 1/ 7,951.1 6.b 7.4 ' 5.3 -0.1 4.9 S.5 4.5 0.3 3.1 AKriculture 1059.2 4.B 9.9 6.5 -10.3 2.5 13.3 1.0 -9.9 3.5 Indust ry 2.411.8 10.8 9.0 6.. 0.5 1.3 3.2 1.1 I.E. 3.8 Sorvires 3.414.4 8.4 7.7 6.6 2.4 3.9 5.0 4.3 3.0 3.4 UonsuugiLlon b.387.4 4.0 12.7 1.4 3.2 1.3 4.4 3.8 3.7 3.1 lross inveetnmet 2,501.4 6.3 0.9 15.1 1.5 -4.3 12.0 -16.2 -13.8 3.2 KaportL of goods4 end IWS 2,720.1 21.5 0.0 3J5 -6.9 1.4 2.4 l.b 5.8 5.0 LuportL of goods and WGS 3.1b58.4 15.1 4.5 13.0 0.9 -I.e 5.2 -14.2 4.5 3.4 (rons natioNal produCt 8,013.9 6.9 7.9 S.7 0.3 5.0 5.1 3.4 0.1 3.7 Grose national savings 1,626.5 15.2 .4.7 0.3 -9.4 0.0 a.2 1.7 -14.3 6.0 PRICES COP deflator (1130 * 100) 18.6 100.0 111.4 128.1 140.0 149.5 336.9 Etchsnge rate 2.4b0 2.4b9 2.O02 1.693 1.4i3 1.287 1.198 Shars of CDP at mrket prices (2) Least Square Srovth rate(Z) (at current Prces) 2a (at constant prices) 3971 197b 1981 1963 1966 1991 1971-76 1976-_1 1963-611 1986-91 Gross domestic llroduct /I IW.0 10 100.0 100.0 100.0 100.0 7.1 6.1 3.6 3.4 Agriculture 19.4 178 13.17 12.3 13.3 13.4 6.3 1.0 4.0 3.6 Industry 20.5 25.2 32.0 30.2 31.0 33.Z 8b 6.9 3.0 3.b Servicer 47.1 44.U 41.6 44.0 43.2 42.9 7.1 1.5 3.9 3.3 Conuymption 80.5 77.3 76.2 80.2 83.7 78.9 B.9 7.4 4.4 2.5 Grose inv-stsunt 21.5 }0.7 32.3 28.1 24.5 22.0 3.9 6.6 -4.2 3.5 Experts of loods and IFS 24.1 29.1 41.4 35.4 27.5 33.7 7.1 5.5 1.1 1.9 Imports of goods and IFS 20.1 37.0 49.j 44.3 35.8 34.5 11.6 10.68 -1.6 0.2 Cross national product 99.0 90.7 100.8 101.2 99.5 99.6 7.0 b l. 3.3 3.4 Net factor incom -0.4 -1.3 0.8 1.2 -0.3 S 0.4 1.5 -1.5 -18.6 2.0 Crose ntional aevings 19.1 21.4 24.6 21.0 15.S 20.6 -2.3 4.2 1.2 7.4 As I of GOP (at current prices) 197b 1931 1963 1964 195 PUBLIC FINANCE = Current revenue 26.1 29.3 31.3 32.6 31.4 Current expenditure 19.9 21.5 23.1 24.7 25.2 Surplus (*3 or deficit (-3 6.9 7.8 8.1 7.9 6.2 C&pitml expenditure 3/ 11.8 15.3 15.2 16.5 15.6 Foreign financing 1.0 1.0 1.7 2.3 3.2 1971-76 1976-81 1981-16 199e-91 LJFILKr INUll AtJRS GNP per capita growth rat. (2) 5.0 3.6 0.4 1.4 1 £1lt 2.7 5.2 10.0 1.4 Marginal savings rate -0.0 0.1 -0.2 0.4 Import elasticity 1.6 1.8 D0.5 0.0 I I \orld lank Atlas Methodology. Ii COP at market price% and components at factor cost. EUa CPQII-C di Projecced years in constant prices. July 1986 1/ Includinu thr debt morttzstion. TVblISlb 1L13IA - EXTERNAL lEADS A3Ul 1 1Pm1. f of 8 4n3110. growth Kate. Amouni (at 1980 rricea (milie.I 1s11U Actual Prel. ProjetLd at r4rrwet prices. Indicator 1914 1979 19H0 1961 It82 Its] 1914 1915 10 11 tXTINFtAL T 9 23 hlports ol goods 1.l60I. 18.0 -0.4 4.3 -a.9 3.9 0.' -2.1 7.3 5.1 Petrolmm 79".9 22.9 2.2 -2.) -20.9 0.e -1.7 -2.3 0.0 -9.4 Agricullure 92.7 11.4 -21.1 13.3 -33.3 -13.4 39.5 -14.1 5.0 4.0 Uther prkmaries 102.7 e.I -18.2 121. -13.6 21.8 -1.6 -1.2 14.7 14.2 Hanulecturiniti 34e9.7 13.l 2.5 1313 11.3 .a -1.4 0.5 12.9 h.l Imports of giods 3.232.5 15.9 4.3 11.7 -0.9 -2.9 *.4 -17.4 *.7 3.4 food 4b7.3 17.4 -7.0 2W.1 -1.1 20.7 2.b -24.J 15.9 1.1 Putrul.u- 372.0 12.1 7.9 -1.7 4..9 3.0 7.3 0.9 2.9 14.3 Iniemedist. gueds 990.YO 20.2 11.0 3.6 12.4 -4.b 7.9 -13.3 12.3 3.4 Capital 8oals 539.3 S9.9 -2.2 40.9 1I.6 -19.5 1.6 -32.5 0.9 2.14 Qlutirn 563.9 8.4 9.3 6.e b .1 10.B -3.9 -7.1 -0.1 2.3 Price Index PRICZIS ExparL price ind.. 74.) 100.0 9s.3 61.0 7J.7 7S.7 73.3 J0.3 99.3 ILpaut pricr ind.. 62.1 100.0 93.4 64.5 ) 0.0 73.7 78.7 78.9 111.6 Term. of trade ,ndem 90.9 100.0 105.2 103.0 93.4 9b.1 93.7 77.1 U.6 Ceo it ion of hwrcbfthdnde Trlid (2) Isut Iuare Crewth late (Z) (ant rice) (at cohtaut e i ) 1971 1976 .! J9J1 196 Itt1 I971-7b 1979-31 1 -61-b 2966-91 lepartm of gooad 100.0 100.0 100.0 100.0 100.0 100.0 S.0 .1 O .2 0.2 Petruleum 27.9 42.3 53.3 44.7 23.1 3.9 3.4 7.4 -4.2 -19.8 Agricalturv 12.b 4.5 3.1 4.4 6.0 b.2 4-4 2.4 -1.1 4.7 Other prierle. 21.3 11.1 4.4 4.8 9.3 10.0 2.9 0.5 1.3 15.4 ranulseturiog L 39.2 42.1 39.2 49.1 b4.b 74.9 P.2 11.1 4.6 7.1 Impurts of goads 100.0 10.0 100.0 100.0 100.0 100.0 14.2 10.4 -2.9 -0.3 Food 19.b 12.3 11.4 13.9 14.9 14.9 -1.9 11.9 -0.9 1.7 Petraleum 3.b 11.1 19.3 11.1 e.3 4,1 30.3 17.6 -5.8 -17.4 Inte.ediatm goods 30.1 23.9 2e.1 29.9 37.9 40.7 12.1 10.2 1.9 2.9 Capital oads 27.7 31.9 25.4 23.5 21.6 20.0 19.0 4.9 -3.9 <. 5 otherv 19.0 15.8 15.4 19.5 19.6 20.b 1.1 11.4 0.6 1.2 Share of Trade with Share of Trade witb Share of Trade witb there of Trade witb iFdustr;-l CoJuntriestn De IODjineCaurtrie 1Z) Oi'l j rtersj Cntrally P1-r.d Cmueuries (2) 1r70 IITjIS7 W 91 I170 T975 IIee- 11 Ii in7s19WD i9 1970 1S75 193 1964 N' CI hill OF' IEADE l..p4irts 70.3 60.1 93.7 7b.9 4.9 21.7 25.4 14.5 13.9 11.1 4.6 7.7 9.4 *.1 0.4 0.9 h, ,,t S 15.9 79.5 91.8 90.7 7.1 10.9 7.7 11 . 0.7 9.3 7.5 3.9 6.3 3.1 3.0 1.9 1.. 1-1 r o..d prcessaing, phbephates derivativs, chemical, textile, mechanical and electrical industries. 136r* CPU-C July 1936 T UNItI A - ALANCE OF FAIT3 EmNAL CAPIAAL A8 DTll X T (millia. uub at currant pries) Paet il *t1i 1976 --t9-197i0 W9 191 1982 1983 19£ 3 l IIALAI11 OF PAIEiNTS Net balance ofgoods 4 morite -41b.7 -356.0 -472.6 -bb5.3 -790.8 -637.2 -880.l -549.5 -531.4 -552.2 Exports of gooda & gervice 1,479.5 3137.5 3.912.3 3,946.5 3,477.9 3.309.5 5,136.7 3,004.2 2919.6 4678.2 Ieports of g.ods & marvice. 1,896.2 3,493.5 4 ,34.9 4,61.8 4,268.7 3,946.7 6,022.8 3,553.7 3751.0 5630.3 Nat tranaters -0.1 10.3 58.5 18.2 23.4 11.9 10.9 10.7 12.1 16.4 Current account balance '417.2 -345.6 -414.1 -b5U.0 767.4 -625.2 -875.1 -538.8 4139.3 -335.8 biraet private inventmant 102.6 50.9 236.0 317.2 402.2 223.8 206.0 130.6 175.7 230.7 (rint. 53.2 50.7 41.5 20.3 19.0 25.3 23.6 24.0 25.1 11.4 HLT loan. (nat) 25t.6 373.7 215.1 275.8 315.0 345.5 323.1 251.6 620.0 332.0 Official 127.4 3B3.4 12b.5 207.4 258.2 152.3 106.8 149.8 486.1 419.7 Private 131.Z 135.3 83.1 b8.4 56.9 193.1 221.3 101.9 133.8 -87.6 Utter capital 3l.9 5.7 13.b -78.6 -53.2 -15.9 -163.0 0.0 0.0 0.0 Changs in ramerves C- iapiibe increase) 33.7 -124.0 -4.9 -91.7 -27.1 14.7 149.5 132.6 0.0 .34.3 Intern.tional r ervam 273.0 357.9 422.9 514.6 541.7 527.0 377.5 244.9 244.9 412.3 Reservem/laperta 1.8 1.2 1.2 1.3 1.5 1.6 1.1 0.8 0.0 0.9 Actual p_el. 1976 1979 1980 1931 1932 1983 1934 1935 URUSS ulS8tlcszRSDEl Otlicirl grants 33.2 10.7 41.5 20.3 19.0 25.3 28.6 21.0 Gross disburecrpnta .,f MLT Inans 243.0 639.3 562.2 647.2 b69.7 875.1 747.0 766.6 CUnc.esionel 101.5 142.4 207.7 240.5 267.2 169.1 159.1 309.5 Biluteral 92.6 141.5 199.8 233.4 250.0 146.1 145.7 254.1 IDA 8.9 0.2 1.0 1.1 1.0 - - - Othrr mullilateral 0.0 0.7 7.9 6.D 16.2 23.0 13.4 55.4 Nnii-c,neesei.mal 141.5 496.9 33.5 40b.7 402.5 706.0 587.9 457.1 Private 71.6 378.3 Z25.3 238.9 Z73.3 436.8 279.2 178.7 official export credits 9.9 49.b 53.5 65.9 25.2 93.4 208.7 141.1 3i8R 25.3 55.4 51.1 69.4 31.8 89.6 83.0 118.0 Ucler ultilar-ral 30.2 13.7 22.6 32.5 21.7 36.2 12.D 19.3 EIIENAL DEBT Debt Dutatanding and Diabureed 1.182.4 3,021.0 3,229.6 3,321.3 3,555.9 3,353.4 3,774.b 4,3157.2 Official 976.2 1,854.7 2,033.6 2,175.3 2,395.3 2,537.2 2.6W.Y 3,246.0 IIIRD 127.3 232.0 269.0 319.6 375.6 434.2 480.9 53P.2 IIU 64.1 67.3 67.9 67.5 67.0 67.3 6e.2 65.4 Other 784.3 1,554.7 1,701.7 1,73.12 1,952.4 2.036.0 2,133.6 2,642.4 Private 206.4 1,166.8 1,191.0 1,146.5 1.163.1 1.321.0 1.093.9 1,111.2 lli'li.bursrd debt 1.133.0 1,369.6 2,010.4 2.14B.4 2.112.5 2,303.3 2,41233 2,012.8 DEBT SERVICE Total debt service parmnts 98.9 316.3 431.4 518.2 488.8 568.8 656.6 652.5 Interest 37.0 162.8 216.1 204.9 199.7 196.5 243.1 Z45.1 Payenta as 7 exports 6.7 10.1 11.0 13.1 14.1 17.2 20.9 21.7 Payments as 2 GNP 2.2 4.4 4.9 6.1 6.0 6.9 8.2 7.9 World Dank bhar. of: Debt outatandint 10.5 7.7 8.3 9.6 11.3 11.2 12.7 12.4 Disbursemaents 10.4 3.7 9.1 10.7 12.2 10.2 13.3 15.4 Debt Service 16.6 10.1 8.5 8.2 10.7 II.Z 11.9 14.1 Awrage interest rate of new Loans iS) S.5 7.2 6.7 8.0 7.6 8.2 3.9 7.9 Official 4.3 5.b 5.9 6.9 7.1 - - - Private 7.9 9.8 10.5 12.7 9.4 - - - Average aturity of new Loans (yesre) 16.3 15.8 17.3 15.4 16.6 13.7 13.4 17.1 Official 20.4 19.4 19.4 1.2 20.2 - - - Private 3.6 9.2 9.2 5.8 10.2 - An 2 of Debt Outteanding at lld of Host Recent Year (1934) 1EBT STRUClUIN Ntturity atructure of debt outatandin,g () Amortization due within 5 years 43.3 ,jortization due within 10 years 77.6 ,IrrLret etructure of debt outstanding (2) Interest duI within first year 4.0 I' Numbers ay not add up due to rounding. tENEM CPII-C '".I S/8l August 1936 AH 11 PEp =of 2 fl blUM W1 mm Iw WINM IN ISIA A. AaM.a'r uS sa UwIS A iA 05511S OA of IMfl 3. 1198b) /t U6$S Million Loan or n (leas Credit Cancellatioi) isider Y'ii lbrra Fl* LM LkIdisburlwd 1nL-lRuur lAxans anid rditi FULly DiUbariu 4bd.94 75.15 II-All 198 epublic OL DMILi;L tAurjal Mords (Chird Iliglasa) J2.U i.d7 Ls75 1979 Republic ot [imiiia &'corul Urban Swurlage Zb.5U 1.U9 11t 1979 Republic ot Daniei Secund Urban IheaMLopMnE I.0L) Z.17 1746 1979 Republic of Danilia Suea FiLusrids 28.5U 12.95 tho 195) RepubLic At Damisli Suthern Irrigation 25.O0 II.UI 1797 198 Uffice des t[rts Nacuaiax Gat rt 42.5U 9.98 1841 1980 epublic of DTnisia Fourth HiiAts 30.50 ib.43 1mt. 195U 9sc Liedt Rluiiemie de 1'ilWctricitt et du Gtz Secanl NaturaL asa Pipelin 37.0 14.21 MOIS 190U due Nstionale de TuiiLe 'h1ird Agricultural Credit JU.WJ 5.90 1901 91 Republic of runisia rourat Education 26.00 21.ttl l9 d191 Rqpublic of 'l1nisia Smull-scale Indusry ievelopmext 3U.W0 16.9Y 1997 1981 Hepublic of LUnwia Northwest AuraL Oeveloprst 24.0U 14.d1 2003 1981 Sacidt miusinne tde l'ElectricitA et duC Gaz Third Power 37.5U 4.70 05 1981 lepublic oz Tunisia HImlth and ftpulatLin 12,50 9.82 2U52 1'm1 lepublic of runi"s Qrain Diatributi.o at Storage 3d.W 21.71 2108 1982 Republic ot Danisia Fifth Hijmay (0il Moads) 35.50 23.b3 2113 1982 Hof? 8lectrical ad Mieclsuical Industries 30.50 13.11 2134 1962 SIIEE Sixth Witer Supply 30.50 5.72 Jl7 1982 Republic of binisia Irrigtisn lelquinit 22.U0 17.35 2197 1982 RepubLic of Tunisia Tedchical Aistance 4.50 2.99 2223 1983 Republic of runuia Urbra Deelopia 111 25.WU 21.98 2230 1983 Republic of Tbnisia &rcaian V 27.00 25.48 2234 L983 Republic of aunis Central bnia Irrigatian 16.50 11.2H 2255 1983 RepubLic of Tuniia Urban Secrage 111 34.au 32.16 228 1983 Republic of unisiua Sfa Flood PRotection 25.0U 22.32 2301 1983 SILUBA Tndu try (IV) Foandry 16.MM 12.07 2346 1984 Republic of tUnisia Minin Tedcnicl Ass iarna 13.40 11.45 2308 1984 RepubLic of Tunisi Seventh Water Supply 50.00 47.61 24M9 1984 Republic of lDnisis Second Urban Tra;port 3J.U0 32.92 2455 1984 Soc idcd Dnisine de lELectricith et du Gar Fourth bwer 38.70 38b.) 2502 1985 Republic or Tuniuia North West Agricultural Production l.0 15.UU 2512 1985 Republic of Tunisia Export Idastries 5U.U0 5U.O0 2554 1985 RepubLiLc ot Dnisia Second Electrical and Mechnical 54.U0 54.0W mikstries 2573 1985 Republic of Tunisia Irrigation Hangamt lqnrvurt 22.00 22.00 2hO5 1985 Repblic of Raisin Ubes IrigatioL 27.70 27.70 UDAL 1,481.04 75.15 h63.20 Of iuich hba bor rpaid 260.31 9.84 Total now outatig t,220.73 b5.31 Aunt Sold 23.38 of nich hba been repaid 14.33 Total -w held by Bank and WA b/ 16197.35 65.31 Total Undibusred 663.2b al tkms not jIrcluItdergye Conervation Osiamtration Project (LAMt No. 21359ltJN of July 18, 198b for $4.0 million) and the Fourth Urbon LXvelo.mnc Project (LOan No. 2736-US of July La, 1986 for $30.2 million). bl Prior to exdrrge rate adjusowut Septeber 2. 