By Michael Juge
October 4, 1998
There should be an understanding before I begin this paper. I am not an
economist. I didn't have the background in World Economics before I began
my work. I believe that the best way for me to approach the subject of
Tunisia and its response to the global community is to describe the
situations and the basic meanings of the statistics, instead of showing
charts that mean little to me without an explanation of their implications.
As I had to learn to understand terms and the charts used, I will instead
explain their meaning and implications from my understanding.
Tunisia generally shows potential as a member of the global economic
community. To be a fully participating member of the economic community, a
country must be self-sustaining as well as attractive to foreign
investment. Basically, Tunisia has kept its domestic and international debt
in check. It has a generally stable economy. It has successfully pursued
structural reform. But Tunisia has one major obstacle and that is
attracting foreign private capital. The main hindrance to this goal is the
state's continued control of the commercial banks and the flow of
information to the public. The reluctance to relinquish control of the
commercial banks, its slow pace in privatization, and its reluctance to
give information to the public makes foreign investors wary in putting
capital into the Tunisian economy. This in turn keeps Tunisia from moving
over from reliance upon the banking system to an open market economy.
Naturally, the basis for this lock on information is politically motivated.
President Ben Ali of Tunisia views economic liberalization as a possible
threat to the political stability and status quo. If there is to be foreign
investment in Tunisia, then the pace of privatization must quicken, the
gates of information must be opened in order to open the economy to the
stock market and the international investors. It is here that political
considerations and economic liberalization meet.
The first step in achieving a viable economy and financial liberalization
is for a reformed internal structure in the Tunisian economy. First,
economic stabilization needs to be achieved. After that is accomplished,
structural adjustment reforms follow to integrate local with international
financial markets (1 Henry p. 41).
Tunisia's form of Capitalism is of the German model. Most capital needed
and financing given to the various public programs and private enterprises
is dependent upon an oligopolistic banking system. In Tunisia, commercial
banks are under the control of the Central Bank, which is dominated by the
State's patronage. This system of the "bank centered " economy, which still
persists today, is reminiscent of its colonial legacy when it was under the
French. During the nineteenth-century, Tunisia became indebted to
mostly French banks starting during the second half of the century. The
debt it owed in the 1850's first started out as a high interest, short-term
loan. But eventually had to switch this to long-term financing which was
only available on the international market, and it was Paris who would be
the creditor (1 Henry p.163-163). Tunisia's economic autonomy fell into a
downward spiral through its debt, and in 1881 the French were able to
formally seize control.
Tunisian nationalism in the 20th century would prevail, but it would
inherit the colonial banking system that was entrenched. Tunisia founded
various nationalized banks. One, the Cooperative Tunisienne de Credit
founded in 1922 subsidized the nationalist movement in 1936 led by Habib
Bourguiba who would eventually lead a sovereign Tunisia by the end of the
1950's. The Central Bank of Tunisia would be established in 1958 as the
head (and State controlled) bank in Tunisia, originally set up to curb the
tide of French capital continuing to be redirected back to France. (1 Henry
pp.167-169)
In its independence, Tunisia maintained a stable economy relative to its
neighbors. It had also kept its debt to the international banks lower than
in the other MENA countries, owing less than one-third of loans to
international banks (1Henry p.30); None-the-less, in 1986, Tunisia fell
into an economic crisis when the actual hard currency it had in reserves
could covered only three weeks of imports (1 Henry p.50). In the wake of
the crisis, Tunisia received a standby agreement in November of 1986 by the
International Monetary Fund (IMF). Tunisia received the standard
stabilization and long-term adjustment package (1 Henry p.38).
Compared to other MENA countries, before the crisis in 1986, Tunisia had
been influenced minimally by the IMF. Most of the other MENA countries
already had several years of standby and extended funds agreements with the
IMF. Tunisia would be compelled to follow the programs of reform laid out
by the IMF and the World Bank as well after 1986.
The IMF's immediate concern is for the respective Debtor State is to
curtail the deficit in the domestic government budget and its balance of
payments. Also, the IMF sees the need for a foreign exchange rate that is
more appealing to international trade, limit the creation of money to
control inflation, increase interest rates to curb government spending and
attract savings, and limit credit to curb the deficits of government budget
and balance of payments. Interest rates had to be kept above inflation in
order to stabilize the economy. The measures would come into to conflict
with some of the IMF's long-term goals of structural reform in that they
desire the banks to be more autonomous and competitive. When this happens,
there is a negative side effect that banks competing with each other will
not keep the "proper" interest rates, which is above inflation (1
Henryp42). But the end goal in structural reform is to privatize the
commercial banking system making it autonomous, competitive, and more
efficient than it is presently, and to open Tunisia to the international
market.
