III. Economic Trends and Outlook Major Trends and Outlook In 1986, Tunisia found itself immersed in a severe balance of payments crisis. It embarked upon a World Bank and IMF approved structural adjustment program that has been largely successful -- foreign trade has been liberalized, price controls and consumer subsidies have been reduced or eliminated, public firms are being privatized, banking and financial market reform is underway, and a unified investment code was recently adopted. Two principal economic indicators, real GDP growth and inflation, bear witness to the success of the program. Over the past four years, real GDP growth averaged 5.6 percent while inflation averaged 6.0 percent. (Note: the 4.0 percent inflation recorded in 1993 was a 20 year low.) For 1994, the government is forecasting real GDP growth of 5.0 percent and inflation of 4.2 percent. Tunisia has also achieved impressive success in bringing its budget deficit under control. In 1991, the deficit as a percentage of GDP was 4.5 percent; in 1992 it was 2.8 percent; in 1993, 2.4 percent; and in 1994, 1.9 percent. Export-led growth continues to be the focus of reform, and during the first four months of 1994 exports were up 17 percent over the comparable period of 1993, while import growth was held to 8.6 percent. This balance of trade improvement is largely the result of greater demand from European trading partners. Other reforms and initiatives in the past year include: (1) making the dinar convertible for current account purposes;(2) inaugurating a foreign currency market in which individual commercial banks can set prices and trade currencies among themselves; (3) adopting a new unified investment code to simplify investment and directing it toward high priority activities; and (4) instituting changes at the Tunisian stock market to attract new listings and make stocks and financial instruments attractive to the average citizen. Tunisia continues to pursue its program of privatization, and its program of trade and tariff liberalization. By the end of 1993, 43 public enterprises had been privatized, and approximately 85 percent of all imports were free of restriction. Tunisia enjoys an excellent reputation with international lending institutions, and is proud of the fact it has never rescheduled any of its debt. Principal Growth Sectors Nominal gross domestic product in Tunisia in 1993 was 14,848 million dinars. Services accounted for 33 percent, manufacturing industries 17 percent, agriculture and fishing 16 percent, and non-manufacturing industries 11 percent. Non-commercial activities accounted for the balance. For the past several years it has been manufacturing and services (especially tourism) that have propelled the economy. In 1992, the non-food product manufacturing sector grew 8.3 percent while services grew 12.2 percent. Two-thirds of the growth in services was in tourism. These two sectors, manufacturing and services, together accounted for three-quarters of the 6.5 percent GDP growth recorded that year. In 1993, the same two sectors led the economy. Non-food product manufacturing grew 6.1 percent, while services grew 7.0 percent. That year the two in combination accounted for 3.0 percent GDP growth, but other sectors recorded negative growth and overall GDP growth was held to 2.2 percent. For 1994, the government is predicting GDP growth of 5.0 percent with agriculture and fishing up 1.5 percent, food and agro-products up 9.7 percent, non-food manufacturing up 6.9 percent, manufacturing up 6.7 percent, and services up 6.6 percent (tourism itself up 6.5 percent). Early 1994 economic results show tourism 12 percent above the same period last year, suggesting another banner year. On the negative side, Tunisia has experienced a very dry 1993/1994 winter and the cereals crop forecast is less than one-half of last year's harvest. The GOT's forecasted growth in agriculture has already been cut from 5.1 to 1.5 percent, and it may slide further. Government Role in the Economy Under the structural adjustment program, the government has sought to reduce its role in the economy. The principal mechanism of disengagement has been the privatization of public enterprises. When this program began in 1987, there were 189 enterprises in which the government held a 50 percent or greater stake. Many of these were holding companies controlling several firms. In its initial phase, the government disposed of the unprofitable firms. By the end of 1992, 37 public enterprises had been privatized -- 27 through sale of assets and 10 through sale of shares. The program slowed in 1993 as the government turned its attention to the larger and profitable public enterprises, but by the end of the year, the number of privatization actions had grown to 43. The Tunisian National Labor Federation recently announced its conditional support for privatization. This support, together with changes in the Tunisian stock exchange and the successful conclusion of national elections in March 1994, may portend an accelerated pace of privatization in the future. Another indication of the Government's disengagement from centralized control of the economy is the diminishing role of the Central Bank. The dinar became convertible for current account purposes in 1993. Businesses may now bypass the Central Bank and obtain foreign currency for import/export transactions from any commercial bank. On March 1, 1994 Tunisia took still another step on the road to full convertibility when it inaugurated a foreign currency market. Prior to that date, the Central Bank set the