1986 lOols/I AIUELI rUge 2 of 2 STATERMNT OF IFC INVESTIENTS IN TUNISIA IAS OF MARCH 21 l.61 Yart Dhl atgr Tinp f uliness haunt of USS Million Loa Equit To 1963 NPK Engrais Fertilizers 2.2 1.5 3.S 1966 Socliti Nationale d'Investissement (now lOfT) Oev. F;nance Co. 0.6 0.6 1969 COFIT Tourism (now SNOT) Dev. Finance Co. a.o 2.2 10.2 1970 BDET 0ev. Finance Co. 0.6 0.6 1973 Socidtd Touristique et iotelibre RYH SA Tourism 1.6 0.3 1.9 1974 Industries Chimiques du Fluor Chemicals 0.6 0.6 1975 Soc iti d'Etudes at de OeveloppWemnt de Sousse-Nord Tourism 2.S 0.6 3.1 1978 ODET Dev. Finance Co. 1.2 1.2 198S Socliti Tunhsienne de Leasing Leasing Co. 0.5 0.5 19e5 Soc iti Minhire de Spar Fluor et de Sarytine (Fluobar) mining Co. 44 -0i Total Gross Commitnents 14.1 8.4 22.5 Less cancellations Terminot ions, Repayments and Sales fl.2 1.1 1. Total Commitments now held by UFC 0.9 6.6 7.5 Total Undisbursed oJ o1 to In FY56 investments in SoclitA Tunisienne de Leasina and SocidtA Industrimlle des TeXtiles (SITEXI were approved. In addition. an 1nvestnent in udtyiJS was approved but not yet signed. 10615/4 ANNEX III REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN Supplementary Projectt Data Sheet Section I: Timetable of Key Events (a) Time taken to prepare project: About 12 months (b) Project preparation responsibility: Government/Bank (c) Project first identified by Bank July 1985 (d) Bank appraisal mission April/May 1986 (e) Negotiations August 1986 (f) Board presentation September 1986 (g) Planned date of effectiveness: October 1986 Section 11: Special Bank Implementation Actions Working with a Government Inter-Ministerial Coordinating Committee to monitor adjustment measures. Section III: Special Conditions (a) Conditions of Effectiveness and Release of First Tranche (US$100.0 million) [See para. 158(a) and 159(a)] (b) Conditions of Release of Second Tranche (US$50.0 million) [See para. 158(b) and 159(b)] (c) Condition of Disbursement for Potentially Hazardous Chemicals: Design and start-up of a program of measures acceptable to the Bank designed to ensure safe handling and storage of these chemicals (para. 155). 255 7E/p65 ANNEX IV(a) Page 1 of 11 Republic of Tunisia Confidential The President September 1, 1986 World Bank Washington D.C. LETTER OF ECONOMIC DEVELOPMENT POLICY Dear Mr. President: Within the framework of preparation of the Agricultural Sector Adjustment Loan and the Industrial and Trade Policy Adjustment Loan, I have the honor to set forth below Tunisia's principal development policy goals for the period 1986-91. After 15 years of rapid economic development, during which much economic and social progress has been made, Tunisia is currently going through a period of adapLation to the post-hydrocarbon era, a transition that is particularly difficult because of recent events such as the sharp decline in oil prices, difficulties in exporting phosphates and phosphate derivates, the rise in the price of sulfur, and the decline in Tunisian workers' remittances. To cope with this situation, we have, as you know, adopted a strategy oriented toward the rapid growth of non-oillnon-phosphate exports, the recovery of agricultural production, and the containment of domestic demand. In this way we intend to ensure continued growth and the creation of new jobs while preserving a tolerable and sustainable external balance. To this end, a number of measures have been impltmented over the past few years, of which the following are the most significant: - wages were delinked from the cost-of-living index in 1983 and since then the minimum wage has been increased only once by about 10%; - the Government's investment budget was reduced by close to 11 in real terms in 1985 and by around 221 in 1986; - a flexible exchange rate system was adopted; together with the 101 change in the exchange rate of the Dinar, announced in mid-August 1986, this made it possible to absorb the rise in the value of the dinar in relation to the currencies of partner countries and to improve competitiveness on the export markets; ANNEX IV(a) Page 2 of 11 - deposit and lending interest rates were increased and have mostly become positive in real terms; - the prices of products subsidized by the Caisse Ginfrale de Compensation were adjusted, leading to a gradual decrease in compensation coats with a consequent reduction in budgetary subsidies; - producer prices of agricultural products were increased, in particular for cereals, livestock products and olive oil, to stimulate and promote production in this priority sector; - investment approval procedures on small and medium-scale industrial projects were simplified and decentralized; - an export credit insurance system was established to provide security for exporters and encourage them to explore new markets; - the export prefinancing mechanism was revised, raising the ceiling from 10 to 201 of the value of the export and extending the terms from 90 to 180 days; - lastly, export incentives were strengthened within the framework both of the law on export industries and of the law on encouragement of the manufacturing industries. Thanks to these policy changes, accompagnied by a reduction in imports, we have been able to bring about significant improvements in the 1985 financial situation. In particular, we have achieved: - an increase In non-oil/non-phosphate exports of 41 at constant prices, against an average of 1.51 over the period 1982-1984; - a marked reduction in the current balance of payments deficit, which fell from 10.91 of GDP in 1984 to less than 71 in 1985; - a reduction in inflation to 7.81 in 1985 against 8.61 in 1984 and 13.61 in 1982; - a limitation of the net consolidated State budget deficit to a level (St of GDP) virtually in line with the budget. Preliminary estimates for 1986 indicate a further slow-down in the rate of inflation to about 6.61, and a slight decline in the consolidated budget deficit to about 3.9% of GDP. However, as a result of the sharp decline in oil prices, depressed tourism demand because of political uncertainties around the Mediterranean. and the serious drought, the current balance of payments deficit is likely to worsen in 1986 to about 8.5-9% of GDP, requiring a higher than expected inflow of foreign resources. Over the coming years the stabilization effort will be consolidated and strengthened to enable us to deal successfully with the two major problems still facing Tunisia, namely that of balance of payments equilibrium, resulting principally from the foreseeable decline in foreign exchange earnings, and that of unemployment and underemployment resulting from rapid growth in the active population. We therefore intend to continue our efforts to curb the budget deficit and current balance of payments deficit so as to contain the external debt within limits compatible with our repayment capacity. At this level, and although the goals of the VIIth Plan have not yet been established, we intend to introduce a development plan for the next five ANNEX IV(a) Page 3 of 11 years based on an annual increase in non-oil and non-phosphate exports of 7 to 8%, at constant prices, and real GDP growth of 3.5 to 4%, resulting in a gradual decline of the net budgetary deficit and a marked decrease in the current balance of payments deficit (from 10.9% of CDP in 1984 to around 6% in 1988 and under 41 in 1991). To achieve those goals, we intend to vigorously pursue policies aimed at restricting domestic demand and promoting exports. More precisely, we intend to accelerate the policy of gradual liberalization of the economy, in particular as regards imports, prices and investment8, so that by 1991 we shall have abolished most of the administrative controls in those areas. We also intend to strengthen domestic competition by bringing down import duties and reducing disparities in the effective protection levels of the various branches of economic activity, and to ensure the competitiveness of export products by pursuing a prudent and moderate wage policy and maintaining a flexible exchange rate system. These various structural adjustment measures, which are listed in the attachment to this letter, together with an implementation schedule, should lead to a marked improvement in the general economic environment and an increase in the effectiveness of the sectoral reform measures being implemented in the agricultural, industrial and external trade sectors, or in the course of preparation in other key sectors such as public enterprises, energy, transportation, education, etc. It goes without saying that the policy, which we have designed for the purpose of adapting our economy to the post-hydrocarbon era, will be facilitated if the Bank will give favorable consideration to our request with respect to the Agricultural Sector Adjustment Loan and the Industrial and Trade Policy Adjustment Loan, and will support our medium-term adjustment efforts with other sector loans. We appreciate the discussions we have had with the Bank and hope to continue to exchange views in the future. Very truly yours 151 Ismail Khelil Minister of Planning and Finance ANNEX IV(a) Page 4 of 11 Attachment September 1, 1986 THE MACROECONOMIC ADJUSTMENT PROGRAM 1. The basic strategy underlying the Government's macroeconomic adjustment program reflects its objective of maintaining economic growth and speeding up employment creation by stimulating non-oil/non-phosphate exports, achieving a more efficient utilization of domestic resources and promoting savings through more rigorous demand management. 2. To achieve these objectives, the Government intends to pursue its course of macroeconomic policy adjustment in eight areas: wages and salaries, the exchange rate, the budget, interest rates, credit and monetary policies, and price, investrment and import liberalization. The action program in each of these areas is summarized below. 3. Wages and salaries. Given the decisive role cautious wage and salary policies play in any effort to control domestic demand, improve international competitiveness and ensure more rapid employment creation, the Government decided in 1983 to delink wages and salaries from the cost-of-living index; in consequence, the minimum wage has remained unchanged during 3 1/2 years from January 1983 through July 1986, and average salaries have declined by nearly 15% in real terms during the same period. The Government will pursue these wage policies, limiting wage increases to productivity growth and to the financial situation of each enterprise. In July 1986, Government raised the minimum wage by 10% but it has no intention to increase the minimum wage on average by more than the inflation rate during 1986-1987. During the remainder of the Vllth Plan period, it plans to follow a minimum wage policy which ensures that the growth of the total wage bill will not exceed the growth of GDP at current prices. 4. Government Budget. Recognizing the importance of reduced budget deficits in restoring internal and external financial stability, the Government introduced a program of reducing budget deficits in 1985 and 1986. It is determined to follow through on this effort so as to reduce the consolidated budget deficit, net of debt repayment 1/, from 51 of GDP in 19P.5 to 1.51 in 1988 and practically to zero in 1991. In spite of declining oil revenues, the Government is determined to maintain the budgetary savings rate at around 6% of GDP, while reducing the share of public investments in GDP, particularly by cutting the Government's contributions towards public enterprise investments. The detailed measures envisaged to achieve these targets are mentioned in Annex I to this atcachment. 