Tunisia: First and Second Reviews Under the Stand-By Arrangement, Request for Waiver of Applicability and Nonobservance of Performance Criteria

EXECUTIVE SUMMARYBackground. The political transition is moving forward again following another period of political upheaval and security tensions. However, the protracted political crisis of the past few months has taken a toll on the economy, resulting in a weaker economic recovery than envisaged and further erosion of external and fiscal buffers.Program performance has been mixed. End-June and end-September NIR and NDA quantitative performance criteria have been met, but are estimated to have been missed by end-December because of lower external financing and the high liquidity needs of the banking sector. A weak budget composition, lower budget commitments, and deferred cash payments to 2014 resulted in an overperformance of the end-December fiscal target for the central government primary balance. The implementation of structural reforms has been progressing, but with some delays linked to building a consensus during the political crisis, and to technical difficulties.Looking ahead, the program will continue to focus on ensuring short-term macroeconomic stabilization while laying the foundations for sustained reforms that will reduce economic vulnerabilities and generate higher and more inclusive growth. A more growth-oriented budget composition—including revenue reforms and the reform of regressive energy subsidies—and the build-up of a targeted household support program will lay the foundations for higher and more inclusive growth. A prudent monetary policy and greater exchange rate flexibility will continue to underpin macroeconomic stabilization. Structural reforms should be accelerated to enhance private sector development and make a dent in unemployment.Risks to program implementation are important. Main risks relate to setbacks in the political transition. Commitment to program objectives will be tested by resistance to some necessary but not always popular reforms, which will need to be managed through further consultations and proactive communication with stakeholders.The completion of the combined first and second reviews will make SDR 329.12 million (about USD 500 million) available.