dinar's value and conducted all foreign currency transactions. It still issues a reference rate each morning and conducts some currency transactions, but individual banks are free to bypass the Central Bank, set their own prices, and trade among themselves, unregulated except by market forces. Balance of Payments Situation Tunisia's balance of trade situation deteriorated slightly in 1993 as imports grew 9.6 percent to 6,236 Million Dinar (MD) while exports grew only 7.5 percent to 3,818 MD. The net result was a 13 percent increase in the trade deficit from 2,139 MD in 1992 to 2,418 MD in 1993. Exports of capital goods rose 43 percent to 245 MD, consumer goods were up 17 percent to 1,917 MD, food and agro-product exports rose 19 percent to 399 MD, while raw and semi-processed materials fell 6 percent to 822 MD. The first four months of 1994 saw the balance of trade improve significantly in comparison to the same period of 1993. Exports grew 17.4 percent to 1,384 MD while import growth was held to 8.6 percent and 2,137 MD. The rate of coverage increased from 59.9 to 64.8 percent. During this period, exports of food and agro-products more than doubled to 160 MD while imports of such products were held to a 30 percent increase. Consumer goods exports rose 15 percent while imports rose a greater 22 percent. Raw materials, especially phosphates and chemical products, grew 28 percent and capital goods rose 20 percent, while imports were held to a 4 percent increase. Energy exports declined 36 percent, while energy imports declined only 13 percent. Tunisia traditionally has a large surplus in services that helps offset the deficit in merchandise trade. Tourism, the most important of these service exports, remains one of the brightest spots in the economy and is now Tunisia's single most important source of foreign exchange. In 1993, the number of tourists entering the country grew 3.3 percent, the number of tourism nights grew 4.1 percent, and the receipts grew 19.2 percent to 1,126 MD. During the first four months of 1994, tourism entries grew 7 percent, tourism nights grew 14 percent, and receipts grew 15 percent over the same period in 1993. Trade and Investment Barriers Tunisia acceded to full GATT membership in 1990. All taxes now remaining on imports also apply to locally produced goods and are not considered to be tariff barriers. The only additional minor charge on imports is a small customs user fee of two dinars per declaration. Tunisia's basic tariff ranges from 10 percent to 43 percent. In addition, several years ago Tunisia imposed a temporary supplemental duty on certain imports which compete with locally produced goods. This policy, enacted in 1992, authorized a maximum additional duty of 30 percent, to be reduced in 10 percent increments over a three-year period before being phased out at the end of 1994. While the original items selected for the surcharge in 1992 have been reduced as scheduled, others have been added each year at the 30 percent rate. The government now reports it does not intend to phase out the surcharges until all imports are otherwise free. At this time, approximately 85 percent of imports are free of restrictions, and we expect this to rise to 90 percent by 1995. Tunisia still has non-tariff barriers in the form of import licenses on certain products, particularly durable consumer goods. For such products, an importer must obtain a license from the Ministry of National Economy specifying the product, quantity and amount of foreign exchange needed. Without this license, a bank will not authorize the foreign currency transaction. A new trade law became effective July 1, 1994 and we expect the number of items requiring a license to be reduced at that time. On January 1, 1994, Tunisia adopted a unified investment code designed to simplify investment and direct it toward certain high priority areas. It covers virtually all economic activities except financial services, mining, and energy (which are considered unique and covered by pre-existing legislation). The new code applies equally to Tunisians and foreign nationals, whether resident or non-resident, except that: (1) foreign investors may only lease, not own, agricultural land, and (2) government authorization is required if foreign capital is to exceed 50 percent of a non-wholly exporting service company. Except as noted above, foreign investors can have 100 percent ownership of investments without prior authorization. There are two agricultural products which face import barriers. First, cotton imported from the United States and certain other non-Arab countries is subject to a 17 percent duty, while that from Egypt, Syria and other major Arab-world suppliers is duty free. Second, Tunisia prohibits the importation of American meat which has been treated with hormones. Significant Ongoing Projects and Major Competitors A major infrastructure project currently underway is the construction of the Lac de Tunis project. The Societe de Promotion du Lac de Tunis, a state-owned company, is developing a planned area on the outskirts of Tunis. Preselection is already beginning for the infrastructure work. This is the second phase of the development project and consists of 60 km of roads, an extensive sewage, water, gas, electricity and telephone network, and landscaping. The major competitors for American firms are the Europeans, specifically French, German, and Italian companies. Siemens is very strong in telecommunications and power systems. Althsom, Alcatel, Heurty, and Thomson are all tough competitors in their respective fields.