1/ Including Chapters I and II of the Government's Budget, the Special Funds, the Treasury operations, and the non-budgeted operations financing direct investments by the Government. ANNEX IV(a 1 Page 5 of 11 5. Interest rate policy. Thanks to the interest rate increases in 1985 and 1986 and the drop in inflation, the Gr'-'ern.ent has ensured that most interest rates are now positive in real te..as. During the period of the VIIth Plan, the Government will maintain flexible interest rate policies deslgned to ensure positive rates on most deposit and lending operations. The exceptions will be limited to certain credits for low-income groups, such as parts of the loans granted by FOSDA, FOPROLOS, FONAPAN, FOPRODI and FODERI, and certain forms of high-priority lending such as seasonal credits, export prefinancing and the financing of renewable energy resources. Furthermore, to improve the efficiency and viability of financial institutions, the Government intends to pursue its simplification of the interest rate structure and relaxation of existing regulations. To this avail a detailed program of action will be prepared and discussed with the Bank within the framework of preparation of the VIIth Plan, expected by April 30, 1987. 6. Monetary and credit policy. The Government is firmly committed to a monetary and credit policy that is consistent with declining budget deficits and investment rationalization; this implies that during 1986-91 the growth of the money supply will be kept within a range whose upper limit will not exceed the growth of GDP in nominal terms. r. Exchange rate policy. The Tunisian Government is aware of the importance of this instrument in regulating external trade. Accordingly, it introduced in 1985 a flexible exchange rate system, which made it possible at first, to absorb the rise in the value of the dinar in relation to competitor-country currencies. The situation improved further in mid-August, 1986 when the exchange rate was depreciated by 10S via-i-vis a basket of foreign currencies. This improved the competitive position of Tunisian products by about 28Z compared to the situation prevailing at the end of June 1985. The Govenment will continue this flexible policy so as to maintain an appropriate level of competitiveness for Tunisian products. It also agrees that any exchange rate adjustments will be reflected in the administered producer prices for agricultural products. 8. Price Controls. The Government has for several years pursued a policy of gradual decontrol of agricultural producer prices. This policy will continue and will be extended to the manufacturing srector. In particular, the Government intends, over a period of three years (1986-88), to phase out all price controls in well-established industries where the number of domestic producers is sufficiently large to ensure appropriate competition. A detailed timetable for phasing out price controls is presented in Annex II to this attachment. Between 1989 and 1991, the Government intends to abolish price controls in all other industries in close coordination with the liberalization of imports, with the exception of a few key staples (such as bread. semolina and oil) of which the price must remain regulated for social reasons. In the event of monopolistic agreements, however, the Government would reserve the right to intervene to reestablish satisfactory competition. ANNEX IV(a) Pange 6 of 11 9. With respect to those industrial products for which the price will remain regulated over the short or medium-term, the Goverument intends to introduce a more flexible price control procedure on January 1, 1987 that would allow the enterprise to change a price unilaterally, by reference to agreed parameters, and to apply the new price following a reasonable time lapse, provided there is no justified objection on the part of the Government. To this end, the Government will-with assistance by the World Bank--devise rapidly the operation formulas to be used by entrepreneurs in the various industries. These formulas must be geared to the appropriate utilization of installed production capacities and the adequate control of production costs. 10. Investment liberalization. In the context of a system of gradual decontrol of the economy, the Government intend. to phase out the control (by API, APIA and the Tourism Investment Board) of investments not eligible for special incentives or benefits. in parallel with the liberalization of prices and of external trade, within the framework of a new investment incentive policy. The Government has decided to abolish by the end of 1986 all controls on investments below DT 200,000 and on replacement investments not requiring a specific import authorization for capital equipment and not asking for special investment incentives; it intends to continue this process in 1987 and 1988 with a view to the abolition, in parallel with the overhaul of the incentive system, of the approval requirements for other well-established industries for which the number of domestic producers is sufficiently large to ensure appropriate competition. The approval procedure will be maintained for all investment projects that are asking for special investment incentives linked to transfers of technology, regional development and exports. In early 1989 the Government is to start on a program leading to the abolition, by 1991. of investment controls in all remaining sectors, except for investments asking for special investment incentives. 11. Import liberalization. Cognizant of the importance of import liberalization in improving domestic resource use and allocation and, in general, in helping to achieve the country's development goals over the next five years, the Government reaffirms its intention of gradually liberalizing imports. It intends to effect this decontrol by two principal means: reduction of quantitative restrictions and rationalization of import duties. 12. (a) Quantitative restrictions. In mid-August 1986 the Government abolished all restrictions on imports of raw materials and semi-finished products for companies exporting at least 251 of their turnover as well as of spare parts for use in industry, farms, hotels, hospitals, and other services. It intends to abolish before end-September 1986 all restrictions on imports for newly approved investment projects and for raw materials used in the manufacture of pharmaceutical products. Not later than January 2, 1987, Government intends to abolish restrictions on all other spare parts and raw materials, as well as on ANNEX IV(a) Page 7 of 11 semi-finished products for companies exporting at least 15% of their turnover and for those that are reasonably integrated. Not later than January 2, 1988, it plans to lift import restrictions on capital goods and semi-finished products, with the exception of a list of products which are used exclusively in poorly-integrated plants to be discussed with the Bank. Starting in 1989, the Government will introduce a program leading to the abolition, by 1991, of the remaining quantitative restrictions, mainly those on consumer goods. 13. (b) Import duties. In line with its concern to promote exports, and to ensure greater efficiency of resource allocation, the Tunisian Government intends to gradually reduce import duties and to lessen the disparities in the levels of effective protection between the various sectors of the economy, the goal being to achieve a reasonably uniform effective protection rate of around 251 by 1991. To this end, it aims to introduce, on January 1, 1987, within the framework of the 1987 Eadget Law, the following changes in customs duties: - a raise in the minimum duty to at least 15s; - a reducuction of all import duties to a maximum of 50s; - reduction by 6 percentage points in all duties between 26 and 551 with a minimum not falling below 25t; with the possibility of deferring some of these reductions by up to one year after discussions with the Bank, in case a Tunisian enterprise suffers serious damage as a result of exceptionally large increases in imports and with the aim to provide that enterprise somewhat more time to adapt. However, the Government reserves the right to introduce additional consumption taxes on products of which the local production or import is regarded as a luxury or a waste of resources, so as to absorb all or part of the loss in revenue resulting from the revision of customs duties. It also agrees to continue this process in 1988, introducing on January 1, 1988 a new import duty reduction of 9 percentage points on duties between 26 and 50X, oTnce again with the possibility of offsetting certain losses in revenue by consumption taxes, and over the long term to incorporate the "Taxe sur la Formalite Douaniere" (TFD) intc the actual customs duties, for purposes of simplitication. Lastly, the Government intends to prepare before the end of 1988 a program of further gradual tariff reductions so as to achieve the objective of a 251 effective protection rate by the end of 1991. 14. Monitoring and orogress reporting. Progress on the implementation of the program described above will be monitored by the Government and reported to the Bank every six monthF. ANNEX IV(a) Page 8 of 11 ANNEX I to Macro-economic Adjustment Program Targets for Government Budget (a) Government revenues shall not be less than: 30.02 of GDP in 1987; 29.0% " " ' 1988; gradually declining to 27.0% I " " 1991. (b) Recurrent expenditures shall not exceed: 24.02 of GDP in 1987; 23.0% " " " 1988; gradually declining to 21.02 " " " 1991. Ic) The growth in the number of civil servants employed shall not exceed 21 p.a. during 1986-91. The average civil service wage rate shall not grow by more than the inflation rate during the period 1986-87, and shall not increase Easter than private sector wages during the period 1988-91. (d) The aggregate amount of all subsidies included in the Government budget shall decline by at least 5X p.a. in nominal terms over the period 1986-91, with the Govenment making every effort to reduce it even more rapidly, among others through targeting household subsidies increasingly on the poorest segment of the population. One consequence of this policy is that the increase in producer prices for agricultural products proposed in the medium-term agricultural sector adjusLment program would be reflected as much as possible in consumer prices. (e) Amounts included in the Government budget for development outlays, net of debt repayment shall not exceed: 8.0% of GDP :n 1987; 7.51 " " " 1988; gradually declining to 6.02 " f " 1991. The Government intends to make a sectoral and sub-sectoral allocation of investment funds within these global limits as part of the preparation of the VlIth Development Plan. The resulting investment program will be assessed and discussed with the Bank at the time the report of the Public Expenditure Review mission will he discussed. ANNEX IVta) page 9 of 11 ANNEX II to Macro-economic Adjustment Program Price Liberalization Time-table September 1, 1986 Building materials excluding lime, cement and sanitary appliances Textiles excluding undergarments and articles made out of jute EMI - car parts including batteries - hardware - TV antennas and parts Canned sardines Miscellaneous industries - plastic articles - graphic art - watches - joinery finishings in wood - cork articles - chandeliers - footwear and accessories - tannery products - packing materials of paper and cardboard - printed articles - small-wares January 2, 1987 EMI - control wire and meter transmission cables - electrical and telephone cables - refrigerators and cooking-stoves - boilers Carpentry Glue Inks Liquid detergents Tires and rubber articles ANNEX IV(&) Page 10 of 11 ANNEX II to Macro-economic Adjustment Program July 1, 1987 Soap excluding perfumed soap Food products - canned tuna - canned tomatoes - canned harissa - yogurt - cheese, excluding soft cheese - beverages Furniture Fertilizer - phosphoric acid - hyperphosphate - superphosphate, triple superphosphate - dicalcium phosphate - mono amonium phosphate, diamsonium phosphate - complex fertilizer January 2. 