The commercial banking system is still the main source of finance capital
in Tunisia. The goal of financial liberalization to a great extent involves
the emergent autonomy of the commercial banks. Tunisia received the
structural adjustment package from the World Bank in 1991. By this time,
Tunisia had the lowest inflation rate in the MEN. But the under competitive
public banks posed limitations. The banking system has been under
structural adjustment since 1988 (2 Henry p. 24). Back in 1987, the
governor of the Central Bank officially ended all requirements of prior
Central Bank approval of loans. Instead, banks would limit their credit and
diversify their portfolio investments (1 Henry p. 51). By 1989, money of
the banking reforms were in place. The Central Bank gradually gave up
direct control on most commercial bank lending. Instead, it established a
money market, which should determine the interest rates by market forces
rather than by arbitrary decisions of the administration. The official end
of the direct control over the commercial banks by the Central Bank came in
November of 1996, when it " removed all interest rate subsidies, ceased its
rediscounting operations, and eliminated the requirement that each bank
lend a specific percentage of deposits to 'priority activities' such as
agriculture and handicrafts." (2 Henry p.24)
But the reality is that the banking system is still under the control of
Central Bank, and the money market that is the proof of financial
liberalization is not so dependent upon the market forces. In essence, the
commercial banks are too important to let go of control over. One of the
conditions of the new structural loan program in 1997 by the World Bank is
the privatization of one of the major banks. Tunisia's response is to sell
the shares of a bank to the public, but keep control of the bank's
management (2 Henry p.25). The government insists on maintaining control
despite the inefficiency of the banks. For example, the flagship public
bank's non-performing loans amounted to one-third of the bank's portfolio
(2 Henry p.27). The State still accounts for over 60% of the banks assets,
and public enterprises account for 22% of the GDP (Roula, 9/22/97).
This reluctance of bank privatization is another basic symptom to what Dr.
Henry calls an "information-shy regime." It is easier for enterprises to
maintain confidentiality about its performance through financing through a
bank than to open itself to the open market. The strain of information
through continued reliance upon the commercial banking system dissuades
foreign capital into the Tunisian economy. Private investors tend to be
reluctant to invest into enterprises that have little information to give.
There are four basic types of private capital to an economy: 1.foreign
direct investment 2.bonds 3. Portfolio investment in local stock markets 4.
International bank and trade-related lending (2 Henry p.4). All of these
forms of private capital require information that is publicly available.
The effect is a lack of private investment. In 1990 the number of companies
on the stock market was 13, in 1995 there were 26, and in 1997 it is only
up to 30. This is a slow growth in the stock market. (2 Henry p.9) It has
been successful in issuing government bonds for its macro-economic
stability. But in general, the growth is slow because of the unwillingness
to release information. Under Ben Ali, Tunisia embarked on a major free
trade agreement in 1995 to lift tariffs, which will further pressure
economic liberalization.
Tunisia seems to at a "crossroad" now (Roula, 9/22/97). On the whole,
Tunisia, despite its slow pace of financial liberalization, seems to be
stable. It has strong public finances, a budget deficit of 3% to GDP,
moderate external debt and debt service, and there is a gradual removal of
price, credit, and labor market distortions. (MEED, 9/12/97) There have
been improvements in the country since Ben Ali's rise to power in 1987.
Gradually, Ben Ali has pursued programs of economic reform and opening of
the economy while still trying to maintain a strong economic role and
preventing the social unrest next door in Algeria from reaching Tunisia.
The social indicators corroborate this trend of reform. Infant mortality
has dropped to 3%, rate of population growth has slowed down from 2.4% to
1.7% , and absolute poverty has dropped from 11.2% to fewer than 6.2%
between 1985 and 1995. (Roula, 9/22/97)
There are dangers ahead for Tunisia. The free trade agreement with the
European Union will put other domestic companies at risk as well as make a
loss in government revenues in the form of tariffs. The unemployment rate
is currently at 15%, rising mostly in the 18-24 year-old population (Roula,
9/22/97). This could increase as a result of competition with European
companies. Also, the Islamist opposition remains as a direct to Ben Ali's
regime. But at the same time, there is a gradual opening of Tunisia to the
global community, even if its reforms are slower than the IMF and the World
Bank want.
BIBLIOGRAPHY
1. Henry, Clement;The Mediterranean Debt Crescent; The American University
in Cairo Publishers; 1996
2. Henry, Clement; "Challenges of Global Capital Markets to Information-Shy
Regimes: The Case of Tunisia"; The Emirates Occasional Papers; The Emirates
Center for Strategic Studies and Research; 1998
3. Roula, Khalaf; "Ben Ali's regime at the crossroads"; The Financial
Times; September 22, 1997
4. Middle Eastern Economic Digest; September 12, 1997; p.22