1988 EMI - sound making equipment and parts - taps and faucets - bicycles and motorcycles - batteries and miscellaneous articles Animal food Chemical products - paint, varnish - perfumed soap - detergents - essential oils - linseed oil - perfumes - insecticidec and pesticides ANNEX IV (a) Page 11 of 11 ANNEX II to Macro-economic Adjustment Program July 1. 1988 Household articles in inox and aluminium Copper articles Joinery finishings in aluminium Electrical motors and transformers Tomato paste Canned vegetables and fruits ANNEX IV(b) Page I of 15 GOVERNMENT LETTER OF AGRICULTURAL DEVELOPMENT POLICY September 1, 1986 Mr. Barber Conable President of The World Bank 1818 H Street, N. W. Washington, D. C. 20433 U.S.A. Dear Mr. President: 1. Following the exchanges of views that have taken place between the Tunisian Government and the World Bank in connection with preparation of an agricultural sector adjustment operation, and in the context of our economic discussions and agreements on a macro-economic adjustment program, I should like to set forth below the main orientations of our development policy in the vital agricultural sector of Tunisia's economy. 2. Agriculture occupies an important place among our economic and social development priorities and has always received sustained attention on the part of the public authorities. Agricultural policies have yielded encouraging results in terms of agricultural production, particularly fruit and vegetable production, representing almost half of agricultural GDP. This success has been achieved due to the important investments in irrigation, which represents less than 5% of cultivated land but accounts for 38t of agricultural GDP. We are concerned, however, that growth in the rainfed sector, which provides the bulk of our basic food products and from which the great majority of our rural population earn their living, has lagged behind growth of domestic consumption, giving rise to a steadily worsening food deficit and a corresponding deterioration of the agricultural trade balance. This trade balance is now in deficit by about D 185 million (US$220 million) annually. This figure could be reduced by more intensive utilization of our existing agricultural potential. 3. We have already begun a program to address the obstacles to the full development of this potential, as described in the attachment to this letter. Our efforts are designed not only to improve our trade balance, but also to contribute to the growth of the economy, reduce demand on the Government budget and increase Government revenues. 4. In implementing the Medium-Term Agricultural Sector Adjustment Program, the Government attaches particular importance to the integration of our agricultural policy into general economic policy and to questions of efficiency and optimal utilization of our limited resources. Particular priority will be given to measures to improve productivity, enhance the effectiveness of our production incentives policy and optimize the Government's activities from both the organizational and the financial standpoints. We will also limit Government intervention to those areas where it is essential and justified. ANNEX IU(b) Page 2 of 15 5. We intend to strengthen inter-departmental coordination rno as to ensure proper monitoring of the execution of the program. As in the case of the other projects which you are financing, we will send you a report periodically regarding the measures taken. 6. So that we can achieve both our macro-economic a...d bector objectives, we would ask you to consider making a quick-d4abursing loan to Tunisia in order to support the agricultural adjustment program. S'ety percent of this loan would finance imports of inputs requiced ior the p.ogram, with the remaining 402 covering the Government's general impo:t program. 7. Please accept the assurances of my highest consideration. SiRned by the Minister of Planning and Finance Attachment ANNEX IV(b) Page 3 of 15 Attachment REPUBLIC OF TUNISIA MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM (1986-1991) ANNEX IV(b) Page 4 of 15 1. The Government's medium-term policy objective for the development of the agricultural sector is to strengthen the contribution of agriculture to overall economic growth, balance of payments and budget equilibrium and employment creation, particularly through greater incentives to private initiative and a liberalization of economic activity in the sector. 2. Priority will be given to increasing production of agricultural products in which Tunisia has a comparative advantage, notably cereals, meat, milk, and export crops. 3. To achieve these objectives the Government intends to introduce a medium-term policy based principally on: (a) a greater role for market forces in our price policy allowing greater incentives for the production of import substitutes (cereals, meat, milk) and export crops (olive oil, citrus, dates, fish and off-season vegetables); (b) improving the effectiveness of our public investment and expenditure policy, as regards both capital and operating expenditure, to these production objectives; (c) improving support services to production, particularly research and extension activities, and transferring to the private and cooperative sector commercial activities currently undertaken by the public sector, such as the distribution of inputs, management of cold storage depots, milk collection and regional mechanization services, at a pace compatible with the need to preserve and strengthen the services provided to agriculture; (d) encouraging intensive utilization of land and of natural forest and fish resources; Ce) enhancing the capacity of the Ministry of Agriculture to monitor agricultural performance and analyze alternative development policies for the sector and monitor their effects. I. PRICE POLICY 4. As regards its price and subsidy policy the Government has, since 1980, been following a policy of freeing and adjusting producer prices and eliminating subsidies, with a view to creating a favorable environment for privatization and liberalization of economic activities in the sector. 5. Currently producer prices for most agricultural products are free and are therefore determined by market forces. For staple food products, the prices of which are controlled, a policy of incentives has been adopted. Cereal prices have been doubled and the price of milk more than doubled, while the producer price of beef has been freed in a similar fashion to that of sheep meat. ANNEX IV(b) Page 5 of 15 6. As regards consumer prices, a differential was introduced between fresh milk and reconstituted milk and successive increases were made in the price of milk which is no longer eligible for subsidies from the General Compensation Fund. 7. In parallel with our policy of adjusting producer and consumer prices, input subsidies, although they still exist, have been steadily reduced since 1980. Thus fertilizer prices have risen by 55%, those of animal feed by 200%, and charges for irrigation water by 43% on average. 8. During the period of the VIIth Plan, the Government intends to allow a greater role to market forces to encourage the production of import substitutes (mainly cereals and livestock products) in which Tunisia has a comparative advantage, and to support and promote export crops. To achieve this objective, the Government will continue to adjust the prices of controlled products and inputs so as to bring them closer to world market prices, with . view to freeing them, with the exception of a few product;. Specifically, the program envisages: (a) For products the prices of which are controlled for social reasons: producer prices for these products will be brought closer to their world market equivalents, taking into account exchange rate movements. A price differential will also be re-established between durum wheat and bread wheat so as to reflect their relative international values. For livestock products, the liberalization of the market for beef and the fixing of producer prices for milk will, if necessary, be accompanied by measures to protect local production, taking into account any subsidies provided in exporting countries. (b) For products whose prices are free: the level of prices will be derived from the law of supply and demand, without market intervention to fix ceilings. (c) Input subsidies: The Government intends to pave the way for liberalization by progressively reducing subsidies so as to align the prices of fertilizers, animal feed, seeds and herbicides with world market prices, at a pace compatible with the need to preserve incentives for agricultural production, and promote technical innovation. For water charges, there will be progressive recovery over ten years of the direct operating and maintenance (O&M) costs of irrigation systems according to the conditions laid down in the Irrigation Management Improvement Project which provide for 100% recovery of O&M costs on 65% of the irrigated area by 1991. 9. The reduction in subsidies will be accompanied by appropriate changes in the level of producer prices, our objective being to use price policies for agricultural products to encourage the growth of economically efficient and profitable production activities and to establish a level of protection for the agricultural sector that is more consistent with that prevailing in other sectors of the economy. In this context, and in accordance with the macro-economic adjustment program, a minimum 15% tariff will be applied to imports, which will be taken into account in fixing the prices of controlled products. ANNEX IV(b) Page 6 of 15 (d) Our policy for the promotion of agricultural exports is to achieve 4% real growth over the next Plan, based mainly on the diversification of markets for traditional exports, given the anticipated constraints as regards the EEC. In addition to measures at the macro-economic level (exchange rates) and fiscal and financial incentives the search for new markets will be intensified and administrative procedures simplified. Particular emphasis will be given to research and development activities in the export subsectors. U. PUBLIC INVESTMENT AND EXPENDITURE POLICY 10. Investment policy during the IlIth Plan will be adjusted to the objective of developing agricultural production. The Government will raise the priority of the sector and intends to allocate about 22% of total investment to agriculture. The strategy for allocating these resources will emphasize the need to: (a) improve the efficiency of investments by achieving higher returns on the use of existing resources; (b) emphasize those investments which have a favorable impact on the balance of paynients, i.e., production of cereals, milk, meat and wood for import substitution and dates, citrus, fish and off-season vegetables for export; (c) encourage the private sector, in the context of liberalization, to undertake commercially viable agricultural services which are presently being administered by the public sector; (d) reduce the share of the public sector in the financing of agricultural investment projects during the VIIth Plan; and, (e) create productive jobs through investments which have a relatively Low investment cost per permanent job created. 11. To fulfill these expenditure objectives in the agricultural sector, the Government will develop a method which is available to all participants in the identification and implementation of agricultural investment projects. This method requires the development of appropriate subsectoral investment strategies; a list of projects or project ideas which meet a set of selection criteria which are consistent with the overall sector expenditures strategy; a core program of investments, i.e., some 65% of the nominal investment program, which would be preferentially protected in case of financial constraints; and a monitoring system to control the flow of expenditures by the Ministry over the VIIth Plan period. 12. Specific subsector 6*rftegies consistent with this overall sectoral strategy will guide project identification and prepa-ation for the VIIth Plan, and their main features are as follows: (a) For cereals, develop a plan for long-term sector development and promote its execution during the VIIth Plan; in grain storage, rehabilitate and increase the local storage capacity; begin handling and storage of grain from farmers in bulk. ANNEX IV(b) Page 7 of 15 (b) In livestock, concentrate on the development of local forage resources to substitute for imported concentrates by developing forage reserves in areas with low opportunity costs, focussing extension efforts in the north and on the integration of livestock with cereal production; promote systematic use of crop by-products as feed (straw, bran and by-products of the olive oil industry); create an appropriate storage network and develop forage areas with a view to protect against climatic risks; strengthen the genetic improvement program through greater reliance on cross-breeding versus imports of purebred stock; initiate a development program for camels; encourage wider participation of private individuals and cooperatives in providing artificial insemination services; and encourage the privatization of veterinary services. (c) In research, modify the institutional system of research to seek better coordination of expenditures on research efforts; and focus research on priority import substitution or export products such as cereals, livestock products, dates, citrus and off-season vegetables as well as in the areas of agricultural machinery and farm management practices; in extension, while avoiding a substantial increase in the present level of total expenditures, reorganize the commodity- specific, extension programs to permit increased efficiency in use of operating funds; ensure adequate staffing and funding for the transportation, operation and maintenance of existing centers; establish new centers in rainfed areas; put into action the result' of the Master Plans for research and extension and prepare a national proiect for investment in research and extension. (d) Increase the financial resources available for forestry development to arrest the loss of plant cover in order to better mobilize the subsector's productive potential and reduce imports: priority needs to be given to establisment of nurseries, to improved means of guarding and protecting the natural regeneration areas, to mechanize exploitation and reforestation, and improved inventories and studies. (e) In tree crops, encourage maintenance of existing plantations, in the center of the country, promote the establishment of pasture within the framework of a balanced system of livestock and tree crops; favor the development of export crops such as citrus in the north, pistachios and almonds in the center and date palms in the south; improve the quality of olive oil which is exported; reconvert old olive stands to more productive activities, e.g., pasture, almonds, where olive yields are low. (f) In fisheries, improve the use of existing infrastructure, in the major ports by carrying out marginal investment to make ports more functional; provide incentives to the private sector to develop the marketing and transport of blue fish in the interior of the country; increase the catch of quality fish for export; make more intensive use of the existing tfeet by better management and more effective incentives to the private sector. ANNEX IV(b) Page 8 of 15 (g) In jrr gstt,n, further develop downstream investments under existing projects, particularly in the north, in order to increase the availability of water at farm level; promote rehabilitation and maintenance of existing irrigation infrastructure; encourage investments designed to increase water use efficiency; and develop spate irrigation techniques, complemented by tubewell development in central Tunisia. 13. To strengthen the investment planning and monitoring process, the Ministry of Agriculture needs to install an improved system of project evaluation for all new investments. This implies improving the capacity of the DPSAE in project evaluation and establishing a system of project monitoring and budget control. In addition to meeting the goals and directions of the subsectoral investment strategies, all new projects for the VIIth Plan would be evaluated according to an agreed selection criteria between the Government and the Bank. In order of priority, these criteria are: (a) economic rate of return above 10%, which is based on economic pricing of inputs, outputs, including labor and foreign exchange; (b) positive impact on the agricultural trade balance; (c) significant employment creation at low cost per job created; (d) reduced Government contribution to investment and recurrent costs; and (e) favorable impact on under-developed regions -- centralwest, northwest, southwest -- particularly in the case of large projects. Some trade-offs between criteria may be necessary, but the minimum rate of return would be necessary for all projcts to enter the list for implementation during the VIIth Plan. 14. The concept of the "core" program of investment projects is based on the contingency that Government may not have sufficient funds to carry out the nominal expenditures program agreed for the VlIth Plan. In the event of a shortfall in financial resources during this period, the Government would protect a "core" investment program in the agricultural sector of some 65% of the nominal investment amount. The criteria to be applied to place projects in the core program would be the following: (a) short gestation of the remaining completion periods; (b) reduced demands on the Government budget; and (c) high priority in the overall sectoral development strategy. 15. In planning the allocation of public funds to the agricultural sector account will be taken of the need to ensure the oroper functioning of completed projects. To this ef'ect maintenance iiorms will be established f;: the various kinds of inwestment and public services. ANNEX IV(b) Page 9 of 15 16. As regards private investment, the Government promulgated in 1982 an agricultural investment code containing a range of fiscal and financial incentives. Private companies were authorized to undertake projects in the private sector and the State leased certain publicly-owned land on a long-term basis in order to e,icourage investment and intensification of agricultural production. During the VlItlh Plan, the Government will continue to give priority to private investment in agriculture by encouraging the banking sector to increase its role in financing agricultural activities. The Government has already established a National Guarantee Fund to assist small and medium-scale farms, has strengthened cost recovery methods and has raised interest rates, which are now positive in real terms. Our action plan for the period 1986-91 contains tthe following main points: (a) improving the mobilization of the banks' internal resources (specifically, by encouraging rural savings) and moving steadily towards enhanced fungibility of the funds for agricultural credit; (b) progressively reducing, as a function of the mobilization of other resources and 's improved recovery performance, State budget allocations for the credit part of FOSDA, FOSEP ar,d other special funds with the ultimate objective of better targetting of the resources of these funds; (c) progressively transferring to BNT and the banking sector part of the risk guaranteed by the State; (d) applying the cost recovery methods taken, particularly "le privilege de L'Etat," rescheduling some debts where justified, for example in the case of natural calamities, and studying the possibility of tax relief for the provision for doubtful agricultural debts made by the banks to cover the risk of non-payment; (e) increasing the interest rates permitted for agricultural lending operations to provide coverage of the financial costs, reasonable operating costs and a reasonable part of the risks involved, such Levels to be reached by 1991, further to the recommendations of an analysis of the profitability of agricultural credit operations; (f) defining the eligibility of small and mredium-size farmers for bank credit, taking their incomes into account among othei hings so as to give an increasing number of farmers access to ba..;. 4redit; and (g) harmonizing terms, conditions and procedures for making loans to agriculture and fisheries. mI. SUPPORT SERVICES 17. As regards the marketing of inputs, the Government is conmitted to the objectives of liberalizing and privatizing it as soon as subsidies are eliminated, and by so doing, to disA:.gage itself from these activities. To this end, it has already taken measur-s designed to encourage the private and cooperative sectors to increase their participation in this activity. Resale margins for fertilizers were raised from 5S to 10% in 1985. Our objective is ANNEX IU(b) Page 10 of 15 to liberalize them and to create the conditions enabling the private and cooperative sectors to be more active in the distribution of agricultural inputs and thus to reduce public sector intervention in this area. Charge policies for services provided by the public sector will aim to recover costs, thus permitting these services to be undertaken by the private sector. 18. Within this framework the price of irrigation water will be adjusted over the next 10 years to recover the costs of operating and maintaining the network, according to the conditions laid down in the Irrigation Managemeut Improvement Project, including 100l recovery on 652 of the irrigated area by 1991. These measures will promote greater water savings and intensified irrigation and will help to improve the financial situation of the irrigation authorities (Offices de Mise en Valeur -- OMVs). 19. Furthermore, and in accordance with the macro-economic adjustment program, the quantitative restrictions on imports of capital goods for agriculture will be phased out and will be entirely eliminated by the beginning of 1988 at the latest, including 52 of tractor needs in the horsepower range produced in Tunisia by the start of 1987. Remaining state machinery services will be withdrawn from regions and services where the private sector can adequately take over. This policy will be put in motion by June [987 after the identification of such regions and services. 20. A number of research and extension centers have already been built in the various regions of Tunisia, and master plans are being prepared; the training and visit system is being tested under the Northwest Agricultural Production Project (Loan 2502-TUN). The Government's policy is designed to strengthen agricultural research through the introduction of a pricrity program, coordination of activities through centralized budget programming, and a better status for researchers. As part of the VIIth Plan, it is intended that extension activities be restructured with a view to establishing a unified nationwide :;ystem. IV. NATURAL RESOURCES 21. As regards land policy there are still a number of constraints on the development of agricultural production, namely fragmentation, the lack of titles for a certain number of farms, the legislation on rural leases, insufficiently intensive farming of collective lands, and the absence of appropriate legislation regarding the consolidation of rainfed land. The Government is already working to solve these problems. Since the beginning of the 1970s land consolidation measures have been applied in 45,000 ha of irrigated areas, while 1 million ha of collective lands have been transferred since Independence to 75,000 small private farmers. More recently the Government has introduced a program for the long-term leasing of certain public lands to development corporations and private companies, and has prepared integrated development plans for a large number of state-owned holdings. The Government's medium-term program calls for the continuation of transfers of collective lands to private hands and for the introduction of measures designed to encourage land consolidation in rainfed areas. The issuing of certificates of possession will be accelerated, cadastral work will be stepped up and measures to encourage intensified farming, such as extending rural leases, will be studied. The program for the forestry sector aims to increase the ANNEX IV(b) Page 11 of 15 exploitation of the sector's productive potential and to safeguard forests by more effective management of certain regeneration areas. Prices for cork and esparto grass will be adjusted and investments will be made in equipment, training and organization in order to achieve a significant increase in wood production during the VlIth Plan. 22. The program for the development of fish resources aims to encourage fish exports and to promote bluefish on the domestic market so as to further exploit the available resources of this species. V. AGRICULTURAL PERFORMANCE MONITORING AND POLICY ANALYSIS 23. Finally, the program aims to strengthen the Ministry of Agriculture's capability for analysis of agricultural policies and processing of statistics. This capacity will be upgraded with a view to launching a detailed agricultural price policy review, studying the relationships between agricultural policies and selected macro-economic options, introducing a computerized system of monitoring sector expenditure, and undertaking special studies to evaluate agricultural policies. This analytical work will provide the Government with the means to regularly monitor the medium-term agricultural development program and to make adjustments as necessary. 24. The attachment to this program contains a timetable of key actions to be taken to implement the above prograw. The Government's agricultural import program for the next two crop years (1986/87 and 1987188), designed to support the development of the sector, is also attached (Table 1). 2236E/p3-11 ANNEX IV(b) Page 12 of 15 Attachment REPUBLIC OF TUNISIA MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM. 1986-1991 Tinetable of Key Actions Actions To Be Completed By 1. Adjustment of producer prices to world market price levels July 1988 2. Eliminatiin of fertilizer subsidies July 1990 3. Elimination of animal feed, 2-4-D herbicide and improved cereal seed subsidies July 1989 4. Presentation to Bank of an initial list of projects and investment programs and project ideas consistent with the overall approach to agricultural expenditures with additions or deletions from the list during the VIlth Plan to be based on agreed criteria December 1986 5. Start of private retailing of agricultural inputs including seeds in two zones where volume of activity has been 4dentified as such that the Government can withdraw from input distribution, without prejudice to the objective of Liberalization of input marketing in the country as soon as subsidies are eliminated June 1987 6. Realization of a study to replace the cereal seed exchange program with a private retailer-oriented distribution system June 1987 7. Implementation of an export promotion strategy including product specific export strategies targetted to particuLar markets based on an action plan June 1987 8. Decision by the Governmeat on research issues (i.e., choice of institutional structure, definition of priority research themes, reform of the station network and preparation of national work programs and budgets) June 1987 9. Government approval of an action plan to implement the extension master plan June 1987 10. Preparation of an action plan to implement the new forest development strategy December 1986 11. Equipping the DPSAE with a price policy review capability following previously established terms of reference June 1987 12. Setting-up of the expenditure monitoring system June 1987 2236E/pl_ REPUBLIC OF TUNISIA MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTHENT PROGRAM. 1986-91 Imoort Proaraim for Aariculturail inputs for Crop Years 1936i/37 and 198711S Identi- Main Procurement Annual Projection for Projection for fication Importer(s) Procedure(s) Imports CIF Price 1986/87 1986/87 £ 1987/55 Number Description of Goods (Tons) (0/Ton) t0 000) iuS$ 00e) (D 000) (USS 000) Field Crops and Irriaation Crops 31.14 Anoniumn (for the manufacture SAEPA (Arab Ni- International of nitrogenous fertilizers trogenous Ferti- Competitye used in Tunisia's agri- lizer Company) Bidding 55.000 124 6.820 9.342 13.640 13.614 culture) Sulphur (for phosphatic SIAPE (Phosphoric n fertilizers, idem) Acid and Fertili2er company) ICH (Maghrebian Chem- 0 ical Industry) 35,000 113 3,955 5.417 7.910 10.834 Potassiin Sulphate STEC (Tunisian Chemical Fertili- 2er Company) SCH (M6grine Chemical Company) 5000 161 805 1,102 1,610 2.204 07.12 Seed Potatoes OC (Cereals International 17,000 2S5 4,335 5.938 8.670 11,376 Office) competitive bidding or at least 3 quotes for contracts below US$2.0 million Forage seed OEP (Livestock and Range Agency) GR. FOUPAST (Grain. Forage and Pastoral) (various 600 822 1,200 1.644 ODESYPNO (Northwest products) Rural Develop- ment Office) 38.12 Insecticides and herbicides Private International (or the raw materials to companies competitive bid- o manufacture them) OC (Cereals ding or normal 4.300 5.890 8.600 11.781 Office) procedures/at least . 3 quotes for contracts below ci.o US$5.0/2.0 million REPUBLIC OF TUNISIA MEDIUM-TERN AGRICULTURAL SECTOR ADJUSTMENT PROGRAM. 1986-9l Imoort proaram for Acricultural Ilnuts for Cray Years 1596/87 and 1987/88 Identi- Main Procurement Annual Projection for Projection for fication Importer(s) Procedurec5l Imports CIF Price 1986/87 1986/87 A 1987/88 Number Description of Goods (Tons) (D/Ton) (o 000) (uSS 000) (0 000) (US5 000) Livestock 10.15 Maize DC (Cereals International Office) competitive 200.000 55 17,000 23.288 34.000 46.576 Private bidding Comani aS 23.13 Soybean neal OC (Cereals International Office) competitive Private bidding 100.000 175 17,500 23,973 35,000 47,946 Companies Vaccines Central Pharmacy International competitive bidding or 365 So 730 1,000 normal proce- dures/at least 3 quotes for contracts below US$S5.0/2.0 million CMV (Vitamin-mineral OEP (Livestock eompounds or the raw mate- and Range U 300 411 600 822 rials to manufacture them) Agency) Private 400 S48 S00 1.096 Companies Animal genetic material OEP (Livestock N and Range 730 1.000 1,460 2,000 Agency) Private 150 205 300 410 Purebred Cows and Bulls OEP International 2,500 3.425 5,000 b.850 Competitive Bidding p4(1 oo 0 , C U' REPUBLIC OF TUNISIA MEDIUM-TERM AGRICULTIURAL SECTOR ADJUSTMENT PROGRAM. 1986-91 Imoort Prooram for Aaricultural InDuts for Cron Tears 19a6i/7 and 1987/88 Identi- Main Procurement Annual Projection for Projection for fication Importer(s) Procedure(s) Imports CIF Price 1986/87 1986/87 & 1987/85 Number Description of Goods (Tons) (D/Ton) (D 000c) US$ 000) (0 000) (4US 000) F1sheries Rofpe Private Copanies Normal procedures 120 660 90g 1,320 1.103 Nets * for contracts below 880 1.205 1.760 2.410 Cables US$5.0 million 445 932 1.277 1564 2.554 n*oks so 6s 10o 136 Floats Hardware * 70 96 140 192 Timer for ships * 200 400 548 800 1.096 Steel 2.992 4.098 5,984 8.196 Geneal ODesel Fuel ETAP (Tunisian International Petrole,u Activi- Conipetitive 200,000 110 22.000 30.136 44.000 60.274 ties Enterprise) bidding Spare Parts Private Companies Normal proce- dures for con- 8.760 12.000 17.520 24.000 tracts below US$5.0 million Electric Hotors International 500 Gas 1,000 1.370 competitive Pumps bidding or normal 1.500 2.055 3,000 4.110 procedures/at Raw Materials for the least 3 quotes 1.500 2.058 3.000 4.110 Manufacture of Irrigation for contracts Pipes below UStS.0/2.0 million TOTAL m7n1i fL 2m 2236E/pl4-6 Table 1 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN (ASALI MEOIUM-TEM AGRICULTURAL SECTOR ADJUSTlhENT_PROGRAM It_LAS&AP Policy Recomnmndations and Action Proaram I. Prices and Incentives Policy Government Outstanding Hediun-Term Adjustnment Short-Term Measures Area Objectives Measures Already Taken Issues Program (1986-91) (1936/87) Prices and To Improve the prices (1) 61 'slide' in the (1) Stagnation of exports, (l) Implement a strategy For (1) On the basis oF an ongoing tncentiies and incentives system. exchange rate; fiscal of agricultural products. promoting agricultural exports study, prepare a prwmtion especially for produ- incentives for new to achieve 4S annual growth strategy for agricultural cers, so as to achieve export-oriented during the new Plan, by taking exports that takes each product the objectives assigned companies; studies by specific measures in relation into account and is targeted at to the agriculture CEPEX and the Ministry to different products and specific markets; examination sector under the tIlth of Agriculture to prepare markets so as to increase by the authorities of the Plan (development of an export strategy. exports of both traditional conclusions of the studies and export-oriented and new agricultural products decision by the Government. production and import within the scope offered by substitutes, increased the EEC market. efficiency and employment creation). (2) Producer prices for (2)(a) Under-protection of (2) Introduce a price policy (2) Improve the relatively cereals. milk and beef duruin wheat and barley in that encourages producers to inadequate protection for the raised by amnunts exceed- relation to world prices; grow products in which Tunisia cereal sector and raise the Ing Inflation since 1981; Ib) world market diffe- has a comparative advantage Drices of durtn wheat and consumer prices for rential between prices and which would Improve the barley so that they correspond cereal products. milk and for durar and bread wheat sector's trade balance, taking to non-subsidized world prices. beef raised in recent Is not being reflected In world prices and exchange rate years, premiwn for fresh domestic prices; fluctuations into account. milk as opposed to (c) Imports of powdered Refine this policy on the reconstituted milk. milk and beef subsidized basis of a permanent system by exporting countries. for analyzing the impact of policies for agricultural producer prices. Strengthen Protection against measures for temporary reductions in export prices of powdered milk and beef in exporting countries. (3)(a) Adoption of a 10-year (3) Subsidies on inputs (3) Pursue measures to reduce program for the recovery are a financial burden and Input subsidies (animal feed. of Ohm costs of irrigation a waste of money. fertili2ers, seeds and herbi- networks as part of the cides): continue the program agreements made under to recover OaH costs of the Irrigation Hanagement irrigation networks. Improvemunt Project; a: (b) Gradual reduction of e subsidies for inputs (animal feed, fertilizers, 7574EIp1 seeds and herbicides). '0porters. 'mie amts tax lIPS) £Jmlr-Eec. 16). El va'ste cttsts ctarga am Wariceltsral p-oducts (July-Ca. 86). Euiparters to &loly for uricuItural eewt WwtiIs h19flh fellome by vtiaIng of 'wM licercas for SSS of ,3h:e at eits (1hI7 ultimtelY eetars shmli be allam to import fruits "t wegetables avthrt restrictions 11991 . V -C Pg 2 of 4 REPUBLIC OF TtmISTA anhwtmea sicme atisssuLOArN IASALI MFEDIUM-TERH AGIICLTURALI SECTOR AJET PGM HTASAPI Poliev Recemndatians and Action Ptrara IX. tobut maketing Policy Government Outstanding iedius-Term Adjustnrit S9t-lem measures Area Objectives Measures Already Taken Issues Progra (191-91) (1984/7) OUTPUT Reduce cost of High cost of transport Study uaritime and air Execute trasbort MARKETING exports. due to low-level of transport to increase fre- study ihily-kc. K) export quantities. zWey and select mst a4- ropriate mes of transport- Ge nereit to force Lack of regular calls an FrakbJbunlsian *flqpping Tunisian parts by shipping Cnference to serve companies. Tunisia cn basis of identified reeds (19875. Lack of preferential air- Gove.rm.a to regotiate freight rates for perish- preferw,tial air freight able products. rates for perisiable prDducts. (1987) Expa pruftwutial air freight rates for perish- able prodScts. (19171 To stimulate agro- Authorization for High cost of production. Analysis and restructuring Preparation of balance industries by their producers to determine protection by irort tariffs, of hey industries In lire sheets anO details of subjection to sales price on cost plus low level of utilization and with structural adjntmeot cost for: market forces, basis for certain domes- inefficient operations of objectives. - the sugar factories to strengthen their tic products reduction some processing plants. - the olive oil agency low) their competitive- of subsidies: salary - ML ness. and eliminate adjusteents linked to - TUILSIELAIT their dependence on financial perforaunce of - EL LOLWJDM protection and each enterprise. - iTEC subsidies. (196) Authori2ation of Imports of those products of Preparation of restruct- which domestic produc- u-ing plans for the key tion Is Inefficient. if11ustries ani their sequst iEpl lati n. Protection m*y reain agaist Foreign duing practices. (19871 IUlementatiwn of restruc- -u turing. (115-9l) ao 0 Page 3 of 4 fRffiLYC Of TIIsIA AGRICULTURAL SECTOR ADJUSTHENT LOAN (M5AL) MEDIUM-TERM AGRICULTURAL SECTOR AIXUSThENT PROGRAM (HTASAPI Policy Rerenrandatians and Action Proaram IX. Outout darketinh Policy Goverrnmnt Outstanding Heolum-Ter. Adjustment Short-Term Measures Area Objectives Measures Already Taken Issues Program (1986-91) (19gS/?) OUTPUT Reduce cost and Promote use of carton Too heavy and costly Study packaging (1936) MARKETING improve quality of containers with standard packing material. and establish standard export comModities dimension suitable for packaging norms (1937) such as citrus. use on pallets for most in collab-ration with agricultural export local industry. products except potatoes. Eventually liberalization of packing material imports. with poSSIbly a tartff to offset foreign export subsidies (19S8-91). Eliminate the principle Preparation of a list of of guaranteed profits. agro-Industrtes thiCh have operated on the basis of guaranteed profits. and the budgetary cpnsequences Replace the ban on imports for the State since of processed food item 1975 (1986) which are locally produced by a system of Imoort Study for each concerned tariffs. industry the impact of the lifting of guaranteed profits. (July-Dec- 86) Preparation and subsequent implmentation of elimin- ation of guaranteed profit system. (1987) Publication of custos tariffs for imported agricultural comodi- ties. (1987) *0 o C e c Table9 Page 4 of 4 REPURLrC O! TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN (ASALI MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTHENT PROGRAM IHTASAPI Policy Recommendations and Action Prosram IX. Output Marketing Policy Government Outstanding Meciuim-Term Adjustment Short-Ternm Measures Area ObJectives Measures Already Taken Issues Program 11986-91) (1986/71 OUTPUT Strengthening of key Establishment of APIA Existing Institutes are not Preparation of programme Identification of agro- MARKETING institutions for and API to control and adequately equipped to of specific investments. industrial investment ;tructural adjust- promote agro-industrial initiate, implement and projects (198ly . ment to promote Investments. recormended policy changes. agro/Industries. Establishment of Centrallie analytic Preparation and public- institutions for prom- and monitoring respon- ation of an information otion and monitoring sibility in a single manual for prospective of exports. agency and provide this Investors and business- with appropriate staff men: preparation of and budgetary resources. a small number of viable inlvestment projects (1986). Initiate promotion of specific agro-indust- rial projects by national and foreign investors (1987). Prepare coherent export Strategy for all agricultural exports (19871. Amalgasate functions of monitoring and evaluations of agric- ultural exports now carried out by differ- ent agencies (1986). 2574E/p20-3 pa it ha Table 10 REPtELIC O3F TMISKA AGRICULTURAL SECTOR ADJUSTMENT LOAM (ASAL) HEDIIUH-TERF AGRICULTURAL SECTOR ADJUSTHENT PROGRAM IHTASAPi Policy Recomnendaticns and Action Proarma X. Animal Production Policy Goverrnent Outstanding Medium-Term Adjustisnt Short-Ters Measures Area Objectives Measures Already Taken Issues Program (1986-91) (1986/lI ANIMAL Increase animal prod- Renting of UCP land to Potential for animal Goverment to prmote independent PROOUCTION uction on cooperative private companies. production at cooperatve management and decision eaking by farms (UCPS). farms (UCPsJ in the North rusaining LUCPs. Provide technical 1nsufficiently used. and managerial advice through restructured extension service. Integrate staff of present control office in restructured extension service. Phase out Public Sector Bourj El Amrn Farm no OEP animal productior Assess performance of existing DEP management of state longer managed by OEP. farms not adequately farms. Prepare Dlan for renting animal produ-tion farms managed. to private or cooperative entitles. now managed by OEP. Promete fair competi- Subsidies to STIL and Private dairy processing Wubuit private and tion between dairy El Lauhoum discontinued. plants and meat Public sector equally Processing Dlants New private company plants merchants receive unfair to p rbl t sarketlng and marketing allowed to sell domestic competition fraxn Public and subsidy measures. entities. milk higher prices. sector. Improve academic Veterinarians not Include animal production Appoint a4-0oc training, sufficiently trained and management courses in conmission to pre- in animal husbandry. curriculum of faculty of Pare curriculu veterinary Secence. proposal. Improve animal health Veterinarians allowed to Public Veterinary Increase cost recovery of Encourage veterin- services and reduce carry out private practice Service unable to public animal health service. arians to estab- Government expendit- and serve custaoers serve totality of tncluding prophylactic and lish private ures on animal health outside of Govermnent clientele and requir- preventative imuinization Practice. services. office hours. Ing large budgetary campaigns. support. Oecrease expenditures Natural breeding organized Overlapoing responsib- Integrate OPA and ODP breeding services Introduce cost of Al and natural by NW Rural Development ilities in cattle into a single entity, starting at recovery progrum. breeding services. Project. breeding. Support regiona1 level. Enworage private (both Al and and cooo rate private) between OEP breeding services. and CPA. In order to replace d piblic services. o 2574E/P2* 5!C Table 11 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSThENT LOAN (ASALI MEDIUM-TERM AGRICULTURAL SECTO3R ADJUSTMENT PROGRAM IKTASAPI Policy Recorewndations and Action Prograr XI. Land Tenur Policy Government Outstanding tedium-Term Adjustment Short-Term Measures Area Objectives Measures Already Taken Issues Program (1986-91) (156/7) LAND TENURE Rewerse trend towards Consultant Study, Land fragmentation Preparation of legislation to Legislation to be smaller and disper5ed December 19S5 maintain the farm holding of preceded by legis- parcels in order to a mininmn farm sire as a lation on rural preserve farm holdings single unit through contract- rents and by study as economically viable ual rental or ranagement of minijLm viable units. arrangements without affecting size of holding. inheritance or property rights. Encourage intensif- Preparation of draft Insecurity of Land tenancy ication of land use land tenure land tenancy legislation to and long-term imorov- legislation. be submitted to ements of productive Council of potential of land Ministers. resources of rented agricultural holdings. Increase registration Incomplete land Reduction oF Amount to be of agricultural registration agricultural determined by the property transfers. property transfer Ministry of tax. Amount to Finance. Ministry cover at least of Justice, and the legal fees to Ministry of Public cover tosts. Ubrks. Promote economic land Absence of land Preparation of use through taxation taxation draft land tax of agricultural code. property . 2574E/p25 CI II Table 12 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTHENT PROGRAM (HTASAP) Policy Recommendatlons and Action Proaram XII. Forestr Policy Medium-term Adjustment Actions Proposed under Area Government Objectives Action already Taken Outstanding Issues Program (1986-91) ASAL I (1986 and 1987) Fgrestry Improve management of Preparation of forestry Failure to: recognize Implementation of a plan of Launching a program. forestry and conservation development strategy and forestry as a source of action to improve forestry's agreed with the WaaLer A Soil of water and soil in support project by FAD Trust Fund medium/short-term growth contribution to the national Bank, to assure the CriservatiCn of sectoral objectives. team and Tunisian counter- and import substitution; economy, by restoring regeneration of parts. New tariffs for prevent over-grazing, regeneration of nature or approximately 3,000 wood and wood products which causes destruction degraded forests and ha/year oF forest and introduced. qadgjorestiegr of forest and reduces increasing forest production, to increase funding of under revision. production; and relate conservation of water. soil, forest development and funding of forestry and fauna and flora. reforesta- water and soil conser- water and soil conserva- tion with fast-growing vation operations tion to tntir contribu- plantations and pasture according to prior- tion to agricultural Improvement. ities established by production. the 1985 forest development strategy - Liberalizing prices of cork in the medium- term. Code Forestier to be enacted early 1987. 25 74E/p26 M C'U Table 13 Page 1 of 2 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTHENT LOAN (ASALI MEDIUM-TERN AGRICULTURAL SECTOR AO3USThEMT -PROGRAMi IKTASAPI Policy Recomiwndations and Action Procram XIII. Fisheries Policy Government Outstanding Mediwu-Term Adjustment Short-Term Measures Area Objectives Measures Already Taken Issues Program (1986-91) (1986/7) FISHERIES Establish a Fisheries General orientation Unbalanced development policy Prepare masterplan for Preparation of Terms Development Strategy. For public enterprises in the subsector. fishing development and of Reference for Haster- in 7th Plan period. management. plan Study. including resource evaluation. in particular dersal. (19863 Approval and execution of Kasterplan Study. (1987) Analyse study and prepare investment program. (1990) Increase contribution Increase of retail Insufficient incentives Initiate pilot retail Prepare pilot marketing of Fisheries to the margins for blue fish for traders, absence marketing project limited project (June 86). economny. I198), marketing of retail network and low to two penetration zones, approval and start of program in areas around consumption levels in the mainly for blue fish. pilot project with main cities and the interior. Assure supply by SDPH CNP press and mass media Interior. and CRP. Ensure iprww- publicity (July-Dec. 86). tional credit for retail- ers. Lift restrictions Assess results and on profit taking. If provide financing for necessary. provide temp- distribution network orary compensation to along penetration suppliers to enable them axis in the interior to sell at cost price. (1987L Low consumption of Promote consumPtion of Introduce large cans canned fish. canned fish. (1 and S kg.). (1987) Lack of variety in pro- Encourage private bus- Preparation of pilot cessing and consumption iness to produce new project for trial of fish-based foods. types of fish-based production and sales processed food (fish- (July-Dec. 86). cakes, sausages, approval and execu- pre-cooked meals.) tion (1987). assess- ment. financing and large scale ples- entation 11988-913. 2574EIpZ7 a Table 13 Page 2 of 2 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTHENT LOAN (ASALI MEDIUM-TERM AGRICULTURAL SECTOR ADJUSThENT PROGRAM INTASAPI Policy Recommendations and Action Prnorui XIII. Fisheries Policy Government Outstanding Mediun-Tern Adjustment Short-Tern Measures Area Objectives Measures Already Taken Issues Program (1986-911 (1986/7) FISHERIES Increase exports. Abolition of need for Insufficient detailed Export promotion of new Export warket study by especially of new export licenses. knowledge of absorp- products with a potential CEPEx for fresh. proc- products. tive capacity of export yalue of 0 8-9 million essed and carmed fish. foreign markets for promotional sales and fresh and processed sampling by SOP1 with fisheries products. FOPREIEX support (July- December 86). Reduction of export tax Insufficient export 6 to 32 0985). Incentives. Export support Elimination of export tax for nwie export products, subsidized air and sea Cooled and frozen food freight rates and seasonal marketing study by CEPEX sp3ce reservation for (1985). air freight (July-December S6) SOS subsidy of freight costs (FOPRODEX, 1985). Preparation of quality Absence of adequate Quality improvment Application of quality legis- control legislation. quality control. lations Training of Process- ing industry persmuiel. Exteisive work to Prcomte con- servation on ice on coastal boats and direct processing on trawlers. Imsroewent of packing. (July-Dece ber 1986) 2574E/p28 C' latle 14 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR AOJUSTHENT LOAX (ASAL) MEDhIL-TERM AGRICULTIURAL SECTOR ADJUSTMFMT PROGRAM (KTASAPI PoliC' Recommendations and Actton Pracrm XIV. Sector Monitorina Government Problems Still Medisa-Ter. Adjus tnt Short-Term Measures Subject Objectives Measures Already Taken To Be Solved Program 119*6-913 (9lSfn) gqIiturina sector Upgrade the means Monitoring of production and Insufficient analpti- Formulate proposals with a Carrnp Gut a rewies of agriaul- porformance and available to the expenditure: survey at the cal resources. view to changing price tiral Price policift apalsnitsf Ministry of Agri- farm level. policy in the light of the 5sLtoral culture (OPSAE) to results of a review of Dol] ^;ires. monitor sector agricultural price policies. performance and propose appropriate policies. 2574E/pZ9 CI of ANNEX VI Page 1 of 3 REPUBLIC OF TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN MEDIUM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM (MTASAP) Table of Contents Page No. INTRODUCTION 1 Chapter I PRICES AND INCEiTIVES 12 A. Past Performance 12 B. Past Price Policies 14 C. Price Policy Constraints 17 D. Recommendations 19 E. Expected Effects 20 Chapter II PUBLIC INVESTMENTS AND EXPENDITURES 22 A. Introduction 22 B. Review of VIth Plan Period, 1982-86 23 C. Investment Strategy for the Upcoming VIIth Plan Period, 1987-91 37 D. Actions to Increase Budgetary Efficiency 44 E. The Project List and Core Program 53 Chapter III IRRIGATION MANAGEMENT 56 A. The Irrigation Sub-Sector 56 B. Irrigation Development Agencies (OMVs) 59 Chapter IV AGRICULTURAL CREDIT 68 A. Introduction 68 B. Evaluation of the Current Situation 69 C. Future Prospects for Agricultural Credit 76 D. Policy Reforms in Agricultural Credit 82 ANNEX VI Page 2 of 3 Page No. Chapter V AGRICULTURAL RESEARCH 83 A. Background 83 B. Major Issues 91 C. Proposed Policy Reforms 91 D. Research Institutes and Agencies 93 Chapter VI AGRICULTURAL EXTENSION 103 A. Background 103 B. Major Issues 110 C. Proposed Policy Reforms 111 D. Major Agencies Responsible for Agricultural Extension 112 Chapter VII INPUT DISTRIBUTION 125 A. Fertilizers 125 B. Other Agricultural Chemicals 127 C. Seeds and Seedlings 128 D. Prices and Subsidies 132 E. Major Issues 133 F. Proposed Policy Reforms 135 Chapter VIII AGRICULTURAL MECHANIZATION 151 A. Current Situation 151 B. Major Issues 158 C. Proposed Policy Reforms 159 Cha?ter IX AGRO-INDUSTRY AND EXPORTS 169 A. Summary 169 B. Background 174 C. Domestic Market 183 D. The Export Market 207 E. Export Situation and Outlook 237 Chapter X LIVESTOCK 243 A. Principal Characteristics 243 B. Services Furnished by the Administration 244 C. Government Policies 248 D. Livestock Sub-Sector Production 251 E. Medium-Term Reform Program 257 F. Livestock Development Strategy 264 ANNEX VI Page 3 of 3 PaRe No. Chapter XI LAND TENURE 3L6 A. Current Situation 316 B. Major Issues 322 C. Proposed Policy Reform 323 Chapter XII FORESTRY AND SOIL CONSERVATION 331 A. The Forestry Sub-sector 331 B. The Proposed Forestry Strategy 337 C. The ASAL Action Program 339 Chapter XIII MARINE FISHERIES 351 A. Fisheries Development During VIth Plan 351 B. Analysis of Results of VIth Plan 352 C. Chief Constraints Obstructing Development 357 D. Proposed Medium-Term Priorities 364 E. Proposed Policy Reform Actions 365 Chapter XIV SECTOR PERFORMANCE MONITORING AND POLICY ANALYSIS 372 A. Background 372 B. Recommendations 372 Appendix I POLICY REFORM MATRICES BY SUB-SECTOR 375 Appendix II TERMS OF REFERENCE OF STUDIES 405 Appendix III KEY POLICY PERFORMANCE INDICATORS 411 2236E/pl7-9 ANNEX VIZ TUNISIA ACRICULTURAL SECTOR ADJUSTMENT LOAN Production Levels and Growth Ratim a or Key Agricultural Producta lVth Plan Vth Plan Vlth Plan Past 15 Yearn (1972-76) (1977-81) (1982-8b) J1972-86)t, 'OOOt S 'OOOt S 'OOOt % 'GOat % …(------------------------- (per annum) ---…--------------------- Cereals 1,116.4 4.4 993.6 7.3 1,303.0 4.9 1,137.6 2.2 Durum wheat 704.0 7.4 654.8 5.6 723.0 1.4 693.9 1.4 Bread wheat 151.4 (9.4) 111.6 8.0 182.0 9.7 148.3 0.7 Barley 261.0 7.5 227.2 12.6 398.0 10.3 295.4 5.1 Fruits 1,090.4 5.2 1,028.2 (0.8) 1,064.1 2.9 1,060.9 0.8 Oil olives 625.6 5.5 521.0 (3.8) 490.0 (0.1) 554.2 (1.1) Dates 50.6 6.1 51.8 (0.5) 55.8 (4.9) 52.7 1.4 Citrus L19.2 13.3 188.6 3.8 193.8 2.3 167.2 5.8 Almonds 21.4 14.5 32.6 8.3 41.0 8.9 31.7 7.8 Vegetables 892.6 6.0 1,116.6 4.1 1,330.0 4.8 1,113.1 4.4 Potatoes 97.0 4.2 L15.0 7.9 141.0 4.4 117.7 4.1 Tomatoes 228.8 9.7 304.0 5.2 379.6 6.5 304.1 5.8 Peppers 96.8 3.7 124.8 (0.3) 127.6 7.3 116.4 2.9 Melons/Watermelons 195.6 11.1 258.0 5.1 319.6 3.3 257.7 5.8 Livestock 680.5 7.5 867.9 8.1 1,475.4 6.4 1,079.0 7.9 Cattle 56.8 10.3 61.6 (5.1) 56.9 2.3 57.3 1.0 Sheep 60.9 4.4 57.4 (2.0) 66.8 6.7 61.7 1.3 Poultry 21.4 14.1 50.7 15.8 57.2 0.2 41.3 10.8 Milk 225.4 8.0 257.4 (1.5) 293.2 6.1 258.7 3.2 Fish 41.6 10.5 56.7 3.4 74.8 8.8 57.7 6.5 Coastal 16.8 12.4 22.8 0.6 29.9 8.4 23.2 6.5 Deepsea 8.3 6.8 10.6 2.9 17.0 11.2 12.0 7.1 /a Calculated by least-squares method. Source: Ministry of Agriculture, Department of Planning and Economic Analyses (DPSAE). 2236E/p20 TUNISI1 4§RJCuiJURAL_CCIgR AAJUf lICAN gi icu I tur a I 0 lancc .or ITrc 1976 1977 IQ71) 1979 19A1 llHI 19112 1952 1984 1iQlu GlowLh RA41/0 (I.. poo annuml (D million. 1910 consLAnt Lormh) A9L1LUIIWL&LSLDAE.l 9&A 7'i. ua . .5 101.0 61.5 99.5 78.5 61.3 93.5 82.9 (1.4) Olive oll 52.7 34.3 45.4 51.7 22.7 45.0 44.3 1*1.0 38.4 26.9 (5.3) ri!h 6.7 6.9 10.0 11.4 12.4 ID. 12.2 19.0 17.5 18.7 12.0 DsOh,% 3.1 l.5 2.2 b.2 4.5 13.9 6.0 9.6 12.2 12.7 16.2 Citru -2.6 2.6 8.1 3.1 3.U 4.4 2.9 3.9 3.8 6.5 6.2 wine 6.7 2.9 5.1 2.7 3.9 3.1 3.2 2.1 2.0 3.5 (10.2) &r_SILvL lmnrts 117.7 123.1 132.7 169.1 Ib7.6 2081.2 164.3 210.6 242.8 170.2 5.9 Cercals 28.9 46.1 54.8 69.5 69.5 77.9 70.1 H9.6 109.7 52.2 10.3 Milk 12.8 14.5 10.6 19.5 16.0 25.1 16.0 16.6 15.5 17.2 3.4 c.attlo 3.9 4.6 2.9 4.4 5.6 15.1 13.1 16.1 19.5 8.2 lb.1 Me.at 0.0 2.1 2.2 2.9 3.2 6.1 3.3 6.7 13.6 8.1 26.5 CAID.La.w mDD. (22.6) (47.1) (46.2) (65.1) (106.1) (108.7) (85.8) (149.3) (149.2) (57.3) (17.6) /a CalculaLed by lea.t iquarer method. 2236E/p21 TUNISIA Ir AGRICULTURAL SECTOR ADJUSTMENT LOAN RAINFALL AND IRRIGATED AREAS r Tab b' dCAP BON 6' Mm;An 7/>jr JYrgrba ;~ ~~~~~~~~~~r Anjol Ai r|Doo.8 'a-~~~~~~~~~~~~~~~~~~~~~~e | I=lero^ivu,^}> rtS*wt zr - -e t Boundaries of Agricultural Regions - -~ Annual Average Rainfall in mm. -- \ TUNISIA gf;:-iZjl-;':f Freshwater Lakes .-- . Chotts (Saltwater Lakes) K Tt, I - Rivers . j Main Roads A F R I C A- ManRos / __ . - - - - Railways J1 . - . 6 International Airports \ Ports . -*-. - International Boundaries 4- Remad. 0 20 40 60 so 10O / * e i c KILOMETERS .C.A. .. . so l * lie 8' g.. 1 ; T U N I S I A AGRICULTURAL SECTOR ADJUSTMENT LOAN SOIL SUITABILITY FOR CROPS 0 20 40 60 80 100 7 Z E KILOMETE RS [37_ CAP BON 31 r D- IKeliba ' - dirnooqE -. OJA diNbBEUL < o 4kr Mc............ [w - w. - t 0 X - w fs -' 36s (~Kaioo.gn.roVXONASTIR zi ~~~~~~~~~~~~~~~~~~~~~35' z 1 t() Y ierionav / z - -I 4t# - 0 =i == Mzzoiuno i- I Sklo , G .- Rer S ^ ;X -9 /l/- 2:e9~~~~.~ Fes. sI,rubs ra'SeIo\ to NC % j--- > ro c-p -tw . \ 4 0tKS 3 41 40che~~~~~~~~2Te r01~mbnd i~anutcrp \ / \. G B AnnuaL fra I j tr-.X's^ ~ ILr \~ ~ ~ ~ ~ ~~~ ~~~~~~ .~I \ l-akes \ ('4. (ii'~~To iu nq ~ ~ ~ ~ 'AT _q *S TATAQUINE^s : <>w s --~~T i*IA Se *_ f gau:ge raiwa-y.--.i / ',.' . ALGER-J A . I or-- V. SPA N< n- >~~~~~~~~~~ -.> IAnnueratonal boundareswtlsglid ;- (; ~ ~ O. tceJaa // X*0SltEle //$ ( TU IA a oo Ka -Nrr- gue orar 6 ALGERIA ~ ~ ~ ~ ~~~ 'j ")+ ninainiaiors42mz > h l I B Y 4 Pro~~~~~~Vinmcbural rops | 0.) A. .31' n wit annual crop.s s _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _ _A_ _ _ _ _ _Tree_Cr_ _ _ __co_ _ _ __ned_ _with_ro_ _ge_ _ 4 TUNISIA AGRICULTURAL SECTOR ADJUSTMENT LOAN LOCATION OF MAIN CROPS I .- , , -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2 - 7 ~~~BARLEY -'- RA 3o, |,}'\s >@ @ ie,8 *SOU5SSE SOit-- )7 ; 5U SSE U.L - < .! -MAHIBA MAHD ( ( IBA \ ~ ~ ~ ~ ~ ~ ~ ~ ~ ~~L r - TTO!E*\' .- ,aw-, :a S' ;.- 1'< 2'E1Jt /Z 7 t A;e o t er e ne a r S Eo } |Me S8t a r a re o r e o < Rf i- ,- > ' : t- 0 dI)'-Sj XEGETABLGETABES >. f , gX WHEAT~~~SUSS w-0 iW , - . INDAUSTDRIALw , . , <. J f * .. - . s w.4. CROP ?W- - <---- m1 %/ .. \ ,,ir X ? ( 1 ~LIBYA , (LIY j~. .2 17 --.' ., Tunisto .-.. Province boundaries \ -~~~~~International boundaries 'as o.r ^ds r.fw r7. ~~~~e is it a.@P. . ilS Kiometers 0A20 40R60 C0b10 cs t / ~~~~~~~~~~~~~~ ~~ ~~~~~~~~Miles 0 20 40 0 _ _ . . _ si~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~: