Docuams Of

The World BankFOR 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 performanceof their official duties. Its contents may not otherwise be disclosed without World Bank authorization.

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CURRENCY EQUIVALENIS

Currency Unit - Tunisian Dinar (D)

First SemesterCY1985 CY1986

US$1.00 = D 0.757 D 0.770D 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 lavulgarisation)

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 analyses6conomiques)

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 performanceOf 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 variableInterest rate

Loan Description: The proposed Loan would support the first phase or implementation ofthe Governnent's program of agricultural sector reforms, within theframework of a general macro-economic restructuring program. Theprincipal objectives of the sector adjustment program are to maintainthe growth rate In agriculture in order to reduce the sector tradedeficit. within the overall macro-economic constraints on publicresources. To achieve this objecttve, actions would be taken, in boththe short and medium term, to: (i) improve the prices and incentivesframework; (ii) re-orient the public investment program in agriculture:(iii) strengthen agricultural support services including rationalizingthe role of the private sector; (iv) improve management of naturalresources of land, forests and fisheries: and (v) build upinstitutional capacity for sector performance monitoring and policyanalysis. The Government's macro-economic restructuring program Isfocusing on measures to limit growth of domestic demand (wage andsalary, budget and monetary policies), to stimulate growth ofnon-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 rapidcreation of new employment and reduced underemployment. The foreignexchange provided by the Loan would be used to finance general importsbased on a negative list and agricultural inputs needed to stimulateagricultural production, including fertilizer and raw materials forits manufacture. insecticides and herbicides, animal feed, dieselfuel, spare parts, tractors and pumps, veterinary supplies, rawmaterials for the manufacture of irrigation pipes and fisheries inputs.

Benefits and Risks: The reforms agreed under the Loan are expected to create a morefavorable environment for overall economic and sectoral growth In atime of resource constraints. In particular, changes in theagricultural pricing and incentives framework and publitc expenditurepriorities are expected to make the sector a more efficient producerof import substitutes and export products. Risks relate to the lengthand difficulty of the process, possible social and political pressures.unpredictable developments in the external environrment anduncertainties in the response of the private sector. These risks arelimited by the Government's strong commitment to objectives of themacro and sector adjustment programs, and by the inherent flexibilityof the phased medium-tern approach.

Estimated Disbursements: The proceeds of the Loan would be disbursed in two tranches: US$100million equivalent soon after effectiveness; US$50 million equivalentafter implementation of specific actions, including an overall reviewof the implementation of the macro-economic and sectoral reformprograms.

Aooraisal Report: This is a conbined President's and Staff Appraisal Report. A detailedMedium-Term Agricultural Sector Adjustment Program (HTASAP) isavailable on request.

Hbos No. IBRD 19855No. IBRD 19856No. 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 4B. Recent Policy Measures Taken by the Government 6C. The Short- and Medium-Term Adjustment Program 7D. Medium-Term Projections 11E. 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 19B. The Sector Adjustment Program 22

- Origin and Objectives 22- Improving the Prices and Incentives Framework 23- Reorienting Public Expenditures 28Strengthening and Privatizing Support Services 34Improving Management of Natural Resources 43

- Building Up Sector Performance Monitoringand Policy Analysis Capabilities 46

PART V THE LOAN 47

A. Origin and Objectives 47B. Action Program Under the Loan 47C. Loan Administration 52D. Management, Coordination, Monitoring and Evaluation 55E. Justification and Risk 56

PART VI : RECOMMENDATION 59

Table of Contents (cont'd)

ANNEXES

r. 'ountry DataII. Status of Bank OperationsIII. Supplemental Loan Data Sheet

IV(a). Government Letter of Economic Development PolicyIV(b). Government Letter of Agricultural Development Policy

V. Sector Adjustment MatrixVI. 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 AreasIBRD 19856 - Soil Suitability for CropsIBRD 19857 - Location of Main Crops

INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT

REPORT AND RECOMMENDATION OF THE PRESIDENT OF THE JBRDTO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN

TO THE REPUBLIC OF TUNISIAFOR AN AGRICULTURAL SECTOR ADJUSTMENT LOAN

L. I submit the following report and recommendation on a proposed loanfor the equivalent of US$150 million to the Republic of Tunisia to helpfinance an agricultural sector adjustment program. The loan would have a termof 17 years, including 4 years of grace, at the standard variable interestrate.

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 updatedinformation obtained at the time of appraisal of the proposed AgriculturalSector Adjustment Loan in April 1986, and by a mission in June/July 1986, arereflected in this part and the country data sheets attached in Annex I.

3. Tunisia is a medium-size, middle-income country with a population of7.5 million and a per capita income of about US$1,100.1 ' Much of Tunisia isarid or semi-arid. Only 3% of arable land is irrigated, and areas whererainfed agriculture is possible are subject to severe year-to-year fluctuationsin rainfall. Nevertheless, agriculture still occupies nearly one out of everythree Tunisians in the labor force. Tunisia's most important raw materialsare phosphates, petroleum and natural gas. Known exploitable reserves of oiland gas are approaching depletion, and the limited new reserves require costlyoff-shore drilling. Barring large new oil and gas discoveries, and given therise in domestic energy demand, Tunisia is expected to turn into a net oilimporter in the early 1990s. The low quality al phosphate deposits constrainsthe 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 humanresources, paying special attention to family welfare, education, and technicaland vocational training. As a result, between the early 1960s and the early1980s, the infant mortality rate declined from almost 160 to 79, lifeexpectancy at birth rose from 48 to 62 years, the adult literacy rateincreased from about 151 to about 621, and average caloric intake per capitaincreased from 95% to 1211 of minimum standard requirements. An active familyplanning policy pursued by the Government led to a decrease in fertility andbirth rates. Even though mortality rates also decreased, the grossreproduction rate decreased markedly from 3.5% to 2.4% over the same period.However, since net emigration of Tunisians abroad was sharply reduced byrestrictive measures taken in the EEC countries and Libya, the growth rate ofthe labor force accelerated, a main reason for the rapidly growing, serious

LI 1985 figure at current prices and 1985 exchange rates.

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unemployment problem. Open unemployment reached 141 in 1963 and under-employment is extensive. These problems are particularly serious among youngschool dropouts.

5. Recent economic developments. During the 1970s, the Tunisian economydid well. Rapid growth in the range of 7-8Z was accompanied by substantialstructural transformation as manufacturing and tourism became more importantand their share in total exports increased. Economic performance benefittedfrom substantial terms of trade gains due to the rapid price increase of oil,allowing both consumption and domestic savings to increase and investment toremain high (over 30% of CDP). It also benefitted from improved economicmanagement with a cautious shift toward a more liberal, market-orientedeconomy. The inflation rate remained modest, averaging 6.1% over the decade.The balance of payments current account deficit, averaging 51 to 6% of GDPover 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 problemwas a persistently high rate of unemployment/underemployment.

6. The VIth Plan (1982-86) proposed a number of policy reforms to facethe consequence of rising unemployment and the progressive decline in netenergy exports. Its main objectives were employment generation, exportpromotion, regional development and public sector efficiency. Investmentpriority was given to agriculture, engineering industries and tourism. Theoverall rate of investment was projected to decline during the Plan period.To minimize the effects on economic growth and employment, measures wereproposed to increase the efficiency of exi0ting investments and to encourage ashift to labor-intensive activities. They were to be accompanied by asubstantially tightened income policy, in particular cautious wage and salarypolicies, and a considerable slowdown in the growth of recurrent budgetexpenditures.

7. Economic performance, however, deteriorated during the Plan period.Oil production virtually stagnated; in 1982, a prolonged drought depressedagricultural output and agro-industrial production; technical problems plaguedthe phosphate and cement industries; and tourism and exports of manufacturedgoods were adversely affected by the recession in Europe, high domestic pricesand a sizable appreciation of the Tunisian dinar vis-h-vis the currencies ofmost competitor countries as well as the US dollar. The economy recovered in1983 and 1984 due to buoyant growth in manufacturing output, stimulated byrapidly expanding local demand. Growth was further stimulated in 1985 by anexceptionally good agricultural crop and resumed growth in tourism, bringingthe 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 viewof the world recession and as compared with other countries.

8. The Government was slow, however, in adjusting domestic demand to thedecelerated economic growth. Ir, contrast to the Plan's macro-economicobjectives, the investment rate remained high rather than declined, mainly dueto higb public enterprise investments in energy and transportation, whiledomestic consumption expanded rapidly, fuelled by sharp increases in wages andsalaries in 1982 and early 1983. This strong demand pressure, facilitated byrather liberal credit policies, was reflected in rising inflation whichaveraged nearly 10.51 in 1981-84, compared to 8.01 over 1977-81. It alsocontributed substantially towards the marked worsening of the current accountdeficit of the balance of payments which rose to 11% of GDP in 1984. The

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Government's overall budget deficit also increased slightly from Ln average of2.7% of GDP in 1981-82 to 3.2% in 1983-84, excluding deot amortization. Thisreflected increases in recurrent expenditures due to higher wage and salaryoutlays; higher subsidy payments to households and public enterprises; andhigher public investments.

9. While the situation had not reached crisis proportions, the trendobserved during 1981-i4 clearly could not be sustained. Faced with thisdeterioration, the Government started to implement a package of policy measuresaimed at stabilizing the economy as described in some detail in Part 11 below.These measures together with the imposition of drastic foreign exchange andimport restrictions, brought the balance of payments current account deficitback 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 usuallyassociated with controls, such as growing shortages of raw materials, semi-finished products and spare parts, have appeared. Meanwhile, the budgetdeficit rose to 5% of GDP in 1985 because of a slow growth in revenues,despite a slight decline of capital expenditures in real terms. Theauthorities prepared a restrictive budget for 1986, as discussed below(para. 21).

10. Over recent years, the Government had consulted informally with theIMF on a wide variety of economic and financial issues, but had not asked forfinancial support. Before and during the July 1986 Article IV consultationmission, however, there were discussions with the IMF on a possible stand-byagreement cum compensatory financing facility, which will be formalized duringa mission, scheduled for early September.

II. Social issues. Since Independence, the country has gone a long waytowards meeting the basic needs of its population. Over 16% of GDP is nowdevoted 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 waslargely concentrated, however, in urban areas. Since 1981, social issues havefaced a different context than in the 1970s, when an easy financial situationallowed a relatively unconstrained expansion of social services. On one hand,the Tunisian population has become increasingly aware of and sensitive toincome distribution issues, and the beneficial effects of past rapid expansionin social services have created a demand for improved standards in socialservices delivery. On the other hand, the provision of adequate socialservices - education, health, urban infrastructure, housing - is beingincreasingly hampered by budgetary constraints. To reduce the financialburden of social services, the administration is reviewing the cost structureof the various types of social services, including free or below-costdelivery, the possible introduction of some user fees, and improved socialinfrastructure management, in particular as regards hospitals. Also,decentralization of social facilities to deprived zones will have to beassessed carefully because costs for servicing and maintaining them couldbecome prohibitive.

12. To reduce socio-economic differences, in particular between rural andurban areas, and between workers in the modern sector and those precariouslyemployed in informal activities, the Government is channelling more resourcesinto regional development and youth employment. Integrated rural programs arebeing developed to stimulate creation of productive jobs and grassrootsparticipation Subsidies and credit facilities are granted for young

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technicians to create their own enterprises and for entrepreneurs to createnew projects in underdeveloped regions. More efforts are needed, however, tostrengthen the coordination of vocational and on-the-j'b training with marketdemand and to ensure that rural programs create economically viable andsustainable assets and activities.

13. External assistance and foreign debt. During the second half of the1970s, foreign borrowing was modest and a large share of foreign funds wasprovided by public sources at relatively soft terms. At the end of 1979, debtoutstanding and disbursed was estimated at US$3.0 billion, or 42% of GDP; debtservice was less than 11 of export revenues. For reasons mentioned earlier(para. 8), the balance of payments deficit has increased substantially sincethen, as has foreign indebtedness. According to preliminary estimates, totalpublic 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 about22%. However, the Tunisian authorities bave always followed cautious debtmanagement policies; while the share of short-term borrowings has increasedslightly since 1980, Tunisia's overall foreign debt remains predominantly longand medium-term, and debt service requirements are projected to increase onlyslowly. During 1980-84, 60% of foreign loan disbursements were from officialsources, and nearly 31% on concessional terms. Over 70% of officialdisbursements 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 werefavorable, averaging 8% interest and 15.3 years maturity.

14. The balance of payments and foreign debt outlook, including Tunisia'screditworthiness, 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 situationas presented above highlights three major problems facing the Tunisian economytoday, one rather immediate, two somewhat longer term. The immediate problemis 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, thedecline in oil prices, lower tourism revenues as a result of politicaluncertainties around the Mediterranean, and lower workers' remittances haveput further pressure on the balance of payments. While there is no danger ofan immediate crisis, the situation cannot be allowed to continue much longer.The two l1:jger term, but equally important, problems are the progressivedecline in net hydrocarbon exports, requiring the development of other sourcesof export revenues and import substitution (non-traditional exports, tourism,agriculture), as well as the high and growing unemployment and underemploymentrate and the danger of an even worse trend given the high rate of growth ofthe active population, at a time of lower overall economic growth.

16. No single policy instrument can deal successfully with all threeproblem areas; only a carefully balanced and timed package of different policymeasures can do so. Such a comprehensive policy package should be based onthree n.ain considerations:

(a) A return to an export driven growth strategy, as was pursued quitesuccessfully until 1981, is a key to the success of any futuredevelopment program aiming to achieve satisfactory economic growthand employment creation, given Tunisia's limited domestic market1 'and the fact that most obvious import substitution industries arealready well developed. With petroleum production ceasing to be amajor engine of export growth, and export possibilities in agriculturelimited by market constraints in the EEC, manufacturing will have tobecome much more export oriented than in the past, when it cateredprimarily to domestic demand fueled by high petroleum revenues. Thisrequires fundamental changes in industrial policies so as to increaseincentives to export. Such changes are also necessary to revitalizeexisting export oriented economic activities, such as tourism.Emphasis in agriculture will be to promote efficient importsubstitution in commodities such as grains, milk and meat, for whichTunisia has a comparative advantage.

(b) A major improvement in the efficiency of resource use and allocationis required. With the highly profitable production and export ofpetroleum declining progressively, economic resources in Tunisia,domestic as well as foreign and private as well as public, willbecome increasingly scarce. Under these circumstances, the countrycan only achieve a satisfactory rate of overall economic growth andan acceptable level of new employment creation if it uses andallocates these resources with the utmost efficiency. Theliberalization measures covering prices, investments and imports,included in the Government's economic adjustment program, serveprimarily to improve efficiency in the private sector by graduallyintroducing more competition, while proposed changes in lbudgetpolicies, public investments and public enterprise management wouldimprove efficiency in the public sector.

(c) Last but not least, economic development must become much more laborintensive in order to create more employment in spite of lower overalleconomic growth. Future increases in production should be achievedmostly through increasing the number of employed workers and newinvestments should serve mostly to create new employment. This wouldbe achieved through a marked change in relative factor costs, makinglabor less expensive relative to capital. Macro-economic projectionsindicate clearly that if real salaries had continued to increase by4.5-5 per year, as was the case during the 1970s, and if interestrates had continued to be largely negative in real terms, one couldnot expect the creation of even half as many new jobs as necessary toabsorb the rising number of new job seekers during the period of theVIlth Plan (1987-91). Furthermore, priority must be given to thedevelopment of labor-intensive sectors with relativeLy low investmentcosts such as small and medium enterprises, electrical and mechanicalindustries, and agriculture. There is in fact a substantialpotential for employment creation in this latter sector particularlythrough stimulating import substitution.

1/ Less than 10% that of Switzerland and about 5% that of Spain.

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B. Recent Polioy Measures Taken bY the Government

17. The Government of Tunisia already recognized the importance of sucheconomic adjustments during preparation of the VIth Development Plan (1982-86)and a substantial number of concrete policy changes have been implemented overthe last few years, as detailed in this section, some of them bold and oftenunpopular. These efforts need to be pursued and expanded over the comingyears, along the lines presented in Section C below.

18. For the last three nnd half years, the Government has pursued strictwage and salary policies. Since Jonuary 1983, when wage increases weredelinked from the cost oE living index, no general salary increases have beengranted. As a result, average real salaries have declined by more than 15%.This decline has eliminated the main source of the rapid increase in domesticconsumption experienced during 1980-83. While the Covernment raised theminimum 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, thishas reduced by 28% the nominal exchange rate on a trade weighted average, morevis-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 observedover the last couple of years, and so to improve the competitiveness ofTunisia'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 fouryears, general interest rates were raised by 1-2 points in April 1985 and by3-4 points for the particularly low special rates in Spring of 1986. Togetherwith the 1.7 point decline in the inflation rate in 1985, itself a verysatisfactory achievement (from 8.2 to 6.5%), these nominal interest rateincreases raised real interest rates by 3-5 points in 1985; most rates are nowpositive in real terms, in line with the recommendations of the Bank'sFinancial Sector Report (No. 5263-TUN of December 16, 1985). In agriculture.

however, interest rates are not yet high enough to cover financial andoperating costs and risks.

21. Budgetary outlays. As mentioned above (para. 9), 1985 ended with amarkedly worse overall budget deficit (5% of GDP) in spite of a nearly 2%

decline in development outlays, as Government revenues from oil and importtaxes declined even more substantially. In 1986, the situation is expected toimprove 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) bysome 9% in real terms. Sales taxes on alcoholic beverages and tobacco wereraised; recurrent expenditures (net of interest payments) will be reduced by2.5% in real terms, and subsidies to households and public enterprises as wellas development outlays (net of debt amortization) will be reduced by 22% inreal terms. As a result, the overall deficit is expected to decline to 3.9% ofGDP. The substantial reductions in subsidy outlays reflect the Government'spolicies of gradually adjusting the prices of goods subsidized by the budgetand the tariffs charged by public enterprises for their services.

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22. For several years, agricultural producer prices have gradually beendecontrolled 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 domesticmarket and/or exported. While producer prices in general are not aligned withborder prices, producer incentives have improved progressively.

23. Investment controls, while not reduced, have been streamlined, andfocused more sharply on new investment priorities. Among others, renewalinvestments and investments in tourism (other than hotels) receive priorityand incentives similar to those of investments in other sectors.

24. Export promotion. A number of measures have been taken to stimulateexports, streamline export procedures, establish export credit and insurance,develop export marketing, and facilitate re-exports, in line with thereconiendations of the Bank's Industrial Policy Mission of January 1985.The liberalization of all necessary imports for exporting enterprises, asannounced in mid-August 1986, will provide an additional powerful stimulus toexports.

C. The Short- and Medium-Term Adjustment Program

25. As indicated in paragraph 9 above, the package of policy changesimplemented by the Government over the last years has shown some positiveresults, particularly concerning private domestic demand and the budgetdeficit; however, its restrictive elements have also created a number of"tblems, such as the lack of essential imports for directly productiveactivities. Over the coming years, two kinds of measures are of vitalimportance: (a) to maintain and strengther. the positive measures alreadytaken; and (b) to complement these measures through changes in other fieldsdestined to reinforce the effectiveness of the program and minimize itsadverse effects. Included in this second group are measures to restructurethe economy through a progressive liberalization including prices, investmentsand imports. This program of macro-economic adjustment measures provides thepolicy base for the proposed Agricultural Sector Adjustment Loan (ASAL), aswell as the proposed Industrial and Trade Policy Adjustment Loan currentlyunder preparation (para. 53). It is described below, as well as in thec,overnment's Letter of Economic Development Policy [Annex IV(a)].

26. Wage and salary policy. Maintaining cautious wage and salary policiesmay weLl be the single most important policy measure to achieve a long-termsustainable balance of payments equilibrium and more rapid employment creation;it can also contribute significantly to achieving a rapid improvement in thepresent balance of payments deficit. Wages and salaries are an importantdeterminant of (a) domestic demand and in consequence of import demand;(b) the cost of production of manufactured goods and services, and consequentlyof the competitiveness of Tanisia's manufactured exports and tourism; and(c) relative factor costs and, thus, the labor intensity of future economicactivities and growth of employment. The Government is determined to maintainthe restrictive wage and salary policies started in 1983, and limit the growthof the total wage bill to that of GDP during 1988-91, while keeping it belowthat in 1986-87 (limiting it to less than the increase of the CPI), when onlythe minimum wage is raised. While such measures will slow down theimprovement in the standard of living of the labor force already employed,they are necessary and adequate to speed up the creation of new employmentand, thus, reduce unemployment and improve income distribution.

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27. Exchange rate policy. An appropriate exchange rate, allowing forcompetitive exports of non-oil/non-phosphate goods and services is a vitalprecondition for the success of an export-oriented growth strategy in Tunisia.The measures taken since mid-1985 have achieved this goal. The Government hascommitted itself to pursuing a flexible exchange rate policy with theobjective of maintaining a competitive rate vis-i-vis its main competitorcountries. It is in active discussions with the IMF on this issue. Anyadjustments in the exchange rate will be reflected, among others, in domesticproducer 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, theGovernment intends to pursue more flexible interest rate policies than in thepast, changing interest rates in line not only with the inflation rate butalso with financial and operating costs and risks.

29. As mentioned above (para. 21), budget outlays have been cutconsiderably in 1986. In the context of the VlIth Development Plan, theGovernment plans further reductions in the overall budget deficit over thecoming years; in order to achieve its balance of payments and foreign debttargets during the VIIth Plan and beyond (paras. 43-44), the Governmentintends to eliminate the overall budget deficit by 1991 (see Table 1). Thisobjective would be achieved largely through cuts in expenditures, sincebudgetary revenue is already high (nearly 31X of GDP) and likely to increaseless rapidly than GDP given declining oil incomes, low growth of imports andthe proposed reduction in many customs tariffs (para. 36), as well as the taxincentives given for exports and regional development. Even given the plannedmajor Government effort to mobilize new sources of revenues (improvedcollection ot direct taxes, full introduction of the VAT, introduction ofadditional sales taxes on luxury goods), a gradual decline in total budgetrevenues as a percentage of GDP is virtually unavoidable.

Table 1: OVERALL BUDGET DEFICIT

(In percentage of GDP, net of debt amortization)

1986 Average Annual1985 Revised 1987 1988 1991 Growth 86-91Actual 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 -1.3Capital 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 -

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30. Under these circumstances, gradual achievement of a balanced overallbudget requires substantial reductions of expenditures in real terms as wellas in relation to GDP. These can be achieved without impairing the provisionof appropriate social and economic services by the Government, through carefulsetting of priorities among budgetary outlays. The recommendations of theBank's Public Expenditure mission will provide an important input into thistask. For recurrent expenditures, it will be achieved primarily through twomeasures: (a) a considerable slow-down in the growth of salary outlays as thehiring of civil servants will be limited to a maximum of 2% p.a., and salaryincreases will be as limited as in the private sector; and (b) a systematicreduction in subsidies of 52 p.a. in nominal terms. Among others, the latteris possible as a result of the public enterprise reform that the Governmentstarted in 1985 and plans to pursue more vigorously over the coming years;this reform will reduce the number of public enterprises and the deficits ofthe ones retained. In addition, the Government is in the process of devisingnew policies to focus consumer subsidies more strongly on the really needy anddo away with the present across-the-board subsidization of the entirepopulation (para. 49). For capital expenditures the reductions will beachieved by reducing Government subsidies and capital contributions to theremaining public enterprises, whose capital requirements will be progressivelycovered by the development banks. Direct Government investments in sociaL andother infrastructure would be maintained at about the present level.

31. Money and credit policies have been quite expansionary over recentyears, with growth of money circulation (M2) exceeding that of GDP by asubstantial margin (17% p.a. vs. 14X p.a. on average during 1981-85) in spiteof comprehensive Central Bank controls. The Government intends to preventgrowth of money circulation during 1986-91 from exceeding that of GDP, andwill keep it below that under normal circumstances. Given the projectedconsiderable decline in the Government's overall budget deficit and, thus, inits need for new borrowing, tighter monetary and credit policies can befollowed without hampering productive investments in the private sector.

32. The liberalization program. As mentioned above (para. 16), a majorimprovement in the allocation and use of economic resources, as well as in therelative incentives for export production compared to production for thedomestic market, are key preconditions for Tunisia to achieve satisfactoryeconomic growth and employment creation at a time of tightening balance ofpayments constraints. Progressive liberalization of the economy andintroduction of more competition - domestic as well as foreign - is th.e onlyeffective way to achieve this. Given the fact that Tunisia's modern sectorhas operated for decades in a highly controlled and well protectedenvironment, the necessary phasing out of controls on prices, investments andimports can only be attained gradually. The Government is determined,nevertheless, to complete the phasing out of controls largely by the end ofthe VlIth Plan (1991).

33. Price controls. In addition to the ongoing gradual decontrol ofagricultural producer prices, the Government intends to abolish price controlsfor all manufactured goods by 1991, with the exception of a small number ofkey staples suach as bread and edible oils. In a first phase (1986-88),controls will be abolished in well-established industries where the number ofdomestic producers is sufficiently large to ensure appropriate competition.The list of such industries, which account for about 601 of totalmanufacturing output, and a schedule for the decontrol of their prices isincluded in the Letter of Economic Development Policy. In a second phase(1989-91), the controls will be abolished in all other industries. With

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respect to those products for which price controls will continue for aninterim period, a new more flexible price control system will be introduced atthe beginning of 1987, which avoids the major shortcomings of the presentcost-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 Governmentapproval, including replacement investments and expansions of existinginstallations. At the same time, investment incentives are provided tovirtually all approved investment projects. The Government intends (a) tointroduce a much more selective system of investment incentives, limiting themto high priority projects (export industries, regional development, technologytransfer); and (b) to phase out by 1991 at the latest investment approvalprocedures for all projects which do not receive special incentives.

35. For this second category of projects and in line with the plannedphasing out of quanititaLive restrictions on imports of capital goods(para. 36), the Government intends, by the beginning of 1987, to abolishinvestment controls on all investments below D 200,000 and on replacementinvestments not requiring a specific authorization to import capitalequipment. It will continue the abolition of investment controls during1987-88 for other well-established industries for which the number of domesticproducers is sufficiently large to ensure appropriate competition. Asmentioned above (para. 33), those sectors account for about 60% of totalmanufacturing production. Finally, investment controls in all remainingsectors, except for investments for which special investment incentives arerequested, will be abolished during 1989-91.

36. Import liberalization is the third essential liberalization measurewithout which the effects of price and investment liberalization would remainvery limited. It is also essential to improve incentives for exportproduction, 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 endof 1991. In line with the country's import priorities, liberalizationwill start with spare parts for use in industry, agriculture, hotels,hospitals and other services, raw materials and semi-finishedproducts for enterprises that export at least 25% of their output,and capital goods for investmnat projects approved by the IndustrialInvestment Promotion Agency (API), the Agricultural InvestmentPromotion Agency (APIA) and the Tourism Investment Board afterOctober 1, L986; the first two of these were announced in August1986, and liberalization of capital goods for newly-approvedinvestment projects is expected in September 1986. Confirmation ofall of the above issues will be a condition of effectiveness of theproposed Loan. These measures would be followed by liberalization ofsemi-finished products for firms that are well integrated or thatexport at least 15% of their output, as well as all other rawmaterials and spare parts by January 1987; and of capital goods andthe remaining semi-finished products by January 1988. As a result ofthe above measures, about 75% of all imports would be liberalized bythe end of 1.988. During 1989-91, all remaining quantitativerestrictions, essentially on consumer goods imports, would bephased out;

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(b) to reform the tariff system by reducing high import tariffs and thedisparities in the levels of effective protection between thedifferent sectors of the economy with the aim of achieving a lowerand reasonably uniform effective protection rate of about 25% by theend of the VlIth Plan. To achieve this objective, the Governmentintends to prepare a program of gradual tariff reductions forimpLementation over the 1989-91 period. As an interim measure, itwilL amend the present tariff system no later than January 1, 1987 sothat there is a universal minimum tariff of 15%, all existing tariffsbetween 25% and 31% are reduced to 25% and all tariffs presentlybetween 32% and 56% are reduced by 6 percentage points, and allhigher tariffs are reduced to a maximum of 50%. Not later thanJanuary 1. 1988 all tariffs then being between 25% and 34% will bereduced to 252 and all tariffs between 35% and 50% will be reduced by9 percentage points. The Government intends to replace some of thesereduced import tariffs by domestic sales taxes covering imports aswell as domestically produced goods.

37. The entire macro development program, as described above and in theGovernment's Letter of Economic Development Policy [Annex IV(a)] would bemonitored by a Coordinating Committee (para. 160) and by Bank missions. Bankconfirmation of satisfactory progress in implementation of the overall programwould be a condition of second tranche release.

D. Medium-Term Proiections

38. As mentioned above, the economic adjustment program is aimed ataddressing three major areas. First, the direct export promotion measurestogether with the exchange rate adjustments and reduced import protectionwould stimulate the growth of non-oil exports to over 6% p.a., compared to3.3% achieved so far during the VIth Plan. Second, the pricing and investmentincentive policies aimed at raising the efficiency of resource utilization andallocation would reduce the investment rate from 28% of GDP in the last fiveyears to 22% during the Vlith Plan without seriously affecting output growth,and would 'educe the incremental capital-output ratio from the present highlevel of 10 to 6.4 between 1986-91. Third, the substantial changes inrelative factor costs would stimulate the creation of new employment, expectedto average close to 50,000 new jobs p.a. or a 2.5-3% p.a. increase over thePlan 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 andexport of oil tends to overshadow at first glance the projected substantialimprovements in the non-oil sectors, particularly when compared withhistorical performance. Such improvement is vital for Tunisia to achieve asatisfactory overall growth over the coming years. Table 2 shows that eventhough the average GDP growth of the VIIth Plan is slightly lower than theVIth, the growth of non-oil industries is substantially higher (5.5% comparedto 4.4% p.a.). Agriculture's decline (from 4.0% to 3.6% p.a.) is a reflectionof 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 the1976-81 period. Output of the non-oil productive sectors is expected toincrease rapidly, as a result of direct measures stimulating the agriculturaland industrial sectors (improving productivity and efficiency of rainfedagriculture, making more efficient use of irrigation, improving land use

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policy, strengthening export promotion institutions) and indirect measuresaffecting the incentive framework. Developments in the oil sector are heavilyinfluenced by world oil prices, as the production of small oil fields wouldonly become attractive if oil prices increase again substantially. Thepresent outlook is for production of crude to decline to 4.4 million tons bythe 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 3.4Agriculture 1.6 4.0 'b 3.6Industry 8.9 3.0 3.6Hydrocarbon (8.3) (-0.5) (-3.0)Non hydrocarbon (9.2) (4.4) (5.5)Services 6.5 3.9 3.3Consumption 7.4 4.4 2.5Private (7.8) (4.5) (2.7)Public (5.8) (4.3) (2.0)Gross Investment 6.6 -4.2 3.5Imports 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, areaffected by two factors in addition to a depressed price outlook- . Thecoming on stream of the refinery extension at Bizerte will reduce crude oilexports by 1.5 million tons, as more Tunisian crude wi'll be processedlocally. While recently-completed fertilizer plants could increase exports ofphosphate derivatives by over 7% p.a., it is likely that this capacity cannotbe fully utilized in view of the projected glut in world supply, and of thepoor quality of indigenous phosphate rocks. These exports are thus expectedto grow by no more than 6% p.a. during 1986-91.

41. In consequence, manufacturing industries, tourism and agriculturewill have to become the major engines of future export growth. Assuming thatthe policy measures concerning the agricultural sector discussed in Part IVbelow are implemented in a timely fashion, there should be a significantreduction in the agricultural trade deficit. Potential export growth lies inolives, vegetables, dates, wine and fishery products. Overall, manufactured

LI The medium-term projections assume an oil price of US$13-14 per barrel in1986, gradually increasing to US$22 in current prices in 1990, while theprice of TSP, the major fertilizer product of Tunisia, is expected toincrease from the present level of US$120 to US$160 per metric ton.

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exports excluding phosphate derivatives are expected to grow at 7.8% p.a.,with the greatest potential in electrical and mechanical, textile and othermanufacturing industries. Tourism is expected to resume a more satisfactorygrowth, albeit not at the rate experienced during the late 1970s. Averageannual 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 pricesand calculated by least squares)

1976-81 1981-86 1986-91(Actual) (Preliminary) (Projected)

Agricultural Products 2.4 -1.1 4.7Crude Petroleum 7.4 -4.2 -19.8Phosphate + Derivates 2.7 4.5 6.0Processed Food -3.4 6.6 4.9Textiles 23.7 3.2 7.2Electrical/Mechanical 23.9 9.0 11.9Other Goods 6.8 2.5 20.3NFS 9.2 2.8 5.0Total Exports, GNFS 8.5 1.1 1.9

Total, excludingpetroleum 9.0 3.3 6.5

42. Concerning imports, the pivotal role of exports in generatingeconomic growth will require corres.ponding increases in imports, particularlyof raw materials and intermediate goods needed for industrial growth; growthof these imports is assumed to be at par with industrial growth, allowancebeing made for the expected improvement in efficiency. The elasticity ofenergy consumption would decline to 1 during the VlIth Plan, compared to 1.3at the present time, reflecting a continued energy conservation effort beingsupported, in part, by a recent Bank loan. Total energy imports are expectedto decline by 17 p.a. throughout the period, also partly as a result of therefinery extension mentioned above. In addition to stimulating exports, thepolicy measures proposed by the Government are expected to substantiallystimulate import substitution of agricultural products. The growth rate offood imports is expected to be more than halved from 4.8% p.a. during 1977-86to 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 greatestpotential in this category includes durum and bread wheat, barley, milk andbeef. Imports of other consumer goods are likely to remain low between1986-88, due to the impact of short-term stabilization measures, which areexpected to keep growth of domestic consumption below that of total GDP; theyare expected to pick up rapidly thereafter as growth resumes and the impact ofthe liberalization program begins to be felt.

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43. Balance of Payments and external debt. Emigration has slowed down inthe face of weakening demand for foreign workers in Europe, in Libya and inthe countries of the Arab peninsula, and therefore inflows of workers'remittances are expected to decline slightly in real terms. Over the pastfive years, these remittances have averaged over 161 of commodity exports,equivalent to about 4% of CDP. Given this and the above-discussed export andimport outlook, the current account deficit is expected to decline from anaverage of about US$707.0 million, or 9% of GDP in 1984/85, to about US$536.0million, or 3.9% of GDP in 1991. In view of the depressed oil price outlookand assuming no major new oil field discoveries, direct foreign investment isexpected to remain at the current level in real terms.

Table 4: TUNISIA - PROJECTED BALANCE OF PAYMENTS

(Millions of current dollars)(With adjustment)"

Actual Projected1985 1986 1988 1991

Exports of Goods and NFS 2,678.3 2,579 3,306 4,448Imports of Goods and NFS 3,175.6 3,354 3,922 4,918Net Factor Services -52.6 -56 -80 -82Current Account Deficit 539.2 819 682 536Net Foreign Investment 130.6 176 197 231Public M & LT Borrowing (gross) 653.1 1,139 1,131 1,219Amortization on M & LT Debt 388.3 520 629 889Public M & LT Borrowing (net) 264.8 619 502 330

Selected Financial Indicators

Debt Service Ratio (X of exportsof 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 describedherein.

44. Gross foreign loan disbursements required to finance such a currentaccount deficit, to repay maturing debt and to maintain reserves at a levelequivalent to I month of imports would average slightly above US$1.0 billionannually during 1987-91. About two-thirds of this would come from officialsources, compared to 60% in the last three years. Debt outstanding anddisbursed as a percentage of GDP would increase slightly, from 50% in 1984/85to about 52% in 1991, while the debt service ratio would be 26.1%. Averageborrowing terms are not expected to harden much. The average interest rateswould remain in the 6-7% range between 1987-91, while the average maturitywould be slightly shortened to about 13 years from the current level of15-17 years.

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45. This scenario obviously depends on the policy changes to be initiatedduring the next few years, in particular on a timely implementation of policymeasures to accelerate exports, reduce public investments, slow down growth ofdomestic demand and liberalize the economy by phasing out regulations andcontrols. As mentioned in Section B above, the Government lhas already takenseveral steps in implementing such a strategy. Considering its long record ofprudent external debt management, there are good grounds to assume that Tunisiawill implement the necessary policy changes along the lines discussed above andremain creditworthy for a continuled high volume of Bank lending.

46. Domestic resource mobilization. With exports growing Easter thanimports, the resource gap is expected to decline to less than 3.5% of GDP bythe 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 in1984185 to about 3.9% in 1991. The marginal propensity to save over theperiod 1987-91 is estimated at a high 26% (in current prices), assumingsuccessful implementation of the structural reforms to control domesticdemand. Limiting Central Government current budget expenditures to below 21%of GDP and capital expenditures net of debt repayment to about 6% of CDP bythe end of the VIIth Plan period should allow Government savings to financeover 70% of public sector investment (including public enterprises), up from43% in 1984/85, and should increase the percentage of overall investmentfinancing by domestic savings to over 80% on average over the period. Whilethis would help to reduce the pressure on the balance of payments, it alsogives a clear signal to the private sector that the public sector investmentprogram will not lead to a crowding out of private investments but rather willsupplement it by providing the necessary infrastructure.

47. The medium-term framework discussed above corresponds largely withthe Government's own planning scenario for the VEIth Plan. While there areclearly downside risks involving such exogenous factors as the growth of theworld economy, in particular in the EEC countries, and movements ininternational prices, it is clear from the analysis of the recent past thatthere is no alternative to the proposed export-oriented strategy. Slowerexport growth would lead rapidly to sLower GDP growth, in order to keep thebalance of payments manageable. Such a situation would greatly worsen theunemployment rate. As mentioned above, even implementation of the fullstructural adjustment program will not allow absorption of more than 70% ofnew job seekers during 1987-91; any lesser effort would further worsen theunemployment 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 totalTunisian population (823,000 persons) was living below the absolute povertylevel in 19B0.1' Most of the poor and lower income groups are located inrural areas, followed by smaller towns; these groups account for about 14% ofthe total rural population, and 12% of the total urban population. They arelargely employed in agriculture (43%) and construction (16%), where significantunderemployment 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 forfood, housing and clothing.

I/ In 1980, the absolute poverty level was D 60/person/year in rural areasand D 120/person/year in urban areas.

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49. The Government's program of economic adjustment could worsen thesituation of the absolutely poor in two major ways: (i) through the gradualreduction of budget subsidies; and (ii) through increases in consumer pricestriggered by changes in the exchange rate and increases in agriculturalproducer prices. The present system of consumer subsidies is clearlyimportant to the well-being of the poorest segment of the population, as suchsubsidies account for nearly 19% of their total expenditures - 20% for theurbarn poor and 17% for the rural poor. However, the subsidies overwhelminglyprofit the better-off segments of the population, with over 60% of allconsumer subsidies going to the highest income groups, and only less than 10%going to the absolute poor, particularly to the urban poor (6X). Thissituation means that while it would appear socially and politically impossibleand undesirable to deprive the absolutely poor from the support they currentlyreceive, there is ample room to reduce consumer subsidies by as much as 90%without taking away anything from the really poor. This requires that waysand means be found to target this assistance more directly to the realLy needy.The Government is clearly aware of this situation; it recently established aSpecial Commission to study how to target and efficiently distribute consumersubsidies, so as to gradually introduce a more focussed and less expensivesystem of support for the poor as overall subsidy outlays are reduced.

50. The adjustment program also includes a number of important measuresdesigned to improve the situation of the poor: (a) the rural poor,particularly in rainfed areas, will profit from increased agriculturalproducer prices as well as from increases in agricultural production forimport substitution and exports; (b) the urban poor will profit from theincrease in the minimum wage introduced in mid-1986; and (c) both groups willprofit from the stimulating effects of the adjustment measures on employmentcreation, as export industries, agriculture and tourism are all relativelylabor-intensive sectors. As the bulk of the absolute poor are employed insectors with a high underemployment rate, the expected more rapid creation ofnew employment and decline in underemployment ought to have a sizable effecton the standard of living of the poor labor force employed in the modernsector. Given the fact that the informal sector will benefit little fromminimum wage changes and the other measures mentioned above, the Governmenthas initiated several specific programs for the support and development ofthis sector (para. 12).

PART mI - BANK GROUP OPERATIONS DIN TUNISKA

51. Since 1962, the Bank has committed to Tunisia seventy-one loans andten IDA credits amounting respectively to US$1,515.0 million and US$75.2million (net of cancellations) of which forty-four loans and credits have beenfully disbursed. Annex II contains a summary statement of Bank loans, IDAcredits and IFC investments as of March 31, 1986. Project implementation isgeneraLly satisfactory. As of March 31, 1986, overall disbursements amountedto 57.7% of appraisal estimates, which is in line with experience in othercountries in the region. Disbursement performance for agriculture, energy,water supply and sewerage, highway and port projects has generally been abovethe country average, while longer than average disbursement delays have beenexperienced for education, health, technical assistance and urban projects,due to project-specific problems that are being addressed tbrough supervisionmissions and sector discussions. In a number of sectors, important policychanges and institutional improvements have been achieved, and autonomous

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agencies have been created or strengthened to ensure the efficient managementof the related sectors or sub-sectors.

52. The Bank's lending strategy in Tunisia aims at supporting thecountry's transition from a situation of reliance on petroleum exports to asectorally-balanced post-hydrocarbon era through appropriate changes ineconomic policies and programs as described in Part II above, while takingmeasures to increase employment and target development to low-income groups.In support of the above, the overall objective of Bank lending is to emphasizeprojects which have a direct and rapid impact on production, employment andexports (or import savings) and which minimize Government net contributions.The focus of lending for agriculture and industry meets this objective. Inaddition to the above, proposed Bank lending would focus on improvement ofpublic enterprise performance, conservation and development of energyresources, and continued support to the social sectors and operations targetedto low-income groups. For the latter, attention would be given to increasedefficiency and cost-effectiveness of institutions and investments, and tolinkages with directly productive sectors (e.g., education reforms stressingvocational training). We envisage only marginal lending for basic economicinfrastructure, 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 ininfrastructure and social development, with increasing support in recent yearsfor agriculture and industrial financing. Bank/IDA commitments to date aredistributed as follows: urban, water supply and sewerage, 23%; agricultureand industry. 21% each; transport, 17Z; energy, 111; education, 5%; and healthand technical assistance, 1S each. Within the broad framework noted inpara. 52, we expect increasing emphasis on agriculture and industry, whichshouLd represent over half of our lending. In addition to recent loans forenergy conservation demonstration and urban development, and the proposedAgricultural Sector Adjustment Loan, programued lending in the next couple ofyears would include an Industrial and Trade Policy Adjustment Loan as well asprojects for highways maintenance, grain storage and credit lines forsmall-scale industries and agriculture.

54. Bank group lending for agriculture in Tunisia started in 1967, and todate 17 projects have been approved for a total of US$407.9 million of Bank/IDAfunds. Of these, eight are ongoing. Performance under these projects has beenmixed reflecting the institutional constraints in the sector. The FirstFisheries Project (Cr. 270-TUN) was completed at the end of 1979, and theProject Performance Audit Report (PPAR) identified cost overruns and low loanrecoveries for boats as major problems. These problems were addressed underthe Second Fisheries Proiect (Ln. 1746-TUN), but recoveries remain a problem.The First and Second Agricultural Credit Projects (Ln./Cr. 7791263-TUN andLn. 1340-TUN) financed lending by the National Bank of Tunisia (BNT) foron-farm development. While the projects achieved good rates of return, thecontinuing problem of higher interest rates on Bank funds than on Government-supplied credit and the lack of profitability of agricultural creditoperations, as highlighted in the PPAR's for these projects, causeddisbursements to be slower than anticipated. The Third Agricultural CreditProject (Ln. 1885-TUN) is addressing priority credit problems including thelevel of interest rates and recoveries. Action has been taken to decentralizeBNT's operations, raise interest rates, and encourage improved recoveries. Thephysical implementation of the poverty-oriented Northwest Rural Development

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Project (Ln. 1997-TUN) is proceeding satisfactorily. The Grain Storage Project(Ln. 2052-TUN) is also progressing well after inital delays and therecruitment of new consulting engineers. Under the Technical AssistanceProject (Ln. 2197-TUN), strategies have been or are being developed forsevural sub-sectors including farm input distribution, farm mechanization,produce marketing, research and extension, and improved operation andmanLtenance of existing irrigation infrastructure. These strategies havecontributed to the design of the proposed operation. Implementation of theirrigation 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 IrrigationProject (Ln. 2234-TUN), and the recently started Gabes Irrigation Project(Ln. 2605-TUN) - has generally been satisfactory and on schedule. The PPARfor the First Irrigation Rehabilitation Project also found that the increasedreliability of water supply brought about by rehabilitation works carried outunder the project had a major impact on farm production and incomes in theproject area by increasing farmers' willingness to take higher risks byplanting higher value crops. Partly to avoid the need for future rehabili-tation projects caused by lack of maintenance, the Irrigation ManagementImprovement Project (Ln. 2573-TUN) is designed to support nationwideimprovements of the operation and maintenance of existing irrigation systemsas well as policy and institutional reforms to increase the efficiency andself-financing of the Irrigation Development Offices (OMVs). The NorthwestAgricultural Production Project (Ln. 2502-TUN) will help alleviate theconstraints to increased production of cereals and livestock products inNorthwest Tunisia, inter alia by introducing an extension system based on theTraining and Visit (T&V) system.

55. The Bank's economic and sector work will address the increasingcomplexity of the macro-economic and sector problems that Tunisia will face inthe medium term, and continue to focus on strengthening the macro-economic andsector base for our lending ptogram. However, while in the past it was mainlydevoted 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 monitoringof the macro-economic framework of the VlIth Plan, which provides the policybase of sector lending; (b) review of public expenditures under the Plan toprovide guidance for the neressary reductions in budget outlays; (c) assessmentof public enterprise reforms prepared by the Government to reduce their drainon the State budget; and (d) monitoring of the agreed macro-economic and sectorpolicy changes. The program also includes studies on education administrationand finance, municipal finance and development, energy pricing, and the impactof the adjustment program on various income groups.

56. The Bank and IDA accounted for about 27.81 of total commitments fromofficial sources to Tunisia during 1982-1984. Their share in total debtoutstanding and disbursed at the end of 1984 (including loans from privatesources) was an estimated 14.5%, and their share in debt service during 1984was 11.7%. The share of the Bank and IDA in Tunisia's disbursed external debtis expected to increase to about 14.7% and their share in the debt service toabout 15.7% in 1986.

57. As of March 31, 1986, IEC's net commitments in Tunisia totalled aboutUS$7.5 million. IFC has supported the Economic Development Bank of Tunisia(BDET) to foster development projects, and the National Bank for Tourism

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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 frmnlocal fluorspar for export; and the Societ6 d'Etudcs et de D6veloppement deSou:4s,s-Nnrd for an integrated tourism development project. In FY85, IFCaiiproved an equity investment in Fluobar, a project to privatize, rehabil i telt;iiid eIxIlpand an existing fluorspar mine. Two investments in Tunisia Ienas IlgCsi'!'jyinY, Llte first Leasing company in Tuniisia to provide financing to tileirndti,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 illAdjWYD 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 adecline in the relative importance of agriculture in its economy over the past25 years. Today, agriculture in Tunisia accounts for about 13% of GDP, 35X ofemployment and 8% of export earnings, which represent sharp drops from 1960levels of 24% of GDP, 56X of employment, and 601 of export earnings, due mainlyto the more rapid growth of other sectors, principally petroleum, manufacturingand 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 alsoexperienced a widening "food gap" which has placed an increasing strain on thebalance of payments. Domestic food production has failed to keep pace withincreased 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 cheapfood imports, subsidized both by the exporting countries and through theovervalued exchange rate, has diverted attention from the underlying problems.Food imports have increased by about 3.81 per annum (1977-86) and the rate ofself-sufficiency for key items has declined over the last decade (e.g., forcereals from about 75% to 50%). Meat imports more than doubled from 1982 to1984. If present trends continue unchecked, recent projections done by theInternational Food Policy Research Institute (IFPRI) indicate that by the year2000 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 800,000tons per year (compared to the present 244,000 tons) and a meat deficit ofabotut 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 thatthe 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 accountedfor a rising share of the overall trade deficit (from 5% in 1976 to 20% in

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1985). Based on current trends, without policy correction, the agricuJturaltrade deficit, currently about D 185 million per year, could, under the IFPRIassumptions, rise to over D 565 million (in 1986 constant terms), exertingunsustainable pressure on the already difficult balance of payments situation.

61. The sector's overall performance has also not matched the growth of6% p.a. in gross fixed investment in agriculture during the decade 1975 to1985, a rate about twice as high as for the economy as a whole. During therecent 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 oftotal sector investment by the private sector was only 31%, significantlybelow Plan projections. Investments by the public sector were concentrated inIrrigation (42% compared to 22% in the early 1970s). As a result, most ofTunisia's irrigation potential is now harnessed, but downstream investmentsand activities to ensure optimal utilization are lagging behind. Similarly,investment in fishing port infrastructure and processing remain largelyunderutilized, and agro-industry operates at well below capacity (seepara. 80). This capital-intensive nature of investments and low utilizationof installed capacity is not sustainable in the new macro-economic situationof fiscal resource constraints and need to rapidly create employmentopportunities. The VIIth Plan, recognizing the uncertainty in the resourcebase, calls for the proportion of sector investment to shift towards theprivate sector from a ratio of 31% to 501. These shifts require not only aprioritization and adjustrment of public expenditures to focus on improvedutilization of established capacity, but also a selective reduction in thepublic sector role to create the room for private sector participation, and ashift in sector policies to provide greater incentives to private investments.

Resource Base and Structure

62. Growth in the sector has been concentrated in the predominantlymodern irrigated sector, which covers less than 5% of the cultivated land, butaccounts for 38% of agricultural CDP. Not only has the Government concentratedits investment resources in the irrigated areas, but approximately one tIirdof the input subsidies on fertilizer, seed and herbicide has also been consumedin irrigated areas. Moreover, the crops produced in these areas, consistinglargely of fruits and vegetables, have not been subject to any Governmentoutput price intervention. This combination of subsidized, capital-intensivedevelopment and free market pricing has been very successful, and irrigatedoutput has expanded by 4-6% per year. Sustaining such growth under a moredemanding regime concerning fiscal resources is the major challenge facing theTunisian 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 substantiallyin rainfed as well as irrigated areas. In rainfed areas, especially whererainfall exceeds 350 mm, major productivity improvements could be obtainedfrom widespread introduction of improved farming techniques such as shallowerland preparation using tined implements, increased use of inputs and moreintensive cropping patterns including pulses and, in some areas and for certain

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farm sizes, integration of crop and livestock production.1' In the irrigatedareas, there is also considerable scope for yield increases-Z and productiongrowtht through greater intensification in the existing schemes. Croppingintensity iFl the areas already equipped for irrigation through public financingaverages 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 ofthe currently irrigated areas. Considerable room for improvement remains tobe achieved for the citrus growing areas of the northeast (Cap Bon), where useof additional water from the rivers further west could enable citrus productionto double.

Constraints

64. The pace of achievement of this potential is geared to the speed atwhich adjustments are made in macro-economic and sector policies to maintainagricultural growth under a constrained external and fiscal environment(paras. 8-9). Past macro-economic policies have not favored the sector'sdevelopment. The past policy of overvalued exchange rates has handicapped thesector's growth, since it has simultaneously discouraged exports andartificially cheapened food imports to the detriment of locaL food production.

1/ The scope for increasing yields in rainfed areas is evident from thefollowing estimates of present and potential yields for rainfed crops iu,the high and low rainfall zones of northern Tunisia made by the FAO/CPduring preparation of the Northwest Agricultural Production Project (higheryields on larger farms being mainly due to better resource endowment):

High Rainfall Zone Low Rainfall ZonePresent Potential Present Potential---------------- (tons/ha) ----------------

10-50 ha FarmsBarley 1.2 2.0 0.8 1.5Wheat 1.1 1.8 0.8 1.5Feed Pulses 0.5 1.3 0.3 0.6Forage (hay equivalent) 2.8 3.8 2.0 2.5

Over 50 ha FarmsBarley 1.5 2.5 1.2 2.0Wheat 1.3 2.1 1.0 1.7Feed Pulses 0.9 1.7 0.7 1.6Forage, (hay equivalent) 3.5 5.0 2.5 3.0

2/ In the irrigated areas. average yields obtained compare with the bestareas as follows:

IrrigationDev. Offices Results

Crop (OMVs) Average in Better OMVs-- (tons/ha) ------------

Cucurbits 8 20Potatoes 12 18-20Field Tomatoes 25-30 40-45Greenhouse Tomatoes 60 80Apricots 12 20Forage (green matter) 30 50

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The pollcy of subsLdlzing domestic food consumption has reinforced the importbias, particularly when faced with fiscal contraints. Both the processingIndustries and the Government have found it to their short-term advantage topurchase imports at the expense of providing markets to local food production.Finally, the higher relative incentives to other sectors compared toagriculture, notabLy industry, has made agriculture an unattractive place fornew private direct investment or in support services. Restrictions on inmportsof spares and new equipment to encourage domestic industry has led to reducedlevels of maintenance services and inefficiency in operations. Tunisin'smacro-economic adjustment program (Part II) aims to ensure that this biasagainst agricultural growth is steadily eliminated. Actions compLementary tothe macro-econcmic adjustment program are needed in order to overcome thoseconstrrints to efflcient growth which are sector specific. The Government'smedium-term agricuLtural sector adjustment program (MTASAP), discussed inSection B below, aims to identify these constraints and launch an actionprogram to resolve them.

B. The Sector Adjustment Pogtram

Origin and Objectives

65. The main objectives of the Government's MTASAP described below weredeveloped in late 1985 and earLy 1986 as part of Tunisia's efforts to adjustits economy to a more constrained macro-economic situation. For this, Bankassistance was made available to the Government in the form of macro-economicst:ategy discussions and assessments of sector poteatLal and policy andinstitutional constraints. Consistent with the macro-economic objective ofimproving the balance of payments situation and alleviating the burden on theGovernment's budget, the main objective of the MTASAP is to promote greaterefficiency 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 roleof the private sector in the provision of commercially-viable sector supportservices. The MTASAP includes specific actions to address the identifiedconstraints over a six-year period (1986-91) and aims to achieve itsobjectives by:

(a) improving the prices and incentives framework so that prices and priceformation mechanisms are further deregulated or linked to worldmarket prices and incentives made more effective. This involvesachievement within a reasonable time frame of alignment of producerprices with world market prices and elimination of input subsidies,and will result in better farmer response for those crops andlivestock production activities for which Tunisia has a medium-termcomparative advantage;

(b) reorienting the public investment and expenditure program towards lnwcost, high priority, quick maturing projects and programs with lowerbudgetary demands while assuring adequate funding for maintenance ofpast investments;

(c) strengthening basic services in support of farmers, while privatizingthose Government services which are commercially viable, andimproving cost recovery in others;

(d) improving productivity of land use and management of the country'sforest and fisheries resources; and

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(e) building up the sector performance monitoring and policy analysiscapabilities of the Ministry of Agriculture.

Details of the above actions and the analyses behind them are presented in aseparate Medium-Term Agricultural Sector Adjustment Program (MTASAP) availableon request. An outline of the MTASAP is contained in Annex VI, and a summaryis given below.

I. proving the Prices and Incentives Framework (Chapter I of MTASAF)

66. Even though the prices of -'n estimated 751 of agricultural productionare market-determined, Government intervention in agriculEure through taxes,subsidies and price controls has a major impact on the incentives toproducers, processors and providers of services in the sector, especially onresource allocation within the sector, among farming systems and products.Main instruments which have been used are fixed producer and consumer pricesfor basic products, marketing controls, and input and investment subsidies.In brief, producer prices of cereals, milk and industrial crops areadministered through a variety of public and quasi-public agencies. Prices offertilizers and herbicides, improved seed, irrigation water and feedconcentrates are regulated, and price formation in agro-processing andmarketing is subject to a system of fixed margins.

67. Based on available data in Tunisia and in the Bank, a preliminaryanalysis 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 importantdisincentive to export development and increased agriculturalproduction;

(b) the sector compared to other sectors such as industry (which havebenefitted from cost plus pricing and high tariffs) has suffered fromhigh relative net taxation, and input subsidies have been far fromadequate to compensate for this;

(c) within the agricultural sector, the incentive patterns vary signifi-cantly between rainfed farming, particularly cereals which are importsubstitutes, suffering from low or negative protection, and irrigatedfarming, 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 significantinefficiency and avoidable fiscal cost to the Government.

68. Currency valuation. The high value of the dinar in recent years hashad two major consequences for the agricultural sector: (a) it has depressedsector exports by artificially reducing the dinar proceeds from export sales;and (b) it has artificially stimulated food imports by making them cheaper inrelation to domestic food production. When combined with other factors suchaa reduced export markets, subsidized food exports on the world market anddomestic consumer price subsidies, it is not surprising that the sector hasexperienced an increasing trade deficit (para. 60), but more importantlyoverall agricultural production has been depressed by the adverse effects ofthe overvalued currency.

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69. The value of agricultural exports (Chapter IX of MTASAP), includingprocessed 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 brighton the traditional European market due to the enlargement of the EEC to includethe world's largest olive oil producer, Spain. As a cushion, Tunisia hasnegotiated 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 todiversify to other markets and these efforts would require improving thecompetitiveness of Tunisian exports and better incentives to exporters. Onthe other hand, exports of marine products have grown rapidly in recent years,and are now the second most important agricultural export. Althoughtraditional marine exports (shrimp, squid and sponges) have reached theirmaximum sustainable yield, there is considerable untapped production potentialfor swordfish and lobster, exports of which could generate an additional D 8.0million per year by 1991. Strong export growth is still possible in dateswhere Tunisia already accounts for 25% of the world's production of the highlyprized "Deglet-Nour" variety, the export price of which commands a 100% premiumover common varieties. However, the rapid increase in domestic consumptionhas reduced the exportable surplus to only 30X of production. As suppliesincrease in response to recent investments in replanting, additional earningsfrom dates are estimated at D 15 million per year by 1991. Export prospectsfor Tunisian citrus are also better than often thought due to the uniquequality characteristics of the "Maltaise" orange which account for virtuallyall exports. Incremental citrus exports could generate an additional D 2.0million p.a. in foreign exchange by 1991, provided export profitability isimproved to overcome the increased trading costs, 40% of which are in transportand handling in the importing country. Tunisian wine exports, used mainly inblending, face a difficult future because of increasing surpluses on the EECmarket. Nevertheless, encouraging exporters to shift into higher quality wineproduction, Tunisia could expect to earn an additional D 1.0 million per yearby 1991. Incentives for the expansion of off-season vegetables could bring inanother D 3.0 million per year by 1991. It is estimated that totalagricultural exports could increase by about D 34.0 million per year by 1991,enough to reduce the agricultural trade deficit by 18%. Achieving the aboveexport potential, however, will require the development of better incentivesfor export and of new, product-specific marketing strategies and channels. Tobring this about, the Government's MTASAP relies on a flexible competitiveexchange rate policy (para. 27) and the application to the sector of temporarymeasures to keep exporters from paying the high promotional costs of developingnew markets. Product-specific export strategies targeted to particular marketswould be developed through a sector export promotion action program, to bedeveloped based on a study, draft terms of reference for which (in the MTASAP)were discussed at negotiations. Specific measures, the appropriateness ofwhich would be evaluated in the study, are, among others: (a) extendingexport company benefits to agricultural export enterprises; (b) reducingwholesale market taxes for export products; (c) eliminating taxes on processingof export products; (d) giving agricultural import licenses to agriculturalexporters; and (e) renegotiating air and sea transport routes to increasefrequency of appropriate services for agricultural exports.

70. The effect of exchange rate policy has also been important regardingfood imports which have increased by 5.9% p.a. These imports have alwaysentered Tunisia tariff-free, in consideration of the Government's policy oflow consumer prices. Two other factors combining with this policy and leadingto depressed domestic production incentives are: (a) the availability of

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imports often subsidized significantly in the country of origin and availablein Tunisia 30-40% below world market prices; and (b) the fiscal constraints onthe Government. As a result, producer prices have been depressed below worldmarket prices, particularly for cereals, milk and meat.

71. Inter-sectoral terms of trade. The industriaL sector has beencushioned from the effect of exchange rate policies through high tariffbarriers and favorable price formation mechanisms, whiLe agricultural productswere allowed to enter the country virtually duty-free. More recently,restrictions have had to be imposed on imports of many industrial productsproduced Locally. As a result, relative incentives between agriculture andindustry have remained strongly against agriculture, which has faced depressedoutput prices, and also higher costs for inputs, often products of protectedand still inefficient domestic industries. In 1981, the QuantitativeEconomics Institute of the Ministry of Planning (Institut Ali Bach Hamba)estimated that effective protection of agriculture was about 25%, compared to75% for industry and 35% for the economy as a whole. More recent analysis hasput the average protection level for agriculture at a low 5% in 1984.

72. The consequences of these high inter-sectoral variations in relativeincentives for allocation of resources in agriculture have been quite serious.Not only have the Plan's objectives of achieving a 50% share of privateinvestment not been attained, but also most fixed investment in the sector haseither had to be made by the Government (e.g., 60% of cold storage is publiclyowned) or had to be dependent on special investment subsidy programs coveringvirtually 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 nowcompounded by fiscal constraints facing the Government, and correction of thelow relative incentives in the sector is needed to ensure the adequate flow ofprivate resources. The Government's MTASAP relies on shifts in macro-economicand industrial policies, particularly the reduction in high industrial tariffs,the liberalization of prices and the price formation process, and theintroduction of a 15% minimum tariff (para. 36) to start a process ofcorrecting these large imbalances in relative protection. The latter wouldaffect the producer prices for key food imports directly.

73. Intra-sectoral incentives. Within the sector, production incentivesvary widely among farming systems and crops as a result of Governmentinterventions. Despite the generally free market environment, the Governmentfixes the prices of the three major cereals, durum wheat, bread wheat andbarley, as well as of milk and some other crops. Cereal prices haveconsistently been set below world market price levels even at the officialexchange rate. The Government, through the Office of Cereals, purchases30-40% of the cereal harvest at the officially fixed producer prices:official purchases vary from a low of 10-20% of production in the case ofbarley 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 atofficial prices, since, due to an active price intervention at the consumerlevel, parallel markets have tended to disappear and farmers have limitedthemselves to subsistence production only. PotenLial for producer pricedistortion 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 inbarley, 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) suggeststhe effects of these price interventions.

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74. Even at the official exchange rate, official prices are below worldmarket prices: in cereals, nominal protection in 1984/85 was -15% to -20% forthe 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 hasled to the establishment of identical offical producer prices. Given roughlyequal yields for the two wheats in the Tunisian North, the extra fiscal andfozeign exchange cost of this policy (roughly D 1.4 million and 7.5 million,respectively) needs to be reviewed against the psychological benefits otself-sufficiency. Citrus and potatoes, both exportables, are free fromG;overnment price interventions and their domestic prices have been 25-45%above world market prices at the official exchange rate. In the case of milkand beef,' official prices have been close to their world marketeqtuivalents, but the Government, due to its fiscal constraints and availabilityof often subsidized imports, has offered little incentive to agro-industry tobuy domestic production: only 20% of the milk and 5% of the beef enterofficial channels, and producer prices remain depressed (see also paras. L07-110). Poultry production is free from output price interventions and hasgrown at 20% p.a., but has been supported by strong input subsidies.

75. On the input side, subsidies to agriculture amounted to a total ofD 69.0 million (US$95.8 million) in 1985, of which about 33% was for irrigationwater (both capital and O&M), 24% for fertilizers (superphosphate, triplesuperphiosphate and ammoniwn nitrate), 23% for animal feed (maize, soybean mealand barley), 14% for on-farm investments, 4% for seed and 2% for herbicide(2-4-D and multipurpose). ' Unit subsidies for fertilizer have ranged from55-70%, and those for animal feed from 15-26%; herbicides and cereal seedsubsidies have been 50% and 25%, respectively. These subsidies have beenintroduced partly to compensate for the low producer prices, but in case ofproducts manufactured locally (e.g., fertilizers and animal feed concentrates)part of the subsidies have often been absorbed by domestic industry sinceex-factory prices are often higher than world market prices. The subsidizationof itrigation water has strongly favored commodities like milk and vegetableswhich dominate irrigated production. Animal feed subsidies have given astimulus to the imported concentrate-based poultry industry, but has hadadverse consequences for barley producers and mutton/lamb producers since itconstitutes a major disincentive to the increased use of forage, largerqulantitLies of which could be efficiently produced in conjunction with cerealproduction. 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 SubsidyAmount

Input (D million) % of Total

Irrigation Water 23.0 33Fertilizers 16.5 24Animal Feed 15.9 23On-farm Investments 9.9 14Seeds 2.5 4Herbicides 1.2 2

69.0 100

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76. As a result of these Government interventions in product and factormarkets, preliminary estimates of relative incentives for cereals underdifferent rainfed production systems give a range of effective protection from-301 to +10%, which, An view of the average protection oF the agriculturalsector as a whole of 5%, implies a net relative protection for cereals in therange of +5% to -351. In irrigated farming, on the other hand, levels ofeffective protection are well above the sectoral average with particularlyhigh levels for irrigated citrus and potatoes.

77. As a prime feature of its MTASAP, the Government recognizes that itsmacro-economic policies must be consistent with and supportive of the objectiveof fully developing the untapped potential of the agricultural sector andsuitable adjustments are being made (para. 64). Since an important factor inincreasing production in the higher rainfall areas is greater integration ofcereals, livestock, forage crops and pulses, and in irrigated areas, a moreintensive use of irrigated land, the primary objective of the MTASAP is toprogressively improve the prices and incentives framework in the sector so asto encourage rainfed production of cereals, milk and meat under efficientproduction systems while promoting shifts toward more efficient croppingpatterns and input utilization patterns in irrigated areas.

78. The Government's MTASAP aims to eliminate the distortionary effect ofits input subsidy program and to rationalize its output price interventions inorder to allow world market price trends to be reflected in its sector pricingstructure. Combined with macro-economic adjustments. the relative incentivesbetween industry and agriculture would be brought closer to reduce currentintersectora! distortions and the large differences between incentives forvarious commodities would be narrowed. The Government's ultimate objectivesare an across-the-board alignment of producer prices with world market pricesand elimination of input subsidies. In order to give farmers and consumerstime to adjust to the new price signals, these actions are beir.g phased inover a reasonable time frame. Over three years, the system of administeredproducer prices for the wheats and barley would be reshaped progressively toreflect world market price levels plus the 15% tariff. This would specificallyinvolve an upward adjustment of the durum wheat price to restore the 30-40Zdifferential that exists between the two wheats on international markets. Theuse of this formula for setting domestic producer prices would not precludeTunisia from continuing to take advantage of cheap imports.

79. For inputs, the Government's MTASAP aims to elimate current subsidieswhile allowing for the temporary need to promote the adoption of new technologyamong 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 agreementalready reached in the context of the Irrigation Management ImprovementProject, full recovery of the O&M costs of irrigation water over a period of10 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 herbicideand improved cereal seed over a period of three to five years, depending on theinput; and (c) charging the full cost of support services which continue to beprovided by the Government until they are fully transferred to the privatesector. The Government's objective is to completely eliminate the fertiliiersubsidy by the 1990/91 crop season. In view of the input-output pricerelationships prevailing in Tunisia, the elimination of the fertilizer subsidyis not expected to adversely affect production. Crop fertilizer price ratiosin Tunisia are high and value-cost ratios reflecting crop responsiveness arehigher than the threshold levels considered necessary to induce fertilizer use.

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As regards animal feed subsidies, the Government's program calls for theircomplete elimination by the 1989/90 season. This would encourage forageproduction and storage as well as more efficient use of Tunisia's extensiverangelands in the Center and South of the country. Improved cereal seedsubsidies would also be phased out by the 1989/90 crop season (see para. 138for details), and the justification for those to be continued beyond that dateon potatoes and other crops would be reviewed. The subsidy on 2-4-D herbicidewould be phased out by the l9B8/8s crop season, and that on multipurposeherbicide, whose use the Government is currently promoting over 2-4-D,thereafter. As for the commercial services provided by the public sector inthe large irrigated areas, the Government's objectives are to reach fullcosting of the commercial services in Government's hands, and to progressivelytransfer them to the private and cooperative sectors (see para. 95).

80. The price formation process in agro-industry is essentially a costplus system and is therefore subject to extensive administrative controls.Preliminary analysis of the reasons for low capacity utilization rates inagro-industry leads to the conclusion that it is the price formation processthat primarily causes inefficiencies and high costs and eliminates competitivepressure in domestic marketing. The animal feed industry has expanded from 18plants in 1973 to 146 in 1983, but the industry is operating on 801 importedraw materials which are subsidized by 15-26%, at only 301 of its installedcapacity. The canning industry, mostly in the private sector, has also grownrapidly at 8.51 p.a., but demonstrates signs of inefficiency: the tomatoprocessing industry has a processing season of only 35 days against aninternational norm of 100 and operates only at 431 capacity. Rigidity inpricing policy which contributes to peak arrivals had led to installation ofincreased daily capacity, while low plant utilization has been absorbed in thecost plus pricing system. Similar trends are apparent in other vegetableproducts (e.g., harissa at 201 utilization and fish canning at 401). Theresulting high production costs make Tunisian products expensive for the localconsumer and uncompetitive in the export market. The small sugar industry,mostly in the private sector, supplies only 101 of the demand. The newerplants are still operating at 20-351 of installed capacity due to inadequateraw materials, and cube making at 35% of capacity, protected by a guaranteedprofit pricing formula. Only the export segment of the olive oil industry,which has been influenced by the competitive pressure of export markets andcheaper alternatives, is basically competitive, able to produce at about halfthe 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 formationmechanisms from the producer to the retail level through the agro-industry.The progressive move towards price liberalization and gradually subjecting thelocal industry to competitive pressure from imports (paras. 33 and 36) shouldcreate incentives for higher capacity utilization and efficiency, and allowsector growth to be achieved under a situation of reduced availability ofinvestment resources. The price policy review (para. 131), to be executedunder TORs agreed with the Bank, would include a detailed analysis of theeffect of the policy environment on efficiency in selected key agro-industrialactivities.

Reorienting Public Expenditures (Chapter I1 of MTASAP)

81. Public investment. The allocations of investment resources to thesector in the 1970s were generally below the sector's share in GDP, as othersectors such as petroleum and manufacturing were growing more rapidly. Underthe about-to-be-completed VIth Plan, actual investments in the sector at 161of the total have been below the original Plan estimates of 191. While total

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public agriculture expenditures have been maintained at levels envisaged, thedecline 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 1970sthere was an increasin2 emphasis on fully developing the limited irrigationpotential and irrigation investment reached 441 of total investment in thelate 1970s. Investment in livestock and fisheries also increased. In thelivestock sector, the shift in emphasis has been from poultry towards dairy,and 472 of these investments were financed by the private sector. Publicinvestments have emphasized a rather doubtful but rapid program of importingexotic production animals at the expense of a slower but more cost effectivecross-breeding effort. The increase in the fisheries sub-sectoral investments,mostly in infrastructure and processing facilities, have been fruitful sincethe sub-sectoral growth and exports (131) have exceeded all Plan projections.However, capacity utilization remains low. On the other hand, investments inforestry and soil conservation, fruit trees, research and extension, whichwere seen to have only longer-term benefits, were progressively de-emphasized:a neglect which is now beginning to constrain sectoral growth, since 401 ofextension expenditures are in irrigated areas which cover only 5Z of thecultivable area. Investment in farm machinery increased in the 1960s and1970s, as the newLy developed irrigated areas needed mechanization, bututilization rates are low (para. 112). Tunisian research expenditures areabout 1.42 of agricultural GDP - much higher than other developing countrieslike China, India or in Latin America. However, this expenditure is spreadout thinly over a large number of un-coordinated institutes and agencies, andalmost 601 of those expenditures are devoted to fruits, vegetables. andindustrial 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 42.4Livestock 3.9 11.5 12.0 11.0Forestry and Soil Crnservation 25.3 9.5 7.5 8.5Fruit Trees 15.4 13.4 5.0 6.3Farm Machinery 15.8 29.1 17.5 13.4Fishing 4.2 9.2 7.0 8.6Research, Extension, Studies 8.4 4.5 4.1 3.6Cereal Storage - - - 1.5PDRI - - - 1.5Others _ _ 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 IntegratedRural Development Program (PDRI) is administered by the Ministry ofPlanning and Finance.

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83. In view of the country's increasingly strained financial situation,the Government's MTASAP calls for the implementation of a sector expenditurestrategy in which investments are designed to:

(a) boost the efficiency of resource use by maximizing returns on pastinvestment;

(b) increase efficient production of cereals, meat, milk and wood forimport substitution and dates, citrus,- fish and off-season vegetablesfor export;

(c) privatize all commercially viable services and ensure a policyframework encouraging private investments; and

(d) bring about greater labor intensity in investment (also to be tackledby wage policy and interest rates).

This requires first the development of appropriate sub-sectoral investment/expenditure strategies; second, the identification and preparation of specificproject pr.tDosals able to meet the above strategy and rigorous economic rateof return and other criteria; third, to prepare for uncertain developments inresource availability, to establish a "core" program of high priorityexpenditures which would be preferentially protected in case of resourceshortfalls.

B4. Sub-sectoral investment strategies. Specific sub-sector strategiesconsistent with this overall sectoral strategy have been developed and aredescribed in the Government's Letter of Agricultural Development Policy[Annex IV(b)]. These strategies will guide project identification andpreparation for the VIIth Plan, and their main features are as follows:

(a) in grain storage, focus on rehabilitation to increase capacity andimprove the domestic collection network, and on modernization,including bulk handling, to improve cost effectiveness;

(b) in livestock, concentrate on the development of local forageresources to substitute for imported concentrates by developingforage reserves throughout the country, focussing extension effortson the integration of Livestock with cereal production, promotingsystematic use of crop by-products such as feed (straw, bran andby-products of the olive oil industry); strengthen the geneticimprovement program through greater reliance on cross-breeding versusimports of purebred stock; encourage wider participation of privateindividuals and cooperatives in providing artificial inseminationservices; and encourage the privatization of veterinary services;

(c) in research, emphasize better coordination of expenditures onresearch and focus research on priority import substitution or exportproducts such as cereals, livestock products, dates, citrus andoff-season vegetables; in extension, without substantially increasingthe present level of total expenditures, reorganization of multiplecommodity-specific, extension programs would permit increasedefficiency in use of operating funds, while first ensuring adequatestaffing and funding for the transportation, operation and maintenanceof existing centers; new centers would be built in rainfed areas,with housing close to field areas;

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(d) in forestry, increase the financial resources available fordevelopment to arrest the loss of forest cover in order to bettermobilize the sub-sector's productive potential and reduce imports;priority needs to be given to establishment of nurseries, to improvedmeans of guarding and protecting the natural regeneration areas, tomechanized exploitation and reforestation and improved inventoriesand studies;

(e) in fruit trees, encourage maintenance of existing plantations; in thecenter of the country, promote the establishment of pasture withinthe framework of a balanced system of livestock and fruit trees; andfavor 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, whileholding back additional expenditure on ports, fish processingfacilities and the coastal motorized fleet; encourage the developmentof strategically located inland cold storage and ice plants to developand exploit domestic markets for under-exploited bluefish; and

(g) in irrigation, finish downstream investments under existing projectsin order to rapidly increase the availability of water at farm level;promote rehabilitation and maintenance of existing irrigationinfrastructure; and encourage investments designed to increase wateruse efficiency.

85. Project selection criteria. A part (12Z) of the sector expenditureprogram consists of general activities of a program nal -e which do not fallinto a project format, and those that do, except for son.e externally fundedprojects, are not routinely subjected to critical evaluation of investmentstrategy and economic impact. To strengthen its investment planning andmonitoring process, the MTASAP calls for the widespread application of animproved project/program evaluation methodology to all new investments for theVIIth Plan, improving the capacity of the DPSAE in project evaluation andestablishing a system of project monitoring and budget surveillance.

86. All projects to be continued or started during the period of theMTASAP will be first tested for their consistency with the above sub-sectoraldevelopment strategies, followed by evaluation according to the followingproject selection criteria. In order of priority, these criteria are:

(a) economic rate of return above 10% (based on economic pricing ofinputs 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 tobe established); and

(d) low Government contribution to investment and operating costs.

Some trade-off between criteria may be necessary, but the minimum rate ofreturn would guide all project selections.

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87. "Core" program. In the VIIth Plan period, which coincides with theMTASAP, a planning figure of 22% has been established by the Ministry ofPlanning and Finance for the proportion of total investments to be allocatedto the agricultural sector. An underlying assumption is of increased privatesector participation (from 31% to 502) in sector investment. This assumptionalso reflects the uncertainty in the overall resource base and thus the needto 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 inpublic investment funds or lack of response from the private sector, theavailable resources are devoted to a coherent set of high priority andstrategically appropriate projects, the Government's MTASAP aims to have asystem of a pre-screened program of "core" projects which would be assured offunding on a priority basis; as an indicative target, this set of "core"projects would represent 651 of the initial indicative allocation to thesector under the VIIth Plan. The criteria to be applied to put projects inthe "core" program would be:

(a) short gestation or remaining completion periods;

(b) small reliance on Government budgetary resources (e.g., throughgreater 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 theVlth Plan confirms that completion of ongoing viable projects would accountfor roughly 75% of the indicative si7e of the "core" program. The room forintroducing new projects could thus be quite limited. The Government plans tohave ready a draft list of projects and project ideas for the VlIth Plan byDecember 1986, including those earmarked for inclusion in the "core" program.The project list and the "core" would be subject to review and amendment asfeasibility and evaluation work are completed. However, the establishment ofthis systematic approach to project selection and pruning of programs in caseof resource constraints would help to significantly improve the efficiency ofsector investments.

89. Expenditures monitoring system. Close monitoring of publicexpenditure patterns during the resource constrained VIIth Plan would becritical to ensure that available resources are used most efficiently. Thiswill involve monitoring sub-sectoral distribution, project-wise expendituresand the adequacy of OhM expenditures as well as the focus of resources on the"core" program.

90. Recurrent expenditures. Reduced allocations of budgetary resourcesfor maintenance of existing investments has been evident in the recent past.This is especially true of the irrigation sub-sector where the burden on theGovernment has increased rapidly as the network has expanded and cost recoveryfrom 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 toachieve full O&M cost recovery in the Irrigation Offices (OMVs) which wouldgenerate incremental revenue over the next ten years with a view to bringingthe 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 1991and the balance during the program period (except in a few areas in the center

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part of the country where farmers' ability to pay may be a constraint). Inaddition the Government is establishing a set of norms for the maintenance ofequipment and civil works which would serve as guidelines for ensuringadequate funding. The list of maintenance coefficients for various types ofexistitig irrigation inivestments is contained in Chapter II of the MTASAP. Theallocationi of adequate 06M budgets in relation to these norms and actualexpenditures would be monitored with the aid of the computerized expendituretracking system being developed (pora. 85).

92. Private investment and credit (ChapterIV of MTASAPJ. Creotrrreliance on private investment as opposed to direct public investment is a keyclement of the Government's MTASAP (para. 61). Private activity in the sectoris guided by the Agricultural Investment Code which created a package ofincentives for private investment. Typically, farmers finance 201 of the costof these investments, with about 801 coming from budgetary resources in theform of low interest loans or outright subsidies. Private investment nowaccourts for about one-third of total investment in agriculture, a figureunchanged from the Vth Plan. Apart from the tree crops and farm machinerysub-sectors, private sector participation is the highest in the livestocksector (562), followed by fisheries (302), and by private irrigation (131 ofthe total). Most private investments are associated with lending by theNational Bank of Tunisia (BNT), a multipurpose commercial bank which accountsfor about 75X of total banking system credit to agriculture. Most of theremaining 251 is accounted for by short-term lending by commerciaL banks. TheNational Agricultural Development Bank (BNDA) handles less than It of totalbanking system credit to the sector.

93. Agricultural credit in Tunisia is financed largely by Governmentsubsidized special funds (FOSDA, FOSEP, FODERI) which not only are becoming aheavy burden on the budget (a total of D 19.5 million now budgeted for 1986including both loans and subsidies), but also by undercutting the participationof the commercial banking sector, they create serious problems for the overallcredit system. These funds also need annual replenishment from the budgetsince recoveries average less than 50% as the Government (not the BNT whichhandles them) bears the risk of default.-' Liberal eligibility criteriaallow 901 of Tunisian farmers access to those special but progressivelylimited amounts of funds; this, combined with the lack of development of othercredit systems, seriously affects the overall flow of institutional credit topromote private investment.

94. The Government's MTASAP aims to use the agricultural credit system asa primary tool to promote greater private sector participation in agriculturaldevelopment and at the same time to reduce the budgetary burden on theGovernment. Specifically, the MTASAP aims to:

(a) improve the incentives for banks to apply their own resources toagricultural Lending, notably through a policy of interest rateswhich cover the financial and operating costs at reasonable efficiencyand risks of agricultural lending, thereby enabling the shift frompublic to private sector lending to take place; in the medium-term,the Bank's preliminary estimate is that this would imply interestrate increases of 2-4X, up to 9-12%;

(b) reduce progressively (in light of the mobilization of other resourcesto support a Larger program of agricultural credit) the budgetary

1/ BNT recoveries on loans made from its own resources are above 92Z, andthose in which it shares a part of the default risk are above 751.

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allocations to FOSDA, FOSEP and other special funds (FOSDA loansgranted rose to D 21.8 million in 1985) which have the potential toundercut commercial credit, with the ultimate objective of bettertargetting these funds to the poorest farmers;

(c) transfer progressively to BNT and to the banking sector a larger partof the risk assumed by the State in association with the higherinterest rates under (a) above; and

(d) apply better recovery measures, notably the "Privilege d'Etat:"reschedule certain debts when justified by natural disaster, forexample, and stop taxing bad debt provisions made to cover the riskof a non-repayment.

Strengthening and Privatizing Support Services

95. The pattern followed in Tunisia has been one of strong and activeinvolvement of the Government and its agencies in the entire range ofmarketing and support services in Tunisia. Partly because they are often notcharged at their full cost, but also because of the limitations imposed by thefinancial constraints on the expansion of these services in line with demand,the Government has reassessed the need for its continued involvement inprovision of these services. The MTASAP recognizes the benefits from privatesector involvement in the provision of commercial services, and the adverseconsequences of strong Government involvement in providing subsidized serviceswhich 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, theMTASAP recognizes the need to strengthen the quality of continued Governmentinvolvement. Action programs have thus been devised under the MTASAP toincrease 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 supportservices such as research, extension and irrigation management which willremain in the public domain.

96. Input marketing: Fertilizer (Chapter VII of KTASAP). Tunisia is amajor producer of fertilizer, chiefly of triple superphosphate and ammoniumnitrate. Only 181 of triple superphosphate, 421 of ammonium nitrate and 83%of single superphosphate production are consumed by domestic agriculture, theremainder being exported. The only major imported fertl.izer is potassium.Since 1985. when domestic production of nitrogenous fertilizer commenced, thepublic sector Tunisian Chemical Fertilizer Company (STEE' has had the wholesalemonopoly for phosphate anid nitrogen fertilizers. It is at the wholesale levelthrough STEC that the Government subsidizes the three most widely usedfertilizers (superphosphate, triple superphosphate and ammonium nitrate).The Office of Cereals (OC) is the main retail agency handling about 50% ofphosphate and 40% of nitrogen fertilizer distribution. The OC has played auseful role in linking marketing of inputs with domestic procurement ofcereals, and has thus helped in developing the domestic fertilizer market from34,000 tons in 1964 to 230,000 tons in 1984. In this period, nitrogenfertilizer use increased about tenfold, and phosphate fertilizer by about4 112 times, while use of potassium fertilizer, which is not subsidized andis imported by the private sector, has remained relatively stable at 6,000 -10,000 tons/year.

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97. Retail marketing, in addiLion to OC, is done by cooperatives and theprivate sector. During the VIth Plan, there has been an expansion of the OC'snetwork of retail outlets and this combined with absorption of OC's losses bythe Government and the controls on private sector retail margins, particularlyfor the subsidized products, has led to a retail trade which has becomedominated by the OC. In 1982, only 37% of the retail outlets were in thecooperative or private sector. In addition, the private sector has concen-trated 70% of its outlets in the citrus growing northeast, where the majormarket is for potassium, a fertilizer market relatively free from Governmentinvolvement. As a result, many smaller farmers, not linked with OC throughgrain narketing and in Lemote areas, have been without assured and timelyaccess to fertilizer. The growth of private retailing has been constrained bythe lower prices permitted to the public sector. For example, in the 1985/86crop season:

Product Public Sector Mark-up Private Sector Margin…(D/ton) ---------------…-

Triple Superphosphate 2.25 7.00Ammonium Nitrate 3.13 9.73Single Superphosphate 1.25 2.95Diammonium Phosphate 2.25 7.00

98. The Government's MTASAP strategy is to improve the conditionsnecessary for the private sector and service cooperatives to continuallyincrease their participation in fertilizer retail marketing, therebyincreasing farmer access to fertilizer and enabling the Government toconcentrate its effort to the promotion of fertilizer use in low demand areasnot likely to be of interest to the private sector. The Government's MTASAPaims to equalize the retail mark-ups charged by the public sector with thoseof the private dealers and to liberalize retail margins. In parallel,agricultural credit institutions would introduce short-term credit programswhich permit advance purchases of fertilizer to reduce delays in delivery anda seasonal differential in wholesale/retail pricing would encourage moredownstream storage and early purchase.

99. Input marketing: Certified seeds (Chapter VII of MTASAP). Productionor imports of non-cereal seeds including vegetables, industrial crops, pulsesand fruit tree seedlings are handled predominantly by the private sector.Adequate amounts of seed potatoes and forage seeds are imported. Overallquantity and quality of cereal seed is adequate with genetically improvedplant material having been available since the early 1970s, as a result ofnational and international research efforts. Use of certified cereal seedshas stabilized at about 15,000 tons, after fast growth during the 1960s and1970s. Certified cereal seed multiplication is handled by cooperatives, whichcontract out the multiplication of basic seed produced by the NationalAgricultural Research Institute (INRAT) to private farmers and cooperatives.The Office of Cereals distributes certified seed through its network of119 retail outlets, many of which also serve as collection centers for theharvest. Roughly 61% and 82% of the land under durlum and bread wheat in thenorth are now sown with improved varieties. In case of barley this figure isonly 20% although varieties suitable for the north are available. Whileproduction and control of certified seed are adequate, the pricing anddistribution 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

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small farmers. The practice of too frequent seed renewal is encouraged by anout-moded but once useful "seed-exchange" type distribution system still usedby OC. Under the system, farmers exchange their own grain for certified seedon a one to one basis, up to a maximum of 2.5 tons; above this level, and upto eight tons, it is exchanged on the basis of 115 kg grain for 100 kgcertified seed. Requiremenits over 8 tons (about 80 ha) have to be paid at fullcost. Although nominaLly the pricing is set to favor the small farmer, thissystem effectively limoits the access of certified seed only to those farmersselling their grain through OC. Total expenditure on seed subsidies rose fromD 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 aredevoted to the expanded production of barley seed and the apparent over-consumption of cereal seed is controlled. To this end, the seed subsidy is tobe eliminated over 3 years. To ensure better access of smaller farmers toimproved seed, the Government aims to strengthen the distribution system byintroducing 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 belaunched to review the cereal and other seed distribution system including anenhanced role in its distribution by private retailers of other agriculturalinputs.

101. The thrust of the adjustment program for seed marketing is to phaseout the seed subsidy which only accounts for 2-3% of production costs and tostimulate greater private sector involvement in seed marketing together withother inputs. Measures are planned to reduce seed subsidies by about 33% peryear over the next three crop seasons. The exchange program will also begradually converted into a straightforward sales program.

102. Output_marketing: Cereals. Production of cereals, consisting ofabout 601 durum wheat, 25% barley and 15% bread wheat, has increased from anaverage of around 1.0 million tons under the Vth Plan (1977-81) to 1.3 milliontons under the current VIth Plan (1982-86). Meanwhile imports have averagedaround 900,000 tons which means that the production increase has been absorbedentirely by growing internal denmnd. For the future, unless consumption canbe curbed, cereal production must continue to grow or the country will faceincreasing imports.

103. The OC is the national grain supply agency which over the decade ofthe 1970s has been forced to meet rapidly growing demand for industriallyprocessed grain with an infrastructure and institutional practices that havechanged little since the 1950s. Efforts to improve the grain supply werelaunched under the Grain Distribution and Storage Project (Ln. 2052-TUN) andhave 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 severalredistribution silos designed to reduce heavy demurrage and port costs willbreak a major bottleneck in the distribution circuit for imports, andtransform this circuit from largely bag to primarily bulk handling withattendant cost savings. As a result of a study of OC's financial managementsystem, OC's financial functions have been reorganized, and reforms inaccounting practices have been started.

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105. With the recent creation last year of a Logistics and TransportDirectorate in OC, immediate improvement in practices and substantialreduction in losses were evident in handling the peak crop of 1985/86.

106. Completed studies have shown that the diagnosis of problems in OC'soperations management is complex. Further reforms in the management of supplyoperations are clearly needed and the Government has confirmed in the contextof the Letter of Agricultural Development Policy that cereal marketing problemswill be addressed as part of the MTASAP. In support of this, action programsare being prepared and implemented in the context of the ongoing Grain Storageand Distribution Project financed by the Bank (Ln. 2052-TUN) and preparationof a possible second project:

(a) Management Df buying and selling. The buying and selling of importedgrain has long been handled by OC as a completely separate operationfrom the buying and selling of local grain, which has resulted incostly inefficiencies in the transport and storage of both. Areorganization plan has been prepared for these marketing functionsto achieve over the coming months unified direction within a singlemarketing directorate. To improve import operations, OC is workingon improved tender and contract documents to provide for betterprotection and improved quality control. Similarly, the system oflocal purchases is to be improved by simplifying the present systemof quality premiums and penalties.

(b) Management of domestic harvest purchases. At present in manylocalities OC and the two grain cooperatives1' each has its owncollection center operating in conditions that are sub-optimal bothfor storage and for loading and maneuvering of trains and trucks.OC and the cooperatives plan to achieve economies of scale in bothinvestment and operational costs in the domestic procurement networkin the mediium term by implementing a rationalization program.

(c) Maintenance of facilities. To overcome the absence of a tradition ofmaintenance and the lack of a maintenance management structure andtechnical skills, OC has decided to introduce an improved silomaintenance system, initially by recruiting a firm, on a turn-keybasis, with gradual transfer of responsibility to OC and/or thecooperatives.

(d) Reimbursement of storage costs. The present system of Governmentreimbursement of storage costs does not provide adequate incentiveseither to the OC and the cooperatives for the improvement ofmaintenance or to large farms and processing mills for the instal-lation or expansion of bulk storage facilities at their enterprisesto reduce congestion in the collection center network during andafter the harvest. Proposed revisions in the reimbursement systemthat are designed to reverse these incentives have been developed aspart of the cereal marketing improvement program.

(e) Reimbursemnent of transport costs. The method currently used by theGovernment and OC for implementing the Government's program ofreimbursement of transport costs for processed grain in support ofthe Government's policy of a unitary national price for cereal

1/ OC has delegated to the two cooperatives the authority to participate inharvest collection on behalf of OC.

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products is costly. In essence, reimbursement is paid to processorsby the ton-kilometer of transport irrespective of origin anddestination. As a result, there is considerable criss-crossing ofthe country in unnecessary transport from deficit regions to surplusregions and vice-versa, the cost of which appears to be well overUS$L million per year. Alternative formulas for carrying outtransport reimbursement are now under consideration with a view toeliminating these losses.

107. Milk marketing (Chapter X of MTASAP). The dairy industry has grownrapidly (by about 22% p.a. during the 1970s) and milk production reached293,000 tons in 1985. However, imports account for nearly 45% of consumptionand have almost trebled over the same period.

108. The Government currently intervenes in almost every stage of milkproduction and marketing. Although it subsidizes milk collection by theprocessing industry, only an estimated 20% of the national production isactually collected for processing; the remainder is consumed on farm or solddirectly to consumers. The Government also fixes the consumer prices ofdifferent milk products sold by the organized industry. This controlledsystem has a number of adverse consequences for domestic production and anadverse impact on the sector trade balance. Since the margin between theprice at which processors must buy fresh milk and sell finished products isnarrow (20-30%), only the parastatal milk plants (STIL and TUNISIELAIT) withaccess to Government subsidies collect milk while a vast number of milkproducers dispersed over the countryside do not have any assured marketoutlets. More recently, imports which are often subsidized and enter tariff-free, have become the cheapest source of supply. Given the Government's fiscalconstraints, the demand for dairy products is not met, and incentive fordomestic collection is declining.

109. The MTASAP builds on recent Government efforts to alleviate some ofthese constraints. Specifically, it aims to create a more favorable policyenvironment which, by raising the import price through exchange rate adjustmentand the minimum tariff, and progressively liberalizing the pricing andmarketing of domestic fresh pasteurized milk, leaving the import-basedsubsidized reconstituted milk for vulnerable groups, would keep improvingproducer prices and increase the incentives for collection and processing ofdomestic fresh milk production.

110. Beef marketing (Chapter X of MTASAP). Production of sheep, in whichTunisia has a distinct comparative advantage, especially in lower rainfallareas, has risen sharply in recent years in response to the liberalization ofprices in 1978. In contrast, beef production, for which certain high rainfallareas of Northern Tunisia have a comparative advantage, has fallen from anaverage of 62,000 tons in the Vth Plan (1977-81) to 57,000 tons, the same levelachieved under the lVth Plan (1972-76). Until 1985, the Government fixed anofficial producer price of beef at incentive levels, but fixed low consumerprices and imported often subsidized imports of refrigerated beef. Given theGovernment's tight financial situtation and the high value of the dinar,buyer's incentives shifted towards imports: imports of beef virtually trebledin 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 stopsubsidizing the parastatal meat company El Louhoum, and to maintain theliberalization of the producer and consumer prices for beef. A further action

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taken by Government is to induce higher producer prices by applying temporarytariffs as needed against imports of refrigerated beef below world marketprices.

ill. Farm mechanization (Chapter VIII of MTASAP). During the 1970s, farmmechanization progressed rapidly with the area covered per tractor droppingfrom 213 ha to 151 ha by 1980. This has resulted in a high proportion ofolder tractors in the country (50% over six years old) and their consequentgreater need for parts and service. From a situation in 1982 of poorafter-sales service due to an excessive number of makes (13 makes imported and33 others), the situation in 1985 is one of a total ban on imports of tractorsin the horsepower range produced in Tunisia. Deprived of any prospect of newsales, importers have stopped stocking spare parts, especially of the slowmoving variety, and the local tractor manufacturer (CMT), enjoying a monopolyposition in its horsepower range (45-110 hp), has so far failed to work outadequate 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) at1,000 hours per year, the average annual number of hours worked per tractor inTunisia is low, implying considerable scope for more intensive use of farmmachinery; (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 mechanizationservices; (c) there is a lack of farm mechanization subject-matter specialiststo assist extension workers in organizing field demonstrations, especially inthe 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 areasonable temporary tariff for the newly established domestictractor plant to promote greater competition among dealers and betterafter-sales service and spare parts supply;

(b) more effective contractual arrangements between CMT and local dealersto provide after-sales service and spare parts supplies, includingcomputerization 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 typesof machinery for progressiv?ly reducing public sector contractingand, in the meanwhile, increasing charges to reflect the real cost ofservices 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 inTunisia are provided by the Government, through the Animal ProductionDepartment (DPA), the Office of Livestock and Pasture Development (OEP), and11 other "Offices". Services include preventive vaccination campaigns, which

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are free of charge, veterinary care which is partly paid for by the users andgenetic improvement, where the cost recovery performance and quality of serviceare mixed. Due to fiscal and foreign exchange constraints, the import ofexotic 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 artificialinsemination (AI) services are focussed on these large pure-bred herds; only 8%of the remaining herd with private fanrers is provided such services. Tosupport the new strategy towards expanded cross-breeding programs, and givencontinued fiscal constraints, the Government policy is to ensure better costrecovery in these services.

115. The MTASAP focuses on the transfer of full responsiblity (and thusachieve full cost recovery) for Al services from the Government to thosecooperatives which have large pure-bred herds. The DPA would help to traininseminators and provide them with the necessary equipment and materials.Public resources would in future be concentrated on a promotional campaign ofcross-breeding of the local herd, most of which is dispersed in remotelocations not viable for commercial operations.

116. Agricultural research (Chapter V of MTASAP). Although at 1.4% ofagricultural GDP, total expenditures on research are high compared to othercountries 1 , their effectiveness in generating relevant and timely resultscould be improved. Eight research institutes, 11 OMVs, 4 other offices,1 university and six agricultural schools are involved in agricultural researchin Tunisia with the result that the national research effort has often beenpoorly focused, duplicative and insufficiently coordinated. In many researchinstitutes, selection of research subjects is determined more by the individualresearcher's preferences, often in connection with university degree work, thanby national priorities. Notable exceptions are the cereal research programand research by the irrigation and regional development agencies which havebenefitted from more than 70% of the total external assistance. To prepare theframework 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 majorconstraints on the low producti-ity of research expenditures:

(a) a lack of clear research priorities, focussed on national needs andincorporating economic priorities; the OMVs have devoted 80% of theirresources to livestock and vegetable research, while cereals/pulseshave been neglected;

(b) the research institutes suffer from inadequate professional staffsalaries 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% inthe last two years);

(c) certain field stations are not necessary and many have excessive landresulting in the budgetary resources being spread too thinly; and

1/ China/India, 0,5%; Middle East and North Africa, 1.1%; andLatin America, 0.9%.

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(d) not only are the linkages with extension weak, but research workersdo not benefit from enough contact with other research institutes,higher education institutes, and development agencies performingresearch functions. Tunisian research also has much to gain fromresearch findings in neighboring Mediterranean countries such asItaly, 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 sevenalternatives- proposed in the ISNAR master plan study as a meansto improve the programming and budgeting for the national researchefforts 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 bysubstations to private farmers and cooperatives;

(d) strengthening animal production, farm management economics, and farmmachinery research; and

(e) strengthening of the links between research and extension and withother research entitites, both in and outside Tunisia.

By June 1987, the Government will decide which of the seven restructuringoptions it will adopt and prepare with Bank assistance a detailed actionprogram covering the above points for implementation during the VIIth Planperiod (1987-91).

118. Agricultural extension (Chapter VI of MTASAP). A number of publicsector entities have grown up in Tunisia alongside the main ExtensionDepartment of the Ministry of Agriculture to provide advice to farmers on thetechnical, managerial and economic aspects of farming. Tunisia's 1,000 oddextension agents operate under a total of about 25 entities, some focussing onspecific commodities (e.g., olive oil, cereals, meat, milk, wine or tobacco),or a particular region (e.g., Northwest Rural Development Office) or for onefactor of production (e.g., OMVs in the case of irrigation water). Roughly50 work in irrigated areas, which represent only 5 of the cultivable area.Extension workers in Tunisia provide multiple services ranging from inputdistribution, credit applications, authorization for fuel subsidies andstatistical work. Farmers are subject to multiple sources of extension advice.Extension services operate out of CTVs, amounting to 508, which have officeand housing as well as storage space. Sixty percent of the CTVs cover lessthan 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 inthe predominantly high season vegetable areas, 150 in the OMVs, and 1,000 inthe cereal-dominated North.

1/ The alternatives range from a single, unified research institute to acoordinating committee on research. The latter is not a feasible solutiongiven the experience with a similar committee which has met only once since1978. The former would represent a change too major to manage success-fully. An intermediate system for coordinated progranming and centralizedbudgeting for high priority national programs supplemented by individualwork programs for the agencies would probably be more successful.

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119. Tunisia's agriculture needs a clearly defined extension system andmethodology suited to its particular situation. In order to develop a planfor strengthening the extension services, the Government has completed anExtension 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 feedbackfrom farmers to the research system;

(c) ineffectiveness of extension agents who perform multiple administra-tive functions, but have insufficient training in extension andcommunications methodology; and

(d) inadequate preparation of work programs, lack of accountability fortheir execution, and insufficient quality advice by subject-matterspecialists who are insufficient in numbers.

120. Under the MTAbAP, the Government aims to implement a strengthenedextension 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 commandfrom a central unit (responsible for policy, training, use of massmedia and methodology) down to the CTV level field extension worker.In the near term, the irrigation agencies (OMVs) would continue theirseparate extension programs following a uniform methodology, andrestructuring 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 twoagents per CTV is not justified by the level of agriculturalactivities, special work programs would be established wherebycertain days of the week would be reserved for extension;

(c) changes in the function of the commodity-specific agencies to providesubject-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 provideextension and research services with the opportunity for periodicexchanges of updated research information and research requirements;and

(f) encouragement to private enterprises (such as dealers in agriculturalimplements and plant protection chemicals) to play a larger role inextending tectnical and economic information.

An action plan to implement the Government's MTASAP for extension will beprepared with Bank assistance and approved by the Government by June 1987.

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121. Irrigation management (Chapter III of MTASAP). Tunisia's 235,000 haof land equipped for irrigation are managed by 11 OMVs created by theGovernment to: (a) operate and maintain the public Irrigation system;(b) provide extension services for irrigated crops; (c) promote agriculturalproduction by offering a wide range of support services (including inputdistribution, tractor services, product marketing and credit) when notavailable from other sources; and (d) promote the creation of farmer groups orcooperatives to assure responsibility for the operation and maintenance (O&M)of irrigation systems and for commercial activities. Often located downstreamof the large dams, the OMVs have played a crucial role in the development ofirrigated production which today accounts for 38% of agricultural valueadded. As their operations have expanded. however, operational inefficiencieshave become apparent and the OMVs have become increasingly dependent onGovernment 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 continueto provide even basic services, they will have to improve their efficiency andbecome more financially self-supporting.

122. One indicator of the OMVs' operational inefficiency is that theoverall average irrigation intensity (defined as the annual irrigated croppedarea over the equipped area) is only 78% (160,000 ha over 205,000 ha in1984). In the public irrigation perimeters (PPIs), the average intensity is68%, while in the private perimeters it is 86%. These low utilization rates,coupled with low water charges and low rates for other OMV services (inputdistribution, mechanization, etc.) account for the high financial dependenceof OMUs on the Government budget. The cost of services, many of which couldbe provided by the private sector, is often unknown, since the OMVs also lackclear accounting and management information systems.

123. To improve overall OMV operations, the Government has in recent yearsraised water charges by 3-241 annually in real terms between 1981 and 1985.In 1986, it has launched the Irrigation Management Improvement Project withBank assistance (Ln. 2573-TUN) which includes a comprehensive package ofmeasures which form an essential part of the MTASAP. Specifically, theproject will introduce a binomial water charge formula comprising a fixedcontribution on a per irrigable hectare basis charged to every farmer whetherhe 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 theproject period. The OMVs will also establish acounting systems and begincharging beneficiaries the full cost of services rendered. The OMVs will alsodivest themselves of commercial activities in favor of the private sector, andhold new recruitments to a strict minimum necessary for efficient operations.Funds for maintenance will be clearly identified in OMV annual budgets, andthe quality of maintenance will be monitored through performance indicators.Incentives will be introduced for farmer groups to undertake certain O&Mactivities, contractual relationships with the Government will be introducedfor selected OMVs, and the Ministry of Agriculture's monitoring capabilitieswill be strengthened.

Improving Management of Natural Resources

124. Land resources (Chapter XI of MTASAP). Fundamental to achievingTunisia's full agricultural potential is better utilization of the country'sland resources. Currently land tenure patterns constrain the adoption of moreintensive farming practices in several ways:

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(a) With 42% of the farms having less than 5 ha and 11 having more than100 ha, accounting for 61 ard 241 of the cultivable land,respectively, land distribution is highly skewed. This results inunder-utilization of land on some of the larger, often absentee-ownedfarms, 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 toinheritance, into small, frequently dispersed plots which aredifficult to manage intensively: an average farm consists of4.2 plots, and about 22X of farms have 6 or more plots; only in theirrigated areas does a system for consolidation of holdings backed upby legislation exist;

(c) While titles have been issued for about 3.0 million ha, the pace ofregistration for the remaining 1.5 million ha is so slow that it willtake another 60 years to complete this: lack of clear title has itsadverse consequences for access to credit and incentives to invest; ahigh land transfer tax also discourages land registration;

(d) With one third of the holdings in the productive North not operatedby owners, land tenure is a critical aspect: however, land leasesare mostly verbal and cover only 1-2 years. Land leases are notregistered, and a system for cost sharing for permanent improvementsdoes not exist; and

(e) About 72 of the total arable area, including some of the best land inthe North of the country, is managed by publicly owned productioncooperatives (4%) or state farms (3%) where financial results in somecases indicate room for efficiency improvements.

125. While some measures, including issuing certificates of possessionpending full titling, have been taken to facilitate access to institutionalcredit, the Government's MTASAP recognizes that more needs to be done toachieve more intensive land use. A basic element, on which the success ofother measures depends, is the acceleration of the national cadastre. TheBank is assisting with this effort through the preparation of a NationalCadastre and Cartography Program. Another key component is the preparation oflegislation comparable to that existing in irrigated areas to keep theoperational size of farms in rainfed areas above certain minimum sizes throughcontractual or management arrangements without affecting inheritance rights,and to extend the period of rural land leases to 3-9 years. The Governmentalso plans to continue its program of transferring State-owned lands toprivate parties, including leasing to private companies. A more active marketin 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 landregistration.

126. Forestry resources (Chapter XII of MTASAP). Tunisia's 0.9 million haof forests provide an estimated 15% of the agricultural CDP, but it isestimated that at least 10,000 ha are being lost annually. A forestry sectorstrategy paper, prepared for the Tunisian Government by FAO, has establishedthat the most serious threat to forests is from over-grazing by domestic stockof the 120,000 families who live in and around the forest and have grazingrights therein. Poor cover and growth rates result from this pressure and

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unfavorable soil/rainfall conditions, and thus 95% of Tunisia's industrialwood needs are imported. Fuelwood provides 75% of domestic energy andovercutting to meet demand is further reducing the cover. In the absence of aclear strategy to deal with this situation, the resource allocation forforestry has diminished sharply, and annual planting for wood production wasreduced from around 15,000 to 3,000 ha since 1978. In combination wiLh lowsurvival rates (60%), future production is threatened, and the consequences ofthis neglect on soil/water conservation is likely to be severe since 802 ofTunisian land is already subject to erosion. A new strategy to protect andenlarge this resource, while at the same time protecting animal feedrequirements, has been developed. This strategy calls for changes in the lawto limit grazing rights to those who live actually within the forests,development of the forest grass lands which can increase their carryingcapacity ten-fold, selective emphasis on natural regeneration techniques inthe majority of the exploitable forest area, limiting the more costlyreplanting techniques to clearly favorable areas, and use of mechanical (deepploughing) planting for better growth rates. Under the MTASAP, a multiplecomponent program of action, built around thinning and closely monitored andregulated natural regeneration in 3,000 ha increments each year for fiveyears, is being prepared. This would be ready for evaluation in December 1986for later adoption as a national plan, since other Government agencies wouldplay a critical role in its success. Modest increases in sub-sector expendi-tures would be fully justified in the context of the overall expenditurepriorities. This MTASAP strategy would not only provide a modest positivecontribution (about D 1.7 million annually) to reducing the sector tradedeficit in the 3-5 year period, but would play an essential role in protectingthis critical resource base. The Government would prepare a program ofactions to implement the new forestry strategy including an amendment of thelaw to regulate grazing rights, develop forest grass lands, protect andmonitor the natural regeneration of a designated 3,000 ha per year of forest,introduce mechanical planting and other activities. It is expected that thefinancing for the implementation of the evaluated program would be providedunder the VIIth Plan, since criteria (para. 86) are expected to be met.

127. Fisheries resources (Chapter XIII of MTASAP). Tunisia's fisheriesresources fall into two broad categories, each with their own developmentopportunities and constraints. Growth of fisheries production during the lastfive years has been 10.5% p.a. compared to only 6.5% annually during the1970s. As a result, high-value, predominantly white, demersal fish, consumedmainly in Tunis and other coastal cities, or exported, as well as Tunisia'straditional marine exports of shrimp, octopus, shellfish and sponges, arebeing exploited at about 85% of their potential. On the other hand, only anestimated 39% of coastal pelagic species are being exploited, and the catchhas remained static. Price controls on domestic fish marketing margins havebeen the main obstacle to developing the internal market and better exploitthe 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 marketinglinks with importers abroad.

128. In maintaining a harmonious development of this resource, an earlychange in the emphasis is needed that will give priority to utilization ofcoastal pelagic species, and better exploitation of exportable high value fish.In conjunction with its commodity specific, target market-oriented exportpromotion strategy (para. 69), the Government's MTASAP plans to liberalize

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investment and pricing controls to attract foreign investments in jointventures, and fully exploit fish export markets. Other measures, such as theelimination of export taxes, would also be considered. As a well-known sourceof Mediterranean species, Tunisia is in a good position to exploit particularlythe French and Italian markets, provided it can establish the necessarymarketing chatnels. Meanwhile, the Government recently liberalized domesticfislh marketing marginis, whichl should stimulate internal marketing and fullerexploitation of the abundanit coastal pelagic species. The Government plans tolaunch a pilot project for encouraging domestic fish marketing with theprivate sector involving the establishment of transport and cold storagefacilities initially along two main transport arteries leading into theinterior. Subject to meeting the project selection criteria, a full-scaleproject 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 thatpolicy instruments and expenditure allocations adjust to changing economiccircumstances, so that the agricultural economy stays fully in line withemerging macro-economic objectives. Within the Ministry of Agriculture, theunit responsible for monitoring sector performance and proposing appropriatepolicy responses is the Department of Planning, Statistics and EconomicAnalyses (DPSAE). As the name implies, the DPSAE has basically threefunctions: (a) to prepare five-year development plans for the agriculturalsector and annual budgets; (b) to collect agricultural statistics; and (c) tocarry out economic analyses of sectoral performance and special topics ofinterest to the Ministry and the Government.

130. Although plan and budget preparation are necessary activities of theDPSAE, the often tight schedules for their tasks together with staffconstraints, both quantitative and qualitative, have led to a situation wherefew economic analyses are done. The DPSAE does maintain certain performancedata, 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 ofdifferent production systems, nor has there been a systematic effort tomonitor incentive patterns or the effectiveness of input subsidies. Therealso needs to be an attempt to simulate the impact of alternative pricepolicies on production, the balance of trade and the Government budget. Asystematic system for monitoring actual vs. planned investment and recurrentexpenditures is also needed.

131. To strengthen the DPSAE's sector performance monitoring and policyanalysis capabilities, the first item in the Government's MTASAP is toestablish an adequate data base including not only data on agriculturalproduction, but also detailed cost of production data for at least the majorproducts under the main production systems. Data would also need to becollected on actual CIF and FOB prices of inputs and outputs imported into andexported from Tunisia, as well as the port handling, storage and transportcharges applied to these commodities between the border and farmgate. Thesecond item in the Government's MTASAP, which is also dependent on an adequatedata base, is to develop and maintain quantitative indicators of economicefficiency and incentives for the most important crops. This analysis shouldalso include the principal agro-industries where there seems to be considerable

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scope for efficiency improvements, notably through higher capacity utilization.Thirdly, an adequate data base would enable the DPSAE to construct a simpleanalytical model to simulate the effects of alternative price policyenvironments on agricultural production, the balance of trade and budget.Draft terms of reference for the design and installation of a price policyreview capability in the DPSAE were discussed with the Government atnegotiations. Another major activity of the DPSAE would be the exportpromotion study (para. 144) for whiclh draft terms of reference (in MTASAP)were also discussed at negotiations. In addition to the studies listed inparagraph 161, the DPSAE has aLso included in its work program the identifi-cation of areas where the Government could withdraw from input distributionand 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 theBank consider financing of sector adjustment loans, including one inagriculture, to help support continued reforms to improve the performance ofthe economy. In June 1985, the Government completed with the Bank animplementation review of ongoing Bank-financed projects in the agriculturalsector which revealed a number of unresolved policy issues which wereconstraining their development impact and overall sector performance. TheGovernment as a result decided to pursue with the Bank a broad-based policydialogue with the objective of establishing a medium-term economic and sectorpolicy framework to seek financing for the proposed loan. An inter-ministerial coordinating committee and various sub-sectoral groups workingwith Bank staff designed the sector adjustment program by systematicallyanalyzing constraints, exploring solutions, scheduling reform action andidentifying those areas where further study was required.

133. The purpose of the Loan is to provide the necessary financial andtechnical support to the Government's program for macro-economic reformdescribed in Part II and the MTASAP described in Part IV. The Government'smacro-economic and MTASAP frameworks have been provided to the Bank in Lettersof Economic and Agricultural Development Policy from the Minister of Financeand Planning [Annex IV(a) and (b)]. The MTASAP, including the immediatepolicy reform actions described in this part, were appraised by a mission inApril/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 ofInternational Cooperation. Ministry of Planning and Finance. A Loan Summary isgiven at the beginning of this report, and a Supplementary Project Data Sheetappears as Annex III. Maps illustrating rainfall and irrigated areas, soilsuitability 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 first18 months of the MTASAP would be monitored as conditions for the release ofthe two tranches of the Loan. A review of the overall progress of the MTASAPwould be undertaken close to the time when the first tranche is fully disbursedand Bank confirmation of the satisfactory implementation of the overall Programwould be a condition for the release of the second tranche of the Loan. The

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key selected policy reform actions to be monitored as formal conditlions oftranehe release or as dated actions are discussed below; they mainly includeiniitial adjustments in the prices and incentives framework, chlanges inexpenditure priorities and improvements in support services.

rrires r ind Incentives Framework

11%. Specific actions for further deregulating or adjustinig the prices andinhcentives framework Lo be taken within the time frame of the Loun woul(I aimto acrelerate a-ind chalininel agricultural growth towards those commodities andpro(tlction systems where TunisLa has a distinct medium-term coinparativeadvantage, and mainltain this growth under the new economic environment ofbudgetary constraints. These adjustments (combined with macro-economicreforms of Part 11) would aim to reduce the agricultural trade deficit andimprove incentives for more efficient inLer-sectoral allocation of resources.This medium-term policy objective is fully elaborated in Part IV where theMTASAP is described.

136. It would begin with upward adjustment of the Government's procurementprices for the predominantly rainfed cereal crops. As the first step in athree-year program designed to implement the new pricing formula for cerealsand bring producer prices into line with world market prices, for whichagreement was obtained at negotiations, the Government has increased theadministered producer prices of durum wheat, bread wheat and barley for thecoming 1986/87 crop season as follows: the price of durum wheat from D 16 toD 18.50qt, the price of bread wheat from D 16 to D 17/qt and the price ofbarley from D 11 to D 12/qt. These increases represent well over one-third ofthe increase required to reach world market prices. A second adjustment, toreach 67% of the required increase, would be made in advance of the 1987/88crop season as a condition of the release of the second tranche. Theseactions would also restore the historical premium of durum wheat over breadwheat, thereby reflecting world market relationships. Using this formula tofix domestic producer prices would not prevent Tunisia from continuing to takeadvantage of cheap imports. Other traded agricultural products, mainly beef,prices of which are not controlled, would also benefit from the currencyadjustment and the minimum 15% import tariff included in the macro-economicadjustment program [para. 36(b)]. These actions, combined with the reductionin tariffs on industrial goods (para. 36(b)J would start the process ofreducing the large inter-sectoral differences in incentives, and improve thecurrently 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-termobjectives of which are described in detail in Part IV (para. 79) where theKTASAF is presented, specific actions to be taken within the time frame of theLoan would include increases in the administered prices of fertilizer, animalfeed, herbicides and improved cereal seed. For fertilizers, as part of itsprogram to eliminate the fertilizer subsidy by the start of the 1990/9L cropseason (i.e., over five years), for which agreement was obtained atnegotiations, the Government has recently increased the ex-factory unit pricesof the three subsidized fertilizers"' by the amounts needed to eliminate 11%on average of the total subsidy in a normal consumption year. Together withthe increases in fertilizer retail margins (para. 142), this has led to a17-27% increase in the retail price of fertilizer sold by public sector

I/ The three subsidized fertilizers are ammonium nitrate, triplesuperphosphate and superphosphate.

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agencies which account for 80% of fertilizer sales, i.e. from D 71,950 toD 84,055/qt for ammonium nitrate, from D 57,650 to D 73,480/qt for triplesuperphosphate and from D 33,520 to D 41,670/qt for superphosphate. A secondround 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 thegoal of full subsidy elimination in five years.

138. The objective of eLiminating animal feed,t' 2-4-D herbicide andimproved cereal seed subsidles by the beginning of the 1989/90 season wasconfirmed at negotiations. The Governnent has recently increased the unitprices of maize and soybean meal by the amounts needed to eliminate at leastone third of the total subsidy (in practice 52% and 371, respectively). Theprice of maize was thus increased from D 101 to D 116 per ton, while the priceof soybean meal was raised from D 180 to D 200/ton. A second round increaseto reduce the subsidy on these animal feeds by 671 and an increase reflectingthe elimination of one-third of the subsidy on barley would be implemented asa condition of second tranche release. Action on barley was not taken thisyear, since it is a substitute for forage which was badly affected by therecent drought. Siuilarly, the Government has delayed first actions to reducesubsidies on herbicides and improved seeds to next year, since it did nat wantto 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 trancherelease, with a view to complete elimination by 1988/89. The Government alsoplans to begin phasing out the subsidy on multipurpose herbicide beginning inthe 1989/90 crop season, after the elimination of the subsidy on 2-4-D. Theterms of the cereal seed exchange program will also be revised to phase outthe total subsidy by the 1989/90 crop season; implementation of one-third ofthe necessary action would be a condition of second tranche release. Withrespect to irrigation water charges. the Government has developed and agreedwith the Bank on a ten-year program for fully recovering O&M costs, includingthe recovery of 100% of the costs on 65% of the irrigated areas by 1991, inconjunction with the Bank-financed Irrigation Management Improvement Project(Ln. 2573-TUN). This program would raise water charges by approximately15-171 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), areto increase the efficiency of resource use by maximizing returns on pastinvestments, and selective reduction of public expenditures in commerciallyviable activities to create the room for private initiatives. The Letter ofAgricultural Development Policy confirms that the Government will follow thesub-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 Letterof Agricultural Development Policy states that an initial list of projects andinvestment programs and project ideas consistent with Lhe above approach willbe made available to the Bank by December 1986, and that additions or deletionsof projects from this list during the VlIth Plan would be based on the agreedcriteria (para. 88).

140. Budgetary resources devoted to subsidized agricultural creditprograms which undercut commercial bank activities in the sector would beprogressively 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.

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lanii part of FOSDA budget allocations for 1987 wouLd be not more than the 1986level (D 13 million) in nominal terms and that these resources would be bettertargetted La Lhe poorest farmers. Confirmation that the agreed level of lDanallocations for 1987 is reflected in the 1987 budget would be a condition ofsecond tranche release. The Governiment has Indicated that allocations wouldbe reduced by a furthier 15Z in nominal terms for 1988. In additioni, to'nicourage the commercial banks to participate more aggressively in financinigthe activities of private farmers and service enterprises, the Governmentwoulld, 116 a condition of second troLnche release, take action satisfactory tothe Bank to start implementing its pollcy to establislh by 1991 interest rateswhich cover the financial costs, operating costs at reasonable efficiency anda reasonable share of the risks of agricultural lending (para. 94). Comparedto 1986 levels, preliminary Bank estimates are that this would iiamply interestrate 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 theGovernment in the medium term.

142. Input marketing. To stimulate greater private sector participationin retail distribution, the Government recently increased the mark-up chargedfor fertilizer retaiLing by Government agencies to align their retail levelprices with those allowed to the private sector retailers, at levels consideredadequate to interest the private sector. Agreement was obtained at negotia-LioIls in the context of the Government's Letter of Agricultural DevelopmentPolicy that the Government would also complete the identification of zoneswhere the volume of activity is such that the Government could withdraw fromthe distribution of inputs, including seeds, so that private retailing of allkey agricultural inputs in at least two zones could be launched before June1987, without prejudice to the objective of privatizing and liberalizing inputmarketing throughout the country as soon as subsidies are removed. Finally,prior to the release of the second tranche, the Government would update thefertilizer retail margins for inflation, ensure that public sector agenciescharge the full costs of purchasing and distributing fertilizer, and announcefertilizer margin liberalization to take effect as of January 1, 1988. TheGovernment has also indicated that it would remove remaining obstacles tomultiple input marketing by dealers as of that date. The Government's rolewould then be limited to determining ex-factory prices based on FOB prices andreduced subsidy levcls.

143. The Government's agreement was obtained in the context of the Letterof Agricultural DeveLopment Policy (draft terms of refcrence are included inthe MTASAP) that the cereal seed exchange program, which limits thedistribution of seed to farmers in contact with OC, would be reviewed, and astudy to replace this by a private retailer-oriented distribution system wouldbe launched before June 1987.

144. Export marketing. Ti, realize Tunisia's untapped potentiaL forincreased agricultural exports (para. 69), draft terms of reference for asectoi export promotion strategy, including product-specific export strategiestargetted to particular markets, were discussed at negotiations; theGovernment's Letter of Agricultural Development Policy indicates that an

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action plan to ensure the implementation of the strategy would be developedand discussed with the Bank by June 1987. The draft terms of reference forthis exercise are included in the MTASAP.

145. Agricultural research. With the ISNAR master plan completed and itsfindings scheduled to be reviewed by December 1986, the stage is now preparedfor setting in motion a series of actions to improve the effectiveness of theresources devoted to agricultural research. Agreement was obtained atnegotiations in the context of the Government's Letter of AgriculturalDevelopment Policy that the key decisions which await the Government (fordetails, see para. 116; briefly, choice of the institutional structure,definition of priority research themes, reform of the station network, andpreparation of national work programs and budgets) would be accomplishedbefore June 1987. As an essential first step toward strengthening theresearch system, and as a condition of second tranche reLease, the Governmentwould increase the remuneration of agricultural researchers to an adequatelevel following guidelines acceptable to the Bank.

146. Agricultural extension. Similar to the research master plan, theagricultural extension master plan is scheduled to be reviewed by theGovernment by December 1986. Implementation of a comprehensive reform programwould thus follow beginning in 1987; measures likely to figure in it it.cludenew 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 communityand agro-industry (see para. 120 for details).

147. Agreement was obtained at negotiations in the context of the Letterof Agricultural Development Policy that an action plan, including financialaspects, to implement the master plan would be prepared and approved forimplementation before June 1987. An essential feature of the reform programwould be the unification of extension services starting with rainfed areas,and prior to the release of the second tranche the Government would designatethe lead extension agency with appropriate responsibilities and personnel inrainfed areas to achieve this.

148. Farm mechanization. Purchase of mechanization equipment by publicsector agencies for servicing farmers has been reduced; however, cost recoveryremains poor, and the supply of spares and of the full range of tractors tomeet needs is constrained (see para. 111). The Government recently requiredthe OMVs and other public agencies still renting agricultural equipment tocharge the real costs of their mechanization services, in order to ensure anappropriate environment for private initiatives. The minimum rates are thesame as those charged by SONAM, which has recently set new rates after costaccounting studies. The Government has also indicated, in the context of itsLetter of Agricultural Development Policy, that it intends to withdraw frommechanization services in those regions and for those services where theprivate sector can adequately take over, and that this policy would be put inmotion by June 1987 after the identification of such regions and services.

149. In addition, imports of spare parts for the agricultural sector haverecently been liberalized, and as a condition of second tranche release, theGovernment would authorize the import of 5X of the annual needs of tractors inthe horsepower range manufactured in Tunisia (currently 45-110 hp); byintroducing an element of competition, this should lead to some immediateimprovement in after-sales service and spare parts availability, pending fullliberalization of tractor imports by January 1, 1988 as part of the macro

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program. In practice, the Government plans to implement the initial 5Sliberalization by January L, 1987. In preparation for the full liberalization,tractor importers would be required to meet certain criteria which theGovernment would define in a proposal to be submitted to the Bank by September1987. The criteria should include: (a) the existence and operation of anadequate number of retail-Level agencies with trained staff to offerafter-sales maintenance services; (b) availability of an essential stock ofspares to keep the tractor fleet they represent in working condition; and(c) demonstration of availability of adequate financial resources for workingcapital needs to operate the after-sales service facilities; at a minimum,availability of a commercial bank line of credit to finance the maximumestimated working capital needs. Both spare parts and tractor imports wouldbe financed under the Loan.

Improving Management of Natural Resources

150. Forestry. Agreement was obtained at negotiations in the contextof the Government's Letter of Agricultural Development Policy that, byDecember 31, 1986, the Government would prepare an action program to implementits new forestry development strategy.

151. Fisheries. The Government recently liberalized domestic fishmarketing 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 thechanging macro-economic environment on the sector, especially in the criticalareas of pricing policies and expenditure priorities, the Government wouldstrengthen the capacity of the DPSAE by upgrading its analytical tools andskills to keep agricultural prices, subsidies and expenditure patterns undercontinuous review. Agreement was obtained at negotiations in the context ofthe Government's Letter of Agricultural Development Policy that a price poLicyreview would be undertaken before June 1987, aimed at better quantification ofthe effects of proposed price policy changes on such key aggregates asagricultural growth, fiscal balance, the sector trade balance and ruralincomes and employment. In addition, the export promotion study (para. 144)would be carried out and the expenditure monitoring system (para. 89) would beset up by that date (June 1987). The technical assistance needed for effectiveexecution 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 foreignexchange 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' whileUS$90.0 million (60 of the total) would finance a list of priority importedinputs and raw materials for domestically manufactured inputs needed for theagricultural sector, as follows:

1/ The items not to be financed include goods financed by other sources and aspecific list of excluded items, such as military or para-military itemsand luxury goods such as tobacco, precious stones and jewelry, gold andnuclear reactors and parts.

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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 Materialsand Potassium Fertilizer 25.0

(ii) Spare Parts, Tractors and Pumps(not transferable) 15.0

(iii) Diesel Fuel (maximum allocation forpetroleum 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 generalimports and imports for the agricultural sector, would be made followingregular commercial practices, except when any one contract is US$5.0 millionor more, in which case international competitive bidding (ICB) in accordancewith World Bank guidelines would be used. Procurement of imports by thepublic sector, including both general imports and imports for the agriculturalsector, would be done by ICB except in the case of contracts costing belowUS$2.0 million each, up to an aggregate of US$15.0 million, which would beawarded on the basis of comparison of written quotations solicited from a listof three suppliers eligible under Bank guidelines. Procurement of fertilizerraw materials and potassium fertilizer, tractors, animal feed, petroleumproducts, pumps and raw materials for the manufacture of irrigation pipeswould be grouped whenever possible into packages suitable for ICB. Itemswhich the Bank considers of a proprietary nature, expected to total no morethan US$5 million, would be procured by negotiated contract, followingprocedures satisfactory to the Bank. Bidding documents, bid evaluationreports and proposed awards of contracts procured through ICB would be subjectto the prior approval of the Bank. For the rest, the Borrower would furnishto the Bank, prior to the submission of the related withdrawal application,such documentation and information as the Bank may reasonably request tosupport the withdrawal of funds from the Loan account in respect of suchcontracts. In view of the Bank's policy on the procurement of hazardousmaterials, assurances were obtained at negotiations that the Government wouldprepare and start implementing a program of measures acceptable to the Bankdesigned to ensure safe handling and storage of potentially hazardousagricultural chemicals used for plant protection and weed control.

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Disbursement

155. The Central Bank of Tunisia would have primary responsibility foradministering the proposed loan. Disbursements from the Loan account for bothgeneral imports and agricultural inputs and raw materials would be madeagainst 100l of the foreign cost of eligible imports. Disbursements forcontracts procured through ICB would be made against fully documentedwithdrawal applications. Disbursements for other items would be made on thebasis of statements of expenditures (SOE) from the Central Bank detailingindividual transactions in a given period, together with a certification ofpayment of the amounts involved. and of their eligibility under the Loan.Supporting documentation for SOEs would be retained by the Bank of Tunisia andmade available for review to Bank supervision missions. Applications forwithdrawal would be consolidated and submitted in amounts not less than US$1.0million. The allocations for spare parts, pumps and tractors would not betransferable and there would be a US$30.0 million maximum on financing ofpetroleum products. In order to accelerate disbursements, a revolving fund(special account) with an initial deposit of US$35.0 million (corresponding tofour months' payments expected to be made through the revolving fund) would beestablished at the Central Bank. Replenishments would be made either once amonth or when half of the revolving fund has been utilized. The Loan isexpected to be fully disbursed within 18 months of effectiveness. The ClosingDate would be June 30, 1988. In order to ensure a smooth flow of necessaryimports, retroactive financing of up to US$15.0 million for eligibleexpenditures made after May 1, 1986 would be included. No disbursements wouldbe made for potentially hazardous agricultural chemicals until the program ofmeasures mentioned in paragraph 154 is put into effect.

Accounts and Audits

156. The Central Bank would maintain records of all transactions under theLoan in accordance with sound accounting practices. Not later than six monthsafter the end of each fiscal year of the Borrower, all accounts, including thespecial account (revolving fund), would be audited by independent auditorsacceptable to the Bank. Audit reports would include a separate opinion withregard to the claims submitted to the Bank on the basis of SOE and statewhether 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 intvo tranches, the first of US$100.0 million upon Loan effectiveness, thesecond 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 eachtranche would relate to the implementation of specific measures which arecrucial to the execution of the overall macro-economic and sector adjustmentprograms. Besides these measures, the Government has already demonstrated itsconuitment to the objectives of the macro-economic and sector programs bytaking 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, fullcost charging for Government mechanization services and liberalization ofdomestic fish marketing margins.

- 55 -

158. The macro-economic reform actions which would be supported andmonitored under the Loan are as follows:

(a) prior to e'ffectiveness: confirmation that the Government has takenall necessary measures to remove restrictions on imports of spareparts for use in industry, agriculture, hotels, hospitals and otherservices, raw materials and semi-finished products for enterprisesthat export at least 25% of their output, and capital goods forinvestment projects approved by API, APIA and the Tourism InvestmentBoard after October 1, 1986 [para. 36(a)]; and

(b) prior to second tranche release: Bank confirmation of satisfactoryprogress in implementation of the overall program 'para. 37).

159. The sector specific actions expected to be supported and monitoredunder 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 toachieve the targeted adjustments and subsidy reductions for the1987/1988 crop season (para. 136-138);

(ii) confirmation that FOSDA loan allocations for the 1987 budgethave not exceeded D 13 million, and that action satisfactory tothe Bank has been taken to start implementing the Government'spolicy to establish by 1991 agricultural interest rates whichcover the financial costs, operating costs at reasonableefficiency, and a reasonable share of the risks of agriculturallending (para. 140);

(iii) updating of fertilizer retail margins for inflation, selling bythe public sector of fertilizer at prices adequate to fullycover the costs of purchase and distribution, and announcementof fertilizer retail margin liberalization to take effect as ofJanuary 1, 19B8 (para. 142);

(iv) designation of a lead extension agency for rainfed areas withappropriate responsibilities and personnel, to achieve gradualunification (para. 147);

(v) authorization for the import of 51 of the annual needs oftractors in the range manufactured in Tunisia (para. 149);

(vi) increase in the remuneration of agricultural researchers to anadequate level following guidelines acceptable to the Bank(para. 145); and

(vii) Bank confirmation of satisfactory progress in implementation ofthe overall M!TASAP (para. 134).

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D. Management, Coordination. Monitoring and Evaluation

160. Management and coordination of the adjustment program, including bothits macro-economic and sectoral components, would be the responsibility of aCoordinating Committee composed of representatives of the key ministriesinvolved in the execution of the overall adjustment program, including theMinistries of Planning and Finance, Agriculture, Industry and Commerce, andthe Central Bank. Establishment of the Committee would be a condition oEeffectiveness. Analytical and monitoring support for the committee work wouldbe provided by the DPSAE in the Ministry of Agriculture. Assurances wereobtained at negotiations that a semi-annual report on the implementation ofthe macro and sector adjustment programs would be provided to the Bank, andthat there would be an exchange of views on the status between the Governmentand the Bank. The sector program would be monitored on the basis of the keypolicy performance indicators provided in Appendix III of the MTASAP.

161. Given the short disbursement period of the Loan, the precise impactof the adjustment program would be difficult to measure at the time of finaldisbursement. Evaluation efforts are thus expected to focus on: (a) ensuringthe establishment of an adequate data base to assess the magnitude of theresponse over the medium term; and (b) undertaking special studies of theinitial effect of key adjustment measures to ensure that any necessarycorrections are made promptly. Special studies planned, the execution ofwbich would be the responsibility of the DPSAE, would include:

(a) monthly surveys of regional markets to determine the free marketprices for cereals, milk and beef not sold to Government orparastatal marketing agencies, following implementation of the firststage of the Government's new output price policy;

(b) analysis of the supply response to higher cereal, milk and meatprices;

(c) demand for fertilizers, animal feed, seeds, and herbicides followingthe implementation of the first phase of the Government's importsubsidy phase-out program; and

(d) planned vs. actual expenditures by sub-sector using the newcomputerized 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, whichprovides the overall economic environment for implementation of the MTASAP, isexpected to have a favorable impact on economic growth in general, and on theallocation and use of economic resources, the balance of payments and thepublic finance situation in particular. It should result in higher exports ofgoods and services, higher private investments, higher employment creation, adecline in the ICOR, a gradual decline in the balance of payments currentaccount deficit, and in the overall budget deficit. Any comprehensiveadjustment program of this size and complexity necessarily entails some elementof risk. The strict limits on domestic demand might not be maintainable dueto social, political and economic pressures (too rapid increase in salaries,

- 57 -

too rapid growth in domestic credit and money circulation and less rapid thanexpected reduction in the budget deficit). The growth of non-oil/non-phosphateexports might be slower than expected for exogenous as well as indigenousreasons (worse than expected world market conditions, political troublesaround the Mediterranean, insufficient export incentives, excessive domesticdemand). Higher than expected domestic demand combined with lower exportswould put heavy pressure on the balance of payments, jeopardizing the programof gradual liberalization, particularly of imports, which is a key element inthe overall adjustment process. While these risks are real and unavoidable,they are limited by: (a) the Government's clear commitment to the adjustmentprogram, as expressed in the basic policy documents underpinning preparationof the VIIth Plan and clearly presented to the recent congress of the rulingpolitical party; and (b) the proposed gradual approach to change, whichpermits the economy to adapt to the new policies steadily, but progressivelywithin a realistic time period.

163. The sector adjustment measures included in the MTASAP are expected tohave a favorable impact on sector productivity and on both the balance ofpayments and fiscal deficits. Some of the benefits will only be realized inthe longer term. Although none of them lend themselves to detailed andaccurate quantification at this time, all are vital to the process ofadjustment and development.

164. The favorable balance of payments impact would stem from increasedprofitability of efficient import substitution, notably of cereals, milk andmeat, and improvement in export incentives and strategy. The availability ofhigher producer prices for cereals resulting from a better alignment of outputprices with world market prices, and from price liberalization in other areasshould induce a substantial production response resulting in foreign exchangesavings, the magnitude of which will depend on weather conditions and timingof the implementation of the proposed reforms over the next few years.Although the gradual reduction of excessive protection of irrigated areas over7-10 years would result in somewhat higher production costs for the producersof export crops, these should be fully offset by the impact of the moreflexible exchange rate policy on producer prices and efficiency improvementsexpected in the production of these commodities. Increased efficiency in theprocessing of agricultural commodities, as a result of changes in priceformation processes in agro-industry, would also offset the effects of increasein input prices. Although most of the benefits from actions in the forestrysector would only be felt in the longer term, these would make a small butpositive contribution to reducing the sector trade deficit in the medium termtoo. They would also have a positive effect on the country's resource basedon environment.

165. Greater efficiency in the use of budgetary resources as well asdirect 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 developmentapproaches), and the creation of an environment conducive to privateinvestment, would ensure the maintenance of growth despite public expenditureconstraints. Improvement in the low capacity utilization of past investmentsin irrigation, fisheries, farm mechanization and agro-processing would permithigher production responses with lower incremental investments. Directbudgetary 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 theseincreases are passed on to consumers. Without consumer price increases, theagricultural input and output price adjustments would be fiscally neutral.Other direct budgetary economies would be achieved through limitations onFOSDA, accompanied by improved loan recoveries. Full charging for farmmechanization and marketing services by parastatals should raise about D 1.5million annually. Savings in the transfer of the responsibility for AIservices to cooperatives would, however, be absorbed in the costs of anexpansion of the cross-breeding program.

166. Benefits from the sharper focus of research expenditures on nationalpriorities, from a well organized extension service, from improvement inmanagement of input distribution, and from measures in land, forestry andfisheries, would be somewhat longer term in nature, but no less significantfor technology improvement, which is crucial to Tunisia improving on theproductivity of its agriculture. Overall, the adjustment program would ensurethat Tunisian agriculture can at least sustain the 3-4Z p.a. growth in theyears ahead, under the new economic conditions, and maximize its contributionto reducing the balance of payment and fiscal deficits and providing ruralemployment opportunities.

167. The risks facing the agricultural sector adjustment program relate tothe length and difficulty of the process, unpredictable developments in theexternal environment and uncertainties in the response of the private sectorto the program. While Tunisia's record in implementing reforms agreed withthe Bank is satisfactory, the magnitude of the adjustments needed and inter-relationships between them create some risk about the pace of implementationand maintaining the integrity of the reform package. Actions on input subsidyreduction have to be coordinated with adjustment, not only on producer prices,but also with the overall reduction in industrial tariffs to maintain sectorincentives. In these circumstances, maintaining the fiscal objectives andensuring reasonable food prices would pose a major challenge to those managingthe adjustment program. Weather is another potentially important factor whichmight affect the pace of implementation of reductions in input subsidies. Theresponse on the export front is contingent on actions by Tunisia's tradingpartners and competitors, and how the private sector would respond to thechanging environment is difficult to predict with precision.

168. The design and management of the adjustment program has built infeatures to minimize these risks. First, essential linkages with macro-economic actions are an integral part of the design. Second, the specificactions are to be taken over a short 12-18 month period for which uncertaintyis less. Third, the phased approach to implementing the MTASAP inherentlypermits flexibility and adjustments between phases, in light of sectoral andmacro-economic developments for which the institutional capacity for policyanalysis and monitoring is being strengthened.

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PART VI - RECOMMENDATION

169. 'I am satisfied that the proposed Loan would comply with the Articlesof Agreement of the Bank and I recomaend that the Executive Directors approvethe proposed Loan.

Barber ConablePresident

Attachments

September 3, 1986Washington, D.C.

ANNEX IPage 1 of 8

1986 SOCIAL INDICATOR DATA SHEET

TUNISIAReference Groups (MRE)

MostRecent Mid-income Mid-income

1961 1973 Estimate NA & ME LAC

AREATotal land area (thou eq km) 163.6 163.6 163.6Agricultural (% of total) 42.1 44.4 47.1

GNP PER CAPITA (US) 1270.0 1136.1 1782.8

POPULATION AND VITAL STATISTICSTotal population (thou) 4630.0 5412.0 6981.0Urban pop. (% of total) 39.5 47.2 54.1 49.3 68.9Population growth rate(%)

Total 2.0 2.4 2.8 2.3Urban 4.2 328 4.1 3.S

Life expect. at birth (yrm) 50.8 55.5 62.2 59.9 65.6Population projectIons:

Pop. in 2000 (mill) 9.9Stationary pop. (mill) 18.1

Population density per sq kmof agricultural land 67.3 74.5 90.7 105.2 53.5Pop. age structure (%):

0-14 yrs 46.6 45.2 40.5 43.9 38.715-64 yra 49.8 51.1 55.6 52.7 57.165 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 30.1Crude death rate (per thou) 16.7 12.6 9.1 10.4 7.7Total fertility rate 7.0 6.1 4.6 5.6 3.9Infant mort. rate (per thou) 146.5 118.2 79.4 94.0 56.1Child death rate (per thou) 30.0 23.9 7.6 12.1 4.3Famfly planning:

Acceptors, annual (thou) 15.0 43.8Users (X of married women) 6.4 41.0 27.2 46.2

FOOD. HEALTH AND NUTRITIONIndex of food production percapita (1974-76 * 100) 88.8 94.7 82.5 89.1 105.2Per capita supply of:Calories (% of requirmnts) 96.5 107.7 120.9 117.5 109.3Proteins (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 1.3Pop. per nurse (thou) 1.1 1.0 1.0 1.3 1.2Pop. per hospital bed (thou) 0.4 0.4 0.5 a 0.7 0-4Access to safe water(% of population): Total 49.0 63.0 71.3 66.3

Urban 92.0 97.0 94.9 77.0Rural 17.0 25.0 53.6 44.8

ANNEX IPage 2 of 8

1986 SOCIAL INDICATOR DATA SHEET

TUNISIAReference Groups (MRE)

MostRecent Mid-income Mid-income

1965 1973 Estimate NA & ME LAC

LABOR FORCETotal Labor Force (thou) 1167.9 1305.6 1781.2

Female (%) 6.5 7.9 8.9 11.4 22.3Agriculture (%) 49.1 40.1 35.0 a 39.2 31.8Industry (X) 21.4 28.4 36.4 a 25.7 26.0

Participation rate (7:Total 25.2 24.1 25.5 25.8 32.3Male 46.2 44.2 45.9 45.3 49.2Female 3.3 3.8 4.6 5.9 15.4

Age dependency ratio 1.0 1.0 0.8 0.9 0.9

HOUSINGAverage s1ze of household:

Total 5.1 5.5Urban 5.1 5.5Rural 5.1 5.6

Percentage of dwellings withelectricity:

Total 24.0 34.2Urban 6B.2Rural 6.0

EDUCATIONEnrollment rates:

Primary: Total 91.0 100.0 113.0 93.5 107.3Male 116.0 121.0 125.0 107.1 109.7Female 65.0 79.0 102.0 79.7 105.8

Secondary: Total 16.0 23.0 33.0 44.7 49.1Male 23.0 33.0 40.0 52.9 44.5Female 9.0 13.0 26.0 35.5 46.7

Pupil-Teacher ratio:Primary 55.6 4t.0 36.1 29.4 29.8Secondary 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 POVERTYEnergy consumption per cap.(kg of oil equivalent) 170.2 295.0 494.6 719.9 999.0Percentage of private Incomereceived by:Highest 10% of householdsHighest 207 42.0Lowest 20% 6 .0Lowest 40% 15 0

Est. absolute poverty incomelevel (USS per capita):

Urban 204D0bRural 97.0 b

Est. pop. below-absolutepoverty Income level (%)

Urban 20.0 bRural 15.0 b

Passenger cars/thou pop. 11.1 16.7 10.2 45.8Newspaper circulation(per thousand population) 17.5 22.2 39.0 35.3 94.9

EPO dUly 1986Not avalloble

Not. Group erages are Populatlon wolght.d. Country coverage depends on data avellabillit and la nai unIfrrn. Unless otheawlsenoted. 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 IPage 3 of 8

3 Definitions of Social Indicators

The definition of a particular social indicator may Turalfrrilitt rate - The average number of childrenvary among countries or wiLhin one country over thut would be born alivc to a woman during hertime. For instance, different countries define "urban lifelime if during her childbearing years she were toarea" 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' infantsTotil- Total surface area comprising lund area and per thousand live births who die before reaching oneinland 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 deathscultural area used for crops, pastures. market and of children, age 1-4. per thousand children in thekitchen gardens or to lie fallow. as percentage of same age group in a given year. For most developingtotal. 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) - Annualmates 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-bearingTotal population - mid-Year (millions) age who are practising. or whose husbands areUrban population (percentage of total) - Different practising, any form of contraception. Women ofcountries 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 isdata 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 NUTRITIONtions. Index offoodproduction per capita (1974 - 76 = 100)Life expecrancY at birth (years) - Number of years a - Index of per capita annual production of all foodnewborn infant would live if prevailing patterns of commodities. Production excludes animal feed andmortality 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 insteadPopulation 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 netthe 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. Netsquare 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 foryears and over as percentages of population. 1977 by the Food and Agriculture OrganizationCrude birth rate - Annual livc births per thousand (FAO) based on physiological needs for normalpopulation. activity and health considering body weights. envi-Crude death rate - Annual dcaths per thousand ronmental temperature, age and sex distribution ofpopulation. population.

ANNEX IPage 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 assi 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 fruakmcnt 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 arcgrams ol animail and pulse protein. Thes standards based on International Labour Office (ILO) daia onare 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 (agePopulation petr physician - Population divided by 154@).number of pract:sing physicians qualified rrom amcdical school at university level. HOUSINGPopulation 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 anurses. practical nurses and nursing auxiliaries. group of individuals who share living quarters andPopulation per hospital bed - Population divided by nain meals. A boarder or lodger may or may not benumber 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 inpcrnanently staffcd by at least one physician. Es- living quarters as percentage of all dwellings.tablishments principally providing custodial care arenot included. EDUCATIONAccess to safe sater (percentage ofpopulation) - total, Enrollment Ratesurban, and rural - People (total, urban, and ural) with Primary School Enrollment - towal, male andJemalereasonable access to safe water supply (includes treat- - Gross cnrollment of all ages at primary level as aed surface waters or untreated but uncontaminated percentage of primary school-age children. Whilewater such as that from springs, sanitary wells, and many countries consider primary school agc to beprotccted 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 durationfrom a house may be considered within reasonable or school are reflected in the ratios given. For someaccess of that house. In rural areas reonable acce countries with universal education, gross enrollmentwould 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 includesregional comparisons. In addition. certain definitions pupils enrolled in vocational. or teacher trainingand classifications such as urban and rural, reason- secondary schools. for pupils usually of 12 to 17able 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 - Totalcontrol) vary considerably from county to country students enrolled in school divided by the totaland 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 primaryTotal labor force (millions) - Economically active school that persist into grade s.x.persons. including armed forces and uncmployed butexcluding housewives and students. Definitions in INCOME, CONSUMPTION, AND POVERTYvarious 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, naturalAgriculture (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 cashlabor 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 8Passenger cars rper thousand pcpulationa Includes capita) - urban and rural - Absolute poverty incomemolor cars seating rewer than eight perons: ex- level is that below which a minimal nutritionallycludes ambulances, heares and military vehicles. adequate diet plus essential nonfood requirementsNewspaper 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 bepaper." 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; ineometo 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 3.5Indust ry 2.411.8 10.8 9.0 6.. 0.5 1.3 3.2 1.1 I.E. 3.8Sorvires 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 3.1lross inveetnmet 2,501.4 6.3 0.9 15.1 1.5 -4.3 12.0 -16.2 -13.8 3.2KaportL of goods4 end IWS 2,720.1 21.5 0.0 3J5 -6.9 1.4 2.4 l.b 5.8 5.0LuportL 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 3.7Grose national savings 1,626.5 15.2 .4.7 0.3 -9.4 0.0 a.2 1.7 -14.3 6.0

PRICESCOP deflator (1130 * 100) 18.6 100.0 111.4 128.1 140.0 149.5 336.9Etchsnge 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 3.4Agriculture 19.4 178 13.17 12.3 13.3 13.4 6.3 1.0 4.0 3.6Industry 20.5 25.2 32.0 30.2 31.0 33.Z 8b 6.9 3.0 3.bServicer 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 2.5Grose inv-stsunt 21.5 }0.7 32.3 28.1 24.5 22.0 3.9 6.6 -4.2 3.5Experts of loods and IFS 24.1 29.1 41.4 35.4 27.5 33.7 7.1 5.5 1.1 1.9Imports of goods and IFS 20.1 37.0 49.j 44.3 35.8 34.5 11.6 10.68 -1.6 0.2Cross national product 99.0 90.7 100.8 101.2 99.5 99.6 7.0 b l. 3.3 3.4Net factor incom -0.4 -1.3 0.8 1.2 -0.3 S 0.4 1.5 -1.5 -18.6 2.0Crose 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 195PUBLIC FINANCE =

Current revenue 26.1 29.3 31.3 32.6 31.4Current expenditure 19.9 21.5 23.1 24.7 25.2Surplus (*3 or deficit (-3 6.9 7.8 8.1 7.9 6.2C&pitml expenditure 3/ 11.8 15.3 15.2 16.5 15.6Foreign financing 1.0 1.0 1.7 2.3 3.2

1971-76 1976-81 1981-16 199e-91LJFILKr INUll AtJRS

GNP per capita growth rat. (2) 5.0 3.6 0.4 1.41 £1lt 2.7 5.2 10.0 1.4Marginal savings rate -0.0 0.1 -0.2 0.4Import 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-Cdi Projecced years in constant prices. July 19861/ Includinu thr debt morttzstion.TVblISlb

1L13IA - EXTERNAL lEADS A3Ul 11Pm1. f of 8

4n3110. growth Kate.Amouni (at 1980 rricea

(milie.I 1s11U Actual Prel. ProjetLdat 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 3.4food 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 14.3Iniemedist. 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 2.14Qlutirn 563.9 8.4 9.3 6.e b .1 10.B -3.9 -7.1 -0.1 2.3

Price IndexPRICZIS

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 0.2Petruleum 27.9 42.3 53.3 44.7 23.1 3.9 3.4 7.4 -4.2 -19.8Agricalturv 12.b 4.5 3.1 4.4 6.0 b.2 4-4 2.4 -1.1 4.7Other prierle. 21.3 11.1 4.4 4.8 9.3 10.0 2.9 0.5 1.3 15.4ranulseturiog 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 -0.3Food 19.b 12.3 11.4 13.9 14.9 14.9 -1.9 11.9 -0.9 1.7Petraleum 3.b 11.1 19.3 11.1 e.3 4,1 30.3 17.6 -5.8 -17.4Inte.ediatm goods 30.1 23.9 2e.1 29.9 37.9 40.7 12.1 10.2 1.9 2.9Capital oads 27.7 31.9 25.4 23.5 21.6 20.0 19.0 4.9 -3.9 <. 5otherv 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 witbiFdustr;-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 1964N' 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 lIIALAI11 OF PAIEiNTSNet 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 4678.2Ieports 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 16.4Current 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 11.4HLT loan. (nat) 25t.6 373.7 215.1 275.8 315.0 345.5 323.1 251.6 620.0 332.0Official 127.4 3B3.4 12b.5 207.4 258.2 152.3 106.8 149.8 486.1 419.7Private 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 0.0Changs 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 273.0 357.9 422.9 514.6 541.7 527.0 377.5 244.9 244.9 412.3Reservem/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 ulS8tlcszRSDElOtlicirl grants 33.2 10.7 41.5 20.3 19.0 25.3 28.6 21.0Gross disburecrpnta .,f MLT Inans 243.0 639.3 562.2 647.2 b69.7 875.1 747.0 766.6CUnc.esionel 101.5 142.4 207.7 240.5 267.2 169.1 159.1 309.5

Biluteral 92.6 141.5 199.8 233.4 250.0 146.1 145.7 254.1IDA 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 55.4Nnii-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 Z73.3 436.8 279.2 178.7official export credits 9.9 49.b 53.5 65.9 25.2 93.4 208.7 141.13i8R 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 DEBTDebt Dutatanding and Diabureed 1.182.4 3,021.0 3,229.6 3,321.3 3,555.9 3,353.4 3,774.b 4,3157.2Official 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.2IIU 64.1 67.3 67.9 67.5 67.0 67.3 6e.2 65.4Other 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 1,111.2lli'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 SERVICETotal 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 Z45.1Payenta as 7 exports 6.7 10.1 11.0 13.1 14.1 17.2 20.9 21.7Payments 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 12.4Disbursemaents 10.4 3.7 9.1 10.7 12.2 10.2 13.3 15.4Debt 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 7.9Official 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 Outteandingat 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 11PEp =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 MillionLoan or n (leasCredit 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.d7Ls75 1979 Republic ot [imiiia &'corul Urban Swurlage Zb.5U 1.U911t 1979 Republic ot Daniei Secund Urban IheaMLopMnE I.0L) Z.17

1746 1979 Republic of Danilia Suea FiLusrids 28.5U 12.95tho 195) RepubLic At Damisli Suthern Irrigation 25.O0 II.UI1797 198 Uffice des t[rts Nacuaiax Gat rt 42.5U 9.981841 1980 epublic of DTnisia Fourth HiiAts 30.50 ib.431mt. 195U 9sc Liedt Rluiiemie de

1'ilWctricitt et du Gtz Secanl NaturaL asa Pipelin 37.0 14.21MOIS 190U due Nstionale de TuiiLe 'h1ird Agricultural Credit JU.WJ 5.901901 91 Republic of runisia rourat Education 26.00 21.ttll9 d191 Rqpublic of 'l1nisia Smull-scale Indusry ievelopmext 3U.W0 16.9Y1997 1981 Hepublic of LUnwia Northwest AuraL Oeveloprst 24.0U 14.d12003 1981 Sacidt miusinne tde

l'ElectricitA et duC Gaz Third Power 37.5U 4.7005 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 21.712108 1982 Republic ot Danisia Fifth Hijmay (0il Moads) 35.50 23.b32113 1982 Hof? 8lectrical ad Mieclsuical Industries 30.50 13.112134 1962 SIIEE Sixth Witer Supply 30.50 5.72Jl7 1982 Republic of binisia Irrigtisn lelquinit 22.U0 17.352197 1982 RepubLic of Tunisia Tedchical Aistance 4.50 2.992223 1983 Republic of runuia Urbra Deelopia 111 25.WU 21.982230 1983 Republic of Tbnisia &rcaian V 27.00 25.482234 L983 Republic of aunis Central bnia Irrigatian 16.50 11.2H2255 1983 RepubLic of Tuniia Urban Secrage 111 34.au 32.16228 1983 Republic of unisiua Sfa Flood PRotection 25.0U 22.322301 1983 SILUBA Tndu try (IV) Foandry 16.MM 12.072346 1984 Republic of tUnisia Minin Tedcnicl Ass iarna 13.40 11.452308 1984 RepubLic of Tunisi Seventh Water Supply 50.00 47.6124M9 1984 Republic of lDnisis Second Urban Tra;port 3J.U0 32.922455 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.UU2512 1985 Republic of Tunisia Export Idastries 5U.U0 5U.O02554 1985 RepubLiLc ot Dnisia Second Electrical and Mechnical 54.U0 54.0W

mikstries2573 1985 Republic of Tunisia Irrigation Hangamt lqnrvurt 22.00 22.002hO5 1985 Repblic of Raisin Ubes IrigatioL 27.70 27.70

UDAL 1,481.04 75.15 h63.20Of iuich hba bor rpaid 260.31 9.84Total now outatig t,220.73 b5.31Aunt Sold 23.38

of nich hba been repaid 14.33Total -w held by Bank and WA b/ 16197.35 65.31Total 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. 1986lOols/I

AIUELIrUge 2 of 2

STATERMNT OF IFC INVESTIENTS IN TUNISIA IAS OF MARCH 21 l.61

Yart Dhl atgr Tinp f uliness haunt of USS MillionLoa Equit To

1963 NPK Engrais Fertilizers 2.2 1.5 3.S1966 Socliti Nationale

d'Investissement (now lOfT) Oev. F;nance Co. 0.6 0.61969 COFIT Tourism (now SNOT) Dev. Finance Co. a.o 2.2 10.21970 BDET 0ev. Finance Co. 0.6 0.61973 Socidtd Touristique et

iotelibre RYH SA Tourism 1.6 0.3 1.91974 Industries Chimiques du Fluor Chemicals 0.6 0.61975 Soc iti d'Etudes at de

OeveloppWemnt de Sousse-Nord Tourism 2.S 0.6 3.11978 ODET Dev. Finance Co. 1.2 1.2198S Socliti Tunhsienne de Leasing Leasing Co. 0.5 0.519e5 Soc iti Minhire de Spar

Fluor et de Sarytine(Fluobar) mining Co. 44 -0i

Total Gross Commitnents 14.1 8.4 22.5Less cancellationsTerminot ions, Repaymentsand Sales fl.2 1.1 1.

Total Commitments nowheld 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 wereapproved. 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 tomonitor 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 Bankdesigned 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, 1986World BankWashington D.C.

LETTER OF ECONOMIC DEVELOPMENT POLICY

Dear Mr. President:

Within the framework of preparation of the Agricultural SectorAdjustment Loan and the Industrial and Trade Policy Adjustment Loan, I havethe honor to set forth below Tunisia's principal development policy goals forthe period 1986-91.

After 15 years of rapid economic development, during which mucheconomic and social progress has been made, Tunisia is currently going througha period of adapLation to the post-hydrocarbon era, a transition that isparticularly difficult because of recent events such as the sharp decline inoil prices, difficulties in exporting phosphates and phosphate derivates, therise in the price of sulfur, and the decline in Tunisian workers'remittances.

To cope with this situation, we have, as you know, adopted a strategyoriented toward the rapid growth of non-oillnon-phosphate exports, therecovery of agricultural production, and the containment of domestic demand.In this way we intend to ensure continued growth and the creation of new jobswhile preserving a tolerable and sustainable external balance.

To this end, a number of measures have been impltmented over the pastfew years, of which the following are the most significant:

- wages were delinked from the cost-of-living index in 1983 and sincethen the minimum wage has been increased only once by about 10%;

- the Government's investment budget was reduced by close to 11 in realterms in 1985 and by around 221 in 1986;

- a flexible exchange rate system was adopted; together with the 101change in the exchange rate of the Dinar, announced in mid-August1986, this made it possible to absorb the rise in the value of thedinar in relation to the currencies of partner countries and toimprove competitiveness on the export markets;

ANNEX IV(a)Page 2 of 11

- deposit and lending interest rates were increased and have mostlybecome positive in real terms;

- the prices of products subsidized by the Caisse Ginfrale deCompensation were adjusted, leading to a gradual decrease incompensation coats with a consequent reduction in budgetary subsidies;

- producer prices of agricultural products were increased, inparticular for cereals, livestock products and olive oil, tostimulate and promote production in this priority sector;

- investment approval procedures on small and medium-scale industrialprojects were simplified and decentralized;

- an export credit insurance system was established to provide securityfor exporters and encourage them to explore new markets;

- the export prefinancing mechanism was revised, raising the ceilingfrom 10 to 201 of the value of the export and extending the termsfrom 90 to 180 days;

- lastly, export incentives were strengthened within the framework bothof the law on export industries and of the law on encouragement ofthe manufacturing industries.

Thanks to these policy changes, accompagnied by a reduction inimports, we have been able to bring about significant improvements in the 1985financial situation. In particular, we have achieved:

- an increase In non-oil/non-phosphate exports of 41 at constantprices, against an average of 1.51 over the period 1982-1984;

- a marked reduction in the current balance of payments deficit, whichfell 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 and13.61 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 therate of inflation to about 6.61, and a slight decline in the consolidatedbudget deficit to about 3.9% of GDP. However, as a result of the sharpdecline in oil prices, depressed tourism demand because of politicaluncertainties around the Mediterranean. and the serious drought, the currentbalance of payments deficit is likely to worsen in 1986 to about 8.5-9% ofGDP, requiring a higher than expected inflow of foreign resources.

Over the coming years the stabilization effort will be consolidatedand strengthened to enable us to deal successfully with the two major problemsstill facing Tunisia, namely that of balance of payments equilibrium,resulting principally from the foreseeable decline in foreign exchangeearnings, and that of unemployment and underemployment resulting from rapidgrowth in the active population.

We therefore intend to continue our efforts to curb the budgetdeficit and current balance of payments deficit so as to contain the externaldebt within limits compatible with our repayment capacity.

At this level, and although the goals of the VIIth Plan have not yetbeen 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 to8%, at constant prices, and real GDP growth of 3.5 to 4%, resulting in agradual decline of the net budgetary deficit and a marked decrease in thecurrent balance of payments deficit (from 10.9% of CDP in 1984 to around 6% in1988 and under 41 in 1991).

To achieve those goals, we intend to vigorously pursue policies aimedat restricting domestic demand and promoting exports. More precisely, weintend to accelerate the policy of gradual liberalization of the economy, inparticular as regards imports, prices and investment8, so that by 1991 weshall have abolished most of the administrative controls in those areas. Wealso intend to strengthen domestic competition by bringing down import dutiesand reducing disparities in the effective protection levels of the variousbranches of economic activity, and to ensure the competitiveness of exportproducts by pursuing a prudent and moderate wage policy and maintaining aflexible exchange rate system.

These various structural adjustment measures, which are listed in theattachment to this letter, together with an implementation schedule, shouldlead to a marked improvement in the general economic environment and anincrease in the effectiveness of the sectoral reform measures beingimplemented in the agricultural, industrial and external trade sectors, or inthe 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 forthe purpose of adapting our economy to the post-hydrocarbon era, will befacilitated if the Bank will give favorable consideration to our request withrespect to the Agricultural Sector Adjustment Loan and the Industrial andTrade Policy Adjustment Loan, and will support our medium-term adjustmentefforts with other sector loans.

We appreciate the discussions we have had with the Bank and hope tocontinue to exchange views in the future.

Very truly yours

151 Ismail KhelilMinister of Planning and Finance

ANNEX IV(a)Page 4 of 11Attachment

September 1, 1986

THE MACROECONOMIC ADJUSTMENT PROGRAM

1. The basic strategy underlying the Government's macroeconomicadjustment program reflects its objective of maintaining economic growth andspeeding up employment creation by stimulating non-oil/non-phosphate exports,achieving a more efficient utilization of domestic resources and promotingsavings through more rigorous demand management.

2. To achieve these objectives, the Government intends to pursue itscourse 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 eachof these areas is summarized below.

3. Wages and salaries. Given the decisive role cautious wage andsalary policies play in any effort to control domestic demand, improveinternational competitiveness and ensure more rapid employment creation, theGovernment decided in 1983 to delink wages and salaries from thecost-of-living index; in consequence, the minimum wage has remained unchangedduring 3 1/2 years from January 1983 through July 1986, and average salarieshave declined by nearly 15% in real terms during the same period. TheGovernment will pursue these wage policies, limiting wage increases toproductivity growth and to the financial situation of each enterprise.

In July 1986, Government raised the minimum wage by 10% but it hasno intention to increase the minimum wage on average by more than theinflation rate during 1986-1987. During the remainder of the Vllth Planperiod, it plans to follow a minimum wage policy which ensures that the growthof the total wage bill will not exceed the growth of GDP at current prices.

4. Government Budget. Recognizing the importance of reduced budgetdeficits in restoring internal and external financial stability, theGovernment introduced a program of reducing budget deficits in 1985 and 1986.It is determined to follow through on this effort so as to reduce theconsolidated budget deficit, net of debt repayment 1/, from 51 of GDP in 19P.5to 1.51 in 1988 and practically to zero in 1991. In spite of declining oilrevenues, the Government is determined to maintain the budgetary savings rateat around 6% of GDP, while reducing the share of public investments in GDP,particularly by cutting the Government's contributions towards publicenterprise investments. The detailed measures envisaged to achieve thesetargets are mentioned in Annex I to this atcachment.

1/ Including Chapters I and II of the Government's Budget, the SpecialFunds, the Treasury operations, and the non-budgeted operations financingdirect investments by the Government.

ANNEX IV(a 1Page 5 of 11

5. Interest rate policy. Thanks to the interest rate increases in 1985and 1986 and the drop in inflation, the Gr'-'ern.ent has ensured that mostinterest rates are now positive in real te..as. During the period of the VIIthPlan, the Government will maintain flexible interest rate policies deslgned toensure positive rates on most deposit and lending operations. The exceptionswill be limited to certain credits for low-income groups, such as parts of theloans granted by FOSDA, FOPROLOS, FONAPAN, FOPRODI and FODERI, and certainforms of high-priority lending such as seasonal credits, export prefinancingand the financing of renewable energy resources.

Furthermore, to improve the efficiency and viability of financialinstitutions, the Government intends to pursue its simplification of theinterest rate structure and relaxation of existing regulations. To this availa detailed program of action will be prepared and discussed with the Bankwithin the framework of preparation of the VIIth Plan, expected by April 30,1987.

6. Monetary and credit policy. The Government is firmly committed to amonetary and credit policy that is consistent with declining budget deficitsand investment rationalization; this implies that during 1986-91 the growth ofthe money supply will be kept within a range whose upper limit will not exceedthe growth of GDP in nominal terms.

r. Exchange rate policy. The Tunisian Government is aware of theimportance of this instrument in regulating external trade. Accordingly, itintroduced in 1985 a flexible exchange rate system, which made it possible atfirst, to absorb the rise in the value of the dinar in relation tocompetitor-country currencies. The situation improved further in mid-August,1986 when the exchange rate was depreciated by 10S via-i-vis a basket offoreign currencies. This improved the competitive position of Tunisianproducts by about 28Z compared to the situation prevailing at the end of June1985. The Govenment will continue this flexible policy so as to maintain anappropriate level of competitiveness for Tunisian products. It also agreesthat any exchange rate adjustments will be reflected in the administeredproducer prices for agricultural products.

8. Price Controls. The Government has for several years pursued apolicy of gradual decontrol of agricultural producer prices. This policy willcontinue and will be extended to the manufacturing srector. In particular, theGovernment intends, over a period of three years (1986-88), to phase out allprice controls in well-established industries where the number of domesticproducers is sufficiently large to ensure appropriate competition. A detailedtimetable for phasing out price controls is presented in Annex II to thisattachment.

Between 1989 and 1991, the Government intends to abolish pricecontrols in all other industries in close coordination with the liberalizationof imports, with the exception of a few key staples (such as bread. semolinaand oil) of which the price must remain regulated for social reasons.

In the event of monopolistic agreements, however, the Governmentwould 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 willremain regulated over the short or medium-term, the Goverument intends tointroduce a more flexible price control procedure on January 1, 1987 thatwould allow the enterprise to change a price unilaterally, by reference toagreed parameters, and to apply the new price following a reasonable timelapse, provided there is no justified objection on the part of the Government.

To this end, the Government will-with assistance by the WorldBank--devise rapidly the operation formulas to be used by entrepreneurs in thevarious industries. These formulas must be geared to the appropriateutilization of installed production capacities and the adequate control ofproduction costs.

10. Investment liberalization. In the context of a system of gradualdecontrol of the economy, the Government intend. to phase out the control (byAPI, APIA and the Tourism Investment Board) of investments not eligible forspecial incentives or benefits. in parallel with the liberalization of pricesand of external trade, within the framework of a new investment incentivepolicy.

The Government has decided to abolish by the end of 1986 allcontrols on investments below DT 200,000 and on replacement investments notrequiring a specific import authorization for capital equipment and not askingfor special investment incentives; it intends to continue this process in 1987and 1988 with a view to the abolition, in parallel with the overhaul of theincentive system, of the approval requirements for other well-establishedindustries for which the number of domestic producers is sufficiently largeto ensure appropriate competition.

The approval procedure will be maintained for all investmentprojects that are asking for special investment incentives linked to transfersof technology, regional development and exports.

In early 1989 the Government is to start on a program leading to theabolition, by 1991. of investment controls in all remaining sectors, exceptfor investments asking for special investment incentives.

11. Import liberalization. Cognizant of the importance of importliberalization in improving domestic resource use and allocation and, ingeneral, in helping to achieve the country's development goals over the nextfive years, the Government reaffirms its intention of gradually liberalizingimports. 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 Governmentabolished all restrictions on imports of raw materials and semi-finishedproducts for companies exporting at least 251 of their turnover as well as ofspare parts for use in industry, farms, hotels, hospitals, and otherservices. It intends to abolish before end-September 1986 all restrictions onimports for newly approved investment projects and for raw materials used inthe manufacture of pharmaceutical products.

Not later than January 2, 1987, Government intends to abolishrestrictions 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 turnoverand for those that are reasonably integrated.

Not later than January 2, 1988, it plans to lift import restrictionson capital goods and semi-finished products, with the exception of a list ofproducts which are used exclusively in poorly-integrated plants to bediscussed with the Bank.

Starting in 1989, the Government will introduce a program leading tothe abolition, by 1991, of the remaining quantitative restrictions, mainlythose on consumer goods.

13. (b) Import duties. In line with its concern to promote exports,and to ensure greater efficiency of resource allocation, the TunisianGovernment intends to gradually reduce import duties and to lessen thedisparities in the levels of effective protection between the various sectorsof the economy, the goal being to achieve a reasonably uniform effectiveprotection rate of around 251 by 1991.

To this end, it aims to introduce, on January 1, 1987, within theframework 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 ofdeferring some of these reductions by up to one year afterdiscussions with the Bank, in case a Tunisian enterprise suffersserious damage as a result of exceptionally large increases inimports and with the aim to provide that enterprise somewhat moretime to adapt.

However, the Government reserves the right to introduce additionalconsumption taxes on products of which the local production or import isregarded as a luxury or a waste of resources, so as to absorb all or part ofthe loss in revenue resulting from the revision of customs duties.

It also agrees to continue this process in 1988, introducing onJanuary 1, 1988 a new import duty reduction of 9 percentage points on dutiesbetween 26 and 50X, oTnce again with the possibility of offsetting certainlosses in revenue by consumption taxes, and over the long term to incorporatethe "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 aprogram of further gradual tariff reductions so as to achieve the objective ofa 251 effective protection rate by the end of 1991.

14. Monitoring and orogress reporting. Progress on the implementationof the program described above will be monitored by the Government andreported to the Bank every six monthF.

ANNEX IV(a)Page 8 of 11

ANNEX I to Macro-economicAdjustment Program

Targets for Government Budget

(a) Government revenues shall not be less than:

30.02 of GDP in 1987;29.0% " " ' 1988; gradually declining to27.0% I " " 1991.

(b) Recurrent expenditures shall not exceed:

24.02 of GDP in 1987;23.0% " " " 1988; gradually declining to21.02 " " " 1991.

Ic) The growth in the number of civil servants employed shall not exceed21 p.a. during 1986-91. The average civil service wage rate shall not grow bymore than the inflation rate during the period 1986-87, and shall not increaseEaster than private sector wages during the period 1988-91.

(d) The aggregate amount of all subsidies included in the Governmentbudget shall decline by at least 5X p.a. in nominal terms over the period1986-91, with the Govenment making every effort to reduce it even morerapidly, among others through targeting household subsidies increasingly onthe poorest segment of the population. One consequence of this policy is thatthe increase in producer prices for agricultural products proposed in themedium-term agricultural sector adjusLment program would be reflected as muchas 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 to6.02 " f " 1991.

The Government intends to make a sectoral and sub-sectoralallocation of investment funds within these global limits as part of thepreparation of the VlIth Development Plan. The resulting investment programwill be assessed and discussed with the Bank at the time the report of thePublic Expenditure Review mission will he discussed.

ANNEX IVta)page 9 of 11

ANNEX II to Macro-economicAdjustment 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-economicAdjustment 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-economicAdjustment 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 ConablePresident of The World Bank1818 H Street, N. W.Washington, D. C. 20433U.S.A.

Dear Mr. President:

1. Following the exchanges of views that have taken place between theTunisian Government and the World Bank in connection with preparation of anagricultural sector adjustment operation, and in the context of our economicdiscussions and agreements on a macro-economic adjustment program, I shouldlike to set forth below the main orientations of our development policy in thevital agricultural sector of Tunisia's economy.

2. Agriculture occupies an important place among our economic andsocial development priorities and has always received sustained attention onthe part of the public authorities. Agricultural policies have yieldedencouraging results in terms of agricultural production, particularly fruitand vegetable production, representing almost half of agricultural GDP. Thissuccess has been achieved due to the important investments in irrigation,which represents less than 5% of cultivated land but accounts for 38t ofagricultural GDP. We are concerned, however, that growth in the rainfedsector, which provides the bulk of our basic food products and from which thegreat majority of our rural population earn their living, has lagged behindgrowth of domestic consumption, giving rise to a steadily worsening fooddeficit 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 ourexisting agricultural potential.

3. We have already begun a program to address the obstacles to the fulldevelopment of this potential, as described in the attachment to this letter.Our efforts are designed not only to improve our trade balance, but also tocontribute to the growth of the economy, reduce demand on the Governmentbudget and increase Government revenues.

4. In implementing the Medium-Term Agricultural Sector AdjustmentProgram, the Government attaches particular importance to the integration ofour agricultural policy into general economic policy and to questions ofefficiency and optimal utilization of our limited resources. Particularpriority will be given to measures to improve productivity, enhance theeffectiveness of our production incentives policy and optimize theGovernment's activities from both the organizational and the financialstandpoints. We will also limit Government intervention to those areas whereit is essential and justified.

ANNEX IU(b)Page 2 of 15

5. We intend to strengthen inter-departmental coordination rno as toensure proper monitoring of the execution of the program. As in the case ofthe other projects which you are financing, we will send you a reportperiodically regarding the measures taken.

6. So that we can achieve both our macro-economic a...d bectorobjectives, we would ask you to consider making a quick-d4 abursing loan toTunisia in order to support the agricultural adjustment program. S'etypercent 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 ofthe agricultural sector is to strengthen the contribution of agriculture tooverall economic growth, balance of payments and budget equilibrium andemployment creation, particularly through greater incentives to privateinitiative and a liberalization of economic activity in the sector.

2. Priority will be given to increasing production of agriculturalproducts in which Tunisia has a comparative advantage, notably cereals, meat,milk, and export crops.

3. To achieve these objectives the Government intends to introduce amedium-term policy based principally on:

(a) a greater role for market forces in our price policy allowinggreater 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 expenditurepolicy, as regards both capital and operating expenditure, to theseproduction objectives;

(c) improving support services to production, particularly research andextension activities, and transferring to the private andcooperative sector commercial activities currently undertaken by thepublic sector, such as the distribution of inputs, management ofcold storage depots, milk collection and regional mechanizationservices, at a pace compatible with the need to preserve andstrengthen the services provided to agriculture;

(d) encouraging intensive utilization of land and of natural forest andfish resources;

Ce) enhancing the capacity of the Ministry of Agriculture to monitoragricultural performance and analyze alternative developmentpolicies for the sector and monitor their effects.

I. PRICE POLICY

4. As regards its price and subsidy policy the Government has, since1980, been following a policy of freeing and adjusting producer prices andeliminating subsidies, with a view to creating a favorable environment forprivatization and liberalization of economic activities in the sector.

5. Currently producer prices for most agricultural products are freeand are therefore determined by market forces. For staple food products, theprices of which are controlled, a policy of incentives has been adopted.Cereal prices have been doubled and the price of milk more than doubled, whilethe producer price of beef has been freed in a similar fashion to that ofsheep meat.

ANNEX IV(b)Page 5 of 15

6. As regards consumer prices, a differential was introduced betweenfresh milk and reconstituted milk and successive increases were made in theprice of milk which is no longer eligible for subsidies from the GeneralCompensation Fund.

7. In parallel with our policy of adjusting producer and consumerprices, input subsidies, although they still exist, have been steadily reducedsince 1980. Thus fertilizer prices have risen by 55%, those of animal feed by200%, and charges for irrigation water by 43% on average.

8. During the period of the VIIth Plan, the Government intends to allowa greater role to market forces to encourage the production of importsubstitutes (mainly cereals and livestock products) in which Tunisia has acomparative advantage, and to support and promote export crops. To achievethis objective, the Government will continue to adjust the prices ofcontrolled products and inputs so as to bring them closer to world marketprices, 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 theirworld market equivalents, taking into account exchange ratemovements. A price differential will also be re-established betweendurum wheat and bread wheat so as to reflect their relativeinternational values. For livestock products, the liberalization ofthe 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 bederived from the law of supply and demand, without marketintervention to fix ceilings.

(c) Input subsidies: The Government intends to pave the way forliberalization by progressively reducing subsidies so as to alignthe prices of fertilizers, animal feed, seeds and herbicides withworld market prices, at a pace compatible with the need to preserveincentives for agricultural production, and promote technicalinnovation. For water charges, there will be progressive recoveryover ten years of the direct operating and maintenance (O&M) costsof irrigation systems according to the conditions laid down in theIrrigation 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 appropriatechanges in the level of producer prices, our objective being to use pricepolicies for agricultural products to encourage the growth of economicallyefficient and profitable production activities and to establish a level ofprotection for the agricultural sector that is more consistent with thatprevailing in other sectors of the economy. In this context, and inaccordance with the macro-economic adjustment program, a minimum 15% tariffwill be applied to imports, which will be taken into account in fixing theprices 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 diversificationof markets for traditional exports, given the anticipated constraintsas regards the EEC. In addition to measures at the macro-economiclevel (exchange rates) and fiscal and financial incentives the searchfor new markets will be intensified and administrative proceduressimplified. Particular emphasis will be given to research anddevelopment activities in the export subsectors.

U. PUBLIC INVESTMENT AND EXPENDITURE POLICY

10. Investment policy during the IlIth Plan will be adjusted to theobjective of developing agricultural production. The Government will raisethe priority of the sector and intends to allocate about 22% of totalinvestment to agriculture. The strategy for allocating these resources willemphasize the need to:

(a) improve the efficiency of investments by achieving higher returns onthe use of existing resources;

(b) emphasize those investments which have a favorable impact on thebalance of paynients, i.e., production of cereals, milk, meat andwood for import substitution and dates, citrus, fish and off-seasonvegetables for export;

(c) encourage the private sector, in the context of liberalization, toundertake commercially viable agricultural services which arepresently being administered by the public sector;

(d) reduce the share of the public sector in the financing ofagricultural investment projects during the VIIth Plan; and,

(e) create productive jobs through investments which have a relativelyLow 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 inthe identification and implementation of agricultural investment projects.This method requires the development of appropriate subsectoral investmentstrategies; a list of projects or project ideas which meet a set of selectioncriteria which are consistent with the overall sector expenditures strategy; acore program of investments, i.e., some 65% of the nominal investment program,which would be preferentially protected in case of financial constraints; anda monitoring system to control the flow of expenditures by the Ministry overthe VIIth Plan period.

12. Specific subsector 6*rftegies consistent with this overall sectoralstrategy 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 andpromote its execution during the VIIth Plan; in grain storage,rehabilitate and increase the local storage capacity; begin handlingand storage of grain from farmers in bulk.

ANNEX IV(b)Page 7 of 15

(b) In livestock, concentrate on the development of local forageresources to substitute for imported concentrates by developingforage reserves in areas with low opportunity costs, focussingextension efforts in the north and on the integration of livestockwith cereal production; promote systematic use of crop by-productsas feed (straw, bran and by-products of the olive oil industry);create an appropriate storage network and develop forage areas witha view to protect against climatic risks; strengthen the geneticimprovement program through greater reliance on cross-breedingversus imports of purebred stock; initiate a development program forcamels; encourage wider participation of private individuals andcooperatives in providing artificial insemination services; andencourage the privatization of veterinary services.

(c) In research, modify the institutional system of research to seekbetter coordination of expenditures on research efforts; and focusresearch on priority import substitution or export products such ascereals, livestock products, dates, citrus and off-season vegetablesas well as in the areas of agricultural machinery and farm managementpractices; in extension, while avoiding a substantial increase in thepresent level of total expenditures, reorganize the commodity-specific, extension programs to permit increased efficiency in useof operating funds; ensure adequate staffing and funding for thetransportation, 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 anational proiect for investment in research and extension.

(d) Increase the financial resources available for forestry developmentto arrest the loss of plant cover in order to better mobilize thesubsector's productive potential and reduce imports: priority needsto be given to establisment of nurseries, to improved means ofguarding and protecting the natural regeneration areas, to mechanizeexploitation and reforestation, and improved inventories and studies.

(e) In tree crops, encourage maintenance of existing plantations, in thecenter of the country, promote the establishment of pasture withinthe 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 oldolive stands to more productive activities, e.g., pasture, almonds,where olive yields are low.

(f) In fisheries, improve the use of existing infrastructure, in themajor ports by carrying out marginal investment to make ports morefunctional; provide incentives to the private sector to develop themarketing and transport of blue fish in the interior of the country;increase the catch of quality fish for export; make more intensiveuse of the existing tfeet by better management and more effectiveincentives to the private sector.

ANNEX IV(b)Page 8 of 15

(g) In jrr gstt,n, further develop downstream investments under existingprojects, particularly in the north, in order to increase theavailability of water at farm level; promote rehabilitation andmaintenance of existing irrigation infrastructure; encourageinvestments designed to increase water use efficiency; and developspate irrigation techniques, complemented by tubewell development incentral Tunisia.

13. To strengthen the investment planning and monitoring process, theMinistry of Agriculture needs to install an improved system of projectevaluation for all new investments. This implies improving the capacity of theDPSAE in project evaluation and establishing a system of project monitoringand budget control. In addition to meeting the goals and directions of thesubsectoral investment strategies, all new projects for the VIIth Plan wouldbe evaluated according to an agreed selection criteria between the Governmentand the Bank. In order of priority, these criteria are:

(a) economic rate of return above 10%, which is based on economicpricing 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 ofreturn would be necessary for all projcts to enter the list for implementationduring the VIIth Plan.

14. The concept of the "core" program of investment projects is based onthe contingency that Government may not have sufficient funds to carry out thenominal expenditures program agreed for the VlIth Plan. In the event of ashortfall in financial resources during this period, the Government wouldprotect a "core" investment program in the agricultural sector of some 65% ofthe nominal investment amount. The criteria to be applied to place projectsin 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 agriculturalsector account will be taken of the need to ensure the oroper functioning ofcompleted 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 anagricultural investment code containing a range of fiscal and financialincentives. Private companies were authorized to undertake projects in theprivate sector and the State leased certain publicly-owned land on a long-termbasis in order to e,icourage investment and intensification of agriculturalproduction. During the VlItlh Plan, the Government will continue to givepriority to private investment in agriculture by encouraging the bankingsector to increase its role in financing agricultural activities. TheGovernment has already established a National Guarantee Fund to assist smalland medium-scale farms, has strengthened cost recovery methods and has raisedinterest rates, which are now positive in real terms. Our action plan for theperiod 1986-91 contains tthe following main points:

(a) improving the mobilization of the banks' internal resources(specifically, by encouraging rural savings) and moving steadilytowards enhanced fungibility of the funds for agricultural credit;

(b) progressively reducing, as a function of the mobilization of otherresources and 's improved recovery performance, State budgetallocations for the credit part of FOSDA, FOSEP ar,d other specialfunds with the ultimate objective of better targetting of theresources of these funds;

(c) progressively transferring to BNT and the banking sector part of therisk guaranteed by the State;

(d) applying the cost recovery methods taken, particularly "le privilegede L'Etat," rescheduling some debts where justified, for example inthe case of natural calamities, and studying the possibility of taxrelief for the provision for doubtful agricultural debts made by thebanks to cover the risk of non-payment;

(e) increasing the interest rates permitted for agricultural lendingoperations to provide coverage of the financial costs, reasonableoperating costs and a reasonable part of the risks involved, suchLevels to be reached by 1991, further to the recommendations of ananalysis of the profitability of agricultural credit operations;

(f) defining the eligibility of small and mredium-size farmers for bankcredit, taking their incomes into account among othei hings so asto give an increasing number of farmers access to ba..;. 4redit; and

(g) harmonizing terms, conditions and procedures for making loans toagriculture and fisheries.

mI. SUPPORT SERVICES

17. As regards the marketing of inputs, the Government is conmitted tothe objectives of liberalizing and privatizing it as soon as subsidies areeliminated, and by so doing, to disA:.gage itself from these activities. Tothis end, it has already taken measur-s designed to encourage the private andcooperative sectors to increase their participation in this activity. Resalemargins 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 andcooperative sectors to be more active in the distribution of agriculturalinputs and thus to reduce public sector intervention in this area. Chargepolicies 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 adjustedover the next 10 years to recover the costs of operating and maintaining thenetwork, according to the conditions laid down in the Irrigation ManagemeutImprovement Project, including 100l recovery on 652 of the irrigated area by1991. These measures will promote greater water savings and intensifiedirrigation and will help to improve the financial situation of the irrigationauthorities (Offices de Mise en Valeur -- OMVs).

19. Furthermore, and in accordance with the macro-economic adjustmentprogram, the quantitative restrictions on imports of capital goods foragriculture will be phased out and will be entirely eliminated by thebeginning of 1988 at the latest, including 52 of tractor needs in thehorsepower range produced in Tunisia by the start of 1987. Remaining statemachinery services will be withdrawn from regions and services where theprivate sector can adequately take over. This policy will be put in motion byJune [987 after the identification of such regions and services.

20. A number of research and extension centers have already been builtin the various regions of Tunisia, and master plans are being prepared; thetraining and visit system is being tested under the Northwest AgriculturalProduction Project (Loan 2502-TUN). The Government's policy is designed tostrengthen agricultural research through the introduction of a pricrityprogram, coordination of activities through centralized budget programming,and a better status for researchers. As part of the VIIth Plan, it isintended that extension activities be restructured with a view to establishinga unified nationwide :;ystem.

IV. NATURAL RESOURCES

21. As regards land policy there are still a number of constraints onthe development of agricultural production, namely fragmentation, the lack oftitles for a certain number of farms, the legislation on rural leases,insufficiently intensive farming of collective lands, and the absence ofappropriate legislation regarding the consolidation of rainfed land. TheGovernment is already working to solve these problems. Since the beginning ofthe 1970s land consolidation measures have been applied in 45,000 ha ofirrigated areas, while 1 million ha of collective lands have been transferredsince Independence to 75,000 small private farmers. More recently theGovernment has introduced a program for the long-term leasing of certain publiclands to development corporations and private companies, and has preparedintegrated development plans for a large number of state-owned holdings. TheGovernment's medium-term program calls for the continuation of transfers ofcollective lands to private hands and for the introduction of measures designedto encourage land consolidation in rainfed areas. The issuing of certificatesof possession will be accelerated, cadastral work will be stepped up andmeasures 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 bymore effective management of certain regeneration areas. Prices for cork andesparto grass will be adjusted and investments will be made in equipment,training and organization in order to achieve a significant increase in woodproduction during the VlIth Plan.

22. The program for the development of fish resources aims to encouragefish exports and to promote bluefish on the domestic market so as to furtherexploit the available resources of this species.

V. AGRICULTURAL PERFORMANCE MONITORING AND POLICY ANALYSIS

23. Finally, the program aims to strengthen the Ministry of Agriculture'scapability for analysis of agricultural policies and processing of statistics.This capacity will be upgraded with a view to launching a detailed agriculturalprice policy review, studying the relationships between agricultural policiesand selected macro-economic options, introducing a computerized system ofmonitoring sector expenditure, and undertaking special studies to evaluateagricultural policies. This analytical work will provide the Government withthe means to regularly monitor the medium-term agricultural development programand to make adjustments as necessary.

24. The attachment to this program contains a timetable of key actionsto be taken to implement the above prograw. The Government's agriculturalimport program for the next two crop years (1986/87 and 1987188), designed tosupport 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 pricelevels July 1988

2. Eliminatiin of fertilizer subsidies July 1990

3. Elimination of animal feed, 2-4-D herbicideand improved cereal seed subsidies July 1989

4. Presentation to Bank of an initial list of projectsand investment programs and project ideas consistentwith the overall approach to agricultural expenditureswith additions or deletions from the list duringthe VIlth Plan to be based on agreed criteria December 1986

5. Start of private retailing of agricultural inputsincluding seeds in two zones where volume of activityhas been 4dentified as such that the Government canwithdraw from input distribution, without prejudiceto the objective of Liberalization of input marketingin the country as soon as subsidies are eliminated June 1987

6. Realization of a study to replace the cereal seedexchange program with a private retailer-orienteddistribution system June 1987

7. Implementation of an export promotion strategyincluding product specific export strategiestargetted to particuLar markets based on anaction plan June 1987

8. Decision by the Governmeat on research issues (i.e.,choice of institutional structure, definition ofpriority research themes, reform of the stationnetwork and preparation of national work programsand budgets) June 1987

9. Government approval of an action plan to implement theextension master plan June 1987

10. Preparation of an action plan to implement the newforest development strategy December 1986

11. Equipping the DPSAE with a price policy reviewcapability following previously established termsof 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 forfication Importer(s) Procedure(s) Imports CIF Price 1986/87 1986/87 £ 1987/55Number 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- Internationalof nitrogenous fertilizers trogenous Ferti- Competityeused in Tunisia's agri- lizer Company) Bidding 55.000 124 6.820 9.342 13.640 13.614culture)

Sulphur (for phosphatic SIAPE (Phosphoric nfertilizers, idem) Acid and Fertili2er

company)ICH (Maghrebian Chem- 0ical Industry) 35,000 113 3,955 5.417 7.910 10.834

Potassiin Sulphate STEC (TunisianChemical Fertili-2er Company)SCH (M6grineChemical 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 11,376Office) competitive

bidding or atleast 3 quotesfor contractsbelow US$2.0 million

Forage seed OEP (Livestockand Range Agency)GR. FOUPAST (Grain.Forage and Pastoral) (various 600 822 1,200 1.644ODESYPNO (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 forcontracts 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 forfication Importer(s) Procedurec5l Imports CIF Price 1986/87 1986/87 A 1987/88Number Description of Goods (Tons) (D/Ton) (o 000) (uSS 000) (0 000) (US5 000)

Livestock

10.15 Maize DC (Cereals InternationalOffice) competitive 200.000 55 17,000 23.288 34.000 46.576Private biddingComani aS

23.13 Soybean neal OC (Cereals InternationalOffice) competitivePrivate bidding 100.000 175 17,500 23,973 35,000 47,946Companies

Vaccines Central Pharmacy Internationalcompetitivebidding or 365 So 730 1,000normal proce-dures/at least3 quotes forcontracts belowUS$S5.0/2.0 million

CMV (Vitamin-mineral OEP (Livestockeompounds or the raw mate- and Range U 300 411 600 822rials to manufacture them) Agency)

Private 400 S48 S00 1.096Companies

Animal genetic material OEP (Livestock N

and Range 730 1.000 1,460 2,000Agency)Private 150 205 300 410

Purebred Cows and Bulls OEP International 2,500 3.425 5,000 b.850Competitive Bidding

p4(1oo

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 forfication Importer(s) Procedure(s) Imports CIF Price 1986/87 1986/87 & 1987/85Number 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 1.103Nets * for contracts below 880 1.205 1.760 2.410Cables US$5.0 million 445 932 1.277 1564 2.554n*oks so 6s 10o 136FloatsHardware * 70 96 140 192Timer for ships * 200 400 548 800 1.096Steel

2.992 4.098 5,984 8.196

Geneal

ODesel Fuel ETAP (Tunisian InternationalPetrole,u Activi- Conipetitive 200,000 110 22.000 30.136 44.000 60.274ties Enterprise) bidding

Spare Parts Private Companies Normal proce-dures for con- 8.760 12.000 17.520 24.000tracts belowUS$5.0 million

Electric Hotors International 500 Gas 1,000 1.370competitive

Pumps bidding or normal 1.500 2.055 3,000 4.110procedures/at

Raw Materials for the least 3 quotes 1.500 2.058 3.000 4.110Manufacture of Irrigation for contractsPipes below UStS.0/2.0

million

TOTAL m7n1i fL 2m

2236E/pl4-6

Table 1REPUBLIC 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 MeasuresArea 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 ongoingtncentiies 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 agriculturalcers, so as to achieve export-oriented during the new Plan, by taking exports that takes each productthe objectives assigned companies; studies by specific measures in relation into account and is targeted atto the agriculture CEPEX and the Ministry to different products and specific markets; examinationsector under the tIlth of Agriculture to prepare markets so as to increase by the authorities of thePlan (development of an export strategy. exports of both traditional conclusions of the studies andexport-oriented and new agricultural products decision by the Government.production and import within the scope offered bysubstitutes, increased the EEC market.efficiency andemployment creation).

(2) Producer prices for (2)(a) Under-protection of (2) Introduce a price policy (2) Improve the relativelycereals. milk and beef duruin wheat and barley in that encourages producers to inadequate protection for theraised by amnunts exceed- relation to world prices; grow products in which Tunisia cereal sector and raise theIng Inflation since 1981; Ib) world market diffe- has a comparative advantage Drices of durtn wheat andconsumer prices for rential between prices and which would Improve the barley so that they correspondcereal 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 rateyears, premiwn for fresh domestic prices; fluctuations into account.milk as opposed to (c) Imports of powdered Refine this policy on thereconstituted milk. milk and beef subsidized basis of a permanent system

by exporting countries. for analyzing the impact ofpolicies for agriculturalproducer prices.Strengthen Protection againstmeasures for temporaryreductions in export pricesof powdered milk and beef inexporting countries.

(3)(a) Adoption of a 10-year (3) Subsidies on inputs (3) Pursue measures to reduceprogram 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 programagreements made under to recover OaH costs ofthe Irrigation Hanagement irrigation networks.Improvemunt Project; a:(b) Gradual reduction of esubsidies for inputs(animal feed, fertilizers,

7574EIp1 seeds and herbicides).

'0<C

Table 2Page I of 4

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTMENT LOAN IASALI

MEDIUM-TERM AGRICULTURAL SECTOR AOJUSThENT PROGRAM (INASAPI

Policy Recwmundations And Action ProaraM

II. Public Exendituru

Policy Goverrwent Outstanding Mediun-Term Adjustment Short-Term MeasuresArea Objectives Measures Already Taken Issues Program (1986-91) (1996/87)

Public ({) Increase the pro- (1) Proposed l956 invest- (1) Need to define investment (1) Sector Investment Strateov 11) FfD5A: Government wouldEtAenditurtl tivity of the public mrnt budget (Titre I) cut strategy for medium-term for (a) Increase efficiency of agree to separate the loan

investment p!ogram in by 102 from 1955 level in each major subsector. resource use: portion from the subsidy por-agriculturr in terms current prices. (b) Promote export earning tion of the FOSOA program andof the Goverrnent's and import saving acti- develop a plan to shift theobjectives for the vities (e.g. fish, risk of lending to the bank-sector (export promo- cereals, meat and milk ing sector.tion and efficient productionO;import substitution (e) Increase labor intensi-to improve the balance ty of expendituresof payments, and sus- (e.g. through moretain growth and employ- appropriate interest andmrnt creation, wage rate policies):

(d) Shift comnerclal activi-ties out of public intoprivate sector (e.g.turn FOSDA's creditfunctions over to bank-ing system. priVati2eleasing): and

(e) Avoid delays in projectimplementation.

(2) Suhsectoral Investment (2) OL g Irricati: GovernmentStratenies: Irrination should reinstate the Irrigation

(a) Complete existing pro- Management Improvement Projectjects where viable; in the budget for 1987 and seek

(b) Improve management of to find ad hoc funds for start-water use at regional up in 1986.and farmer levels; and

Cc) Have new project metacceptable economicrate of return.

Lvestock:(a) Develop a strategy for

production by special-i2ing breeder sheep/cattle in central andsouthern regions andfattening in northernreg4ons;

h0l%I .

Tabl 2Page 2 of 4

REPUBLIC QF TUNISIA

AGRICULTURAL SECTOR ADJUSTHENT LOAM (ASAL)

MEDIUM-TERM AGRICULTURAL St RSGRAH (KTASAPI

Policy Recommendations and Action Proaram

II. Public Expenditures

Policy Government Outstanding Mediun-Term Adjustment Short-Term MeasuresI e?a Objectives Measures Already Taken Issues Program (1986-91) (1986/87)

(b) Emphasize Investment Inthe private sector: and

(c) Improve support servicesi.e., research, extension,training. animal health.

Research IL Extnsi1on:(a) Train and hire subjnet

matter specialist andeke the available toextension agents;

Cb) Ilrove eeuipment atexisting research andextension field sta-tions; and

Cc) Construct new extensioncenters and provide ap-propriate nu ber ofvehicles and gas tooperate the effeetive-ly.

Forestla) Carry out new forest

surveys;(b) Rehablittate existing

forests;(c) Increase production re-

forestation;Cd) Introduce -ood energy

conservation; and(e) Ste the loss of forests

to desert encroactent.Fruit Trees:(a) Make credit available on

appropriate terms andgrace periods to prcoteprivate sector Involve-ment;

(b) Redirect PAN program toplanting forests andinstalling pereanent I'pastures; and

C

Page 3 of 4REPUBLrC OF TUNI5A

AGRICULTURAL SECTOR ADJUSTKENT LOAN (ASAL)

MEDtIUM-TERH AGRICULTURAL SECTOR AOJUSTMENT PTMARAN INTASAPI

Policy Recommenndations and Action Prooras

II. Public Exoenditures

Policy Goverrnent Outstanding Iedits-Terr Adjustment Short-Tern HeasuresArea Objectives Measures Already Taken Issues Program (19S6-91) (1916517)

lc) Ierave morket identifi-cation on forelgnwarkets.

Fisheries:(a) make more efficient the

existing investments interms of ports. boats.and equipment:

(bh Increase infrastructureof coastal fishing;

(el Provide cold storageservices; and

(d) Proiote private-publicsector. joint ventures.

grain Storang:(a) Rehabilitate priary

silos which receivegrain directly fromfarzers;

Lb) Provide modern etu1p-ment for handling.cleaning and storinggrain;

(c) Begin to convert grainsysten to bulk handling;

(d) iMprove rail spurs tosilos.

(2) Reduce the burden (1) Cutting back and post- (1) Cost recovery of loans (2) Agree on following criteriaof Investaent and Re- poning of development pro- and sound banking practices; ia) economic rate of returncurrent Expenditures jects; and (2) reducing (2) shifting OLM costs of (ERR)" above oppor-on the budget of the recurrent expenditures irrigation onto users. tunity cost of capitalcentral Goverrnent. budget for 1986 over 1985. (OCC) (10-in%);

(b) high net earnings;sav-ings of foreign ex-change;

(c) high private sectormwployent creation awith low investmentcost; a

Table .2Page 4 of 4

REPttLIC OF TUNSTA

AGRICULTURAL SECTOR ADJUSTMENT LOAN (ASALI

MEDIUM-TERM ACRICULTURAL SECTOR ADJUSTMENT PROGRAM tITASAPI

Poler RennJmmantions and Action Prodr-

II. Public EX odituru

Policy Goverruunt Outstanding Hedium-Term Adjustment Short-Tern MeasuresArea Objectives Measures Already Taken Issues Program (1986-911 (1986/87)

(31 Identify a set of Goveriuent has set the Lack of agreed set of (d) low central Govenwnet (3) Set nMs for recurrent-ex-criteria for seleCtion objectives for the criteria for project budget contribution penditures to efficiently ain-of the most appro- WlIth plan. selection. to inwestment and tain existing Investments andgrtati projects for recurrent costs: and works. e.g. puing stations.the Vllth Plan. (e) speed of project exe-

cution and realizationof benefits.

(4) Strengthen capacity (4) Lack of centralized sys- (4) Introduce a computerizedof Ministry of Agricul- stem for monitoring project sstem for monitoring cost andture to monitor expen- costs and expenditures. expenditure in OPSAE.ditures.

(5) Finalize list of projects/project ideas meeting subsectorstrategy and project criteria-

(6) Prepare a list of *core-projects ani.mting to no *arethan 65t of Initial Plan allo-cations based en agreed criter-ia (quick production respanse.low budSetary cost and pastureemployment impact.

11 Based on economic pricing of unskilled labor. mjor Inputs and outputs.

2S74EIp2-5CC0

RbklePage 1 of 5

RIPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTlENT LOAN (ASALI

HtDSLUH-TERH ASUZLTURAI SEC11R AOJUSTJIIT FRA (nA

Policv Recommendations and Action Procrtw

111. Irriaation Manacement

Main Problems Reasons Effects Measures Already Taken Action P;ogrm Under Project"' Medium-Term Objectives

A. Resoure

Water 1. Large and very small 1. Goverrment.; invest- 1. Rehabilitation of irriga- 1. Introduction of a binmi1al 1. Increase irrigation inten-available land holders not using ment in irrigation tnfra- tlion networks and improved water charge formula including sity to adequate levels (lIOM)in Public water resources inten- structure not being extension service under (a) a fixed contribution on a in particular in the perimetersPerimeters sively because of land adequately exploited and Bank's Irrigation Rehabili- per-irrigable ha basis charged of the northern areas. dhtchCPPI). related constraints. production potential not tation Project (tn 1068-TUN) to every farmer whether he uses represent about 60 of PPI-slocated In labor availability and achieved. induced an estimated 25t in- the water or not and represent- total irrigable areas.northern pricing policies. crease in water use In ing the minima desirable w3terpart of the Medjerda and Uebhana Perl- use; and (bi a voluetric term.country 2. IneFficiencies in meters to current levels.is under- water deliveries are These efforts are being Pur- 2. Governaent's conntmentutilized a disincentive to sued under the current (Poltcy letter] to pursue its(60 In water use. Hedjerda/Uebhana Irrig. Pro- efforts to imple_nent the 1935 £average). jeCt (Ln 21S7-Tim) and new 1963 Agrarian Reform La.s for

3. Areas newly measures under proposed pro- PPI and limit the size of landconverted from ject would have synergetic holdings.rainfed to irrigated effect.(PPI of Jendouba).

B. gmFinancialAutonom

t. amVFinancialSituatZQn

1. All OHVs 1. Low water charges 1l.Meavy and increasing 1. Largely because of Sa- 1. Iinroavints in OHs opera- 1. Increased financial aultn-largely de- low tarrifs far other burden an Government's projects, water charges hawe ting efficiency. a y of QWs resulting in apendent on OPVs services (input budget. been substantially increased decrease In Govt. tperatingGovt. sub- distrtbution. mechani- (about lOOt) since 1980. 2. Increase in water charges £ subsidies.sidies for zation services. etc.). tariffs for other OMVs- services.their opera-tions: sub-sidies repre-senting morethan 60 ofoperating costs In 1982. ae

I/ Matrix for program to be ivplemented under the Irrigation Management Inrovem rt Project (LIn. 2573-TUi).

Page 2 of SREPUBLIC OF TtMISIA

AGRICULTURAL SECTOR ADJUSTMENT LOAN (ASALI

IMEDIUM-TERH AGRICULTURAL SECTOR ADJUSTMENT POGRCAN (NTASAPI

Poli1ev Reconmundations and Action Proaras

I11 Irricatlon Ianamemnt

Main Problems Reasons Effects Measures Already Taken Action Program UWder Project Mediu-Term Objectives

Recoverv

I Low 1. Slow and IneFfec- 1. Very low participation 1. Govt.'s cxmitment (Policy 1. Recovery of invest nt costslevels tive apDlication of farmers In PPIs to Letter) to pursue imple- as provided under Agrarianirrigation of Agrarian Reform the financing of irri- mentation of Agrarian Reform Laws.investment Laws, which provide gation infrastructure Reform In Pls and collectcost for adequate invest- cost. land betterment levy.recovery. ment cost recovery

mechanism and levels.

2. Low 1. Water charges too 1. Water charges Currently 1. Recovery of water charges 1. indexation of water aiarges. 1. Recovery of at least lOOt oflevels of low and not deter- covering only 30-60% due from farmers is 2. Increase of 9S in real terms full Irrigation OLm costsirrigation mined in function (average 5sn) of irri- excellent (about Io0). of water charses during within far ers abilityOCM cost of farmerslability gaiton OAK charges. Water charge levels project period, to pay.recovery, to pay. 2. Need for awnual opera- increased by about lOOt 3. Introduction of binoMial

ting Subsidies from since 1980. formula for water chargesGov't to Offices WOW/u) (except in oases projects).for irrigation OLH 4. Privilege d'Etat for theactivities, recovery of fixed term of

water charges.S. Introduction of systematic

monitoring by OHVs of repre-sentative crouifarm budtetsI of faruers' ability to pay.

I. Cost 1. Inadequate 1. OHVs' margin not suffl- 1. Cost accounting to be set 1. Setting-up cost accowiting 1. Beneficiaries to bear fullrecovery of knowledge of real clent to cover costs. up by Kairouan and OOTC system within OHVs, cost of OHes' cnmmrctal0HVs' com- cost oF services. 2. Need for annual opera- Offices under Baik's 2. Beneficaries to bear full services.nercial ser- 2. Services seen as ting subsidies from Central Tunisia Irrigation costs of SlVs services. 2. Gradual divestiture by OW'svices (In- promotional tools Government. Project (Ln. 2234-TUN). 3. Govt's camita ent and of comercial services hitchPut distri- with farmers not to determine real cost agreant on criteria for can be provided by privatebution requtred to beer of services. These OWs divestiture by OHVs of or cooperative sectors.machinery full cost. to charge full cost of their comnercial activitiesservices), services. (Policy letter).

IVr

C

Table 3Page 3sof 5

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTHENT LOAN IASALI

HEDIUM-TERH AGRICULTURAL SECTOR ADJUSTHENT POGRAM EMTASAPI

Policy Racanmmndations and Action Proora

IIr. rrrication ManaaMnt

Main Problems Reasons Effects Measures Already Taken Action Program Uder Project meJdum-Term Objectives

C. Relation-shiOVsXFarmns

1. Lack of 1. OMvs In charge of 1. Heavy OHVs' adminis- 1. Establishment. under Banks 1. Simplification of adminis- 1. Establishient of active UUAsintermdiary hater delivery and trative and technical Central Tunisia Project. trative controls over and dhtch could assume technicalstructure management down to machinery. of Ug facto UUAs in the operating procedures of and financial responsibilitybetween OQV field level. 2. Increase in OMrs perimeters of Kairouan existing WUAs. for water ardeint.and farmers. 2. Lack of incentives 0GM costs. and OOTC; definition of 2. Definition of legal frame- maintenance of infrastrtc-

for farmers to 3. Lack of far-ers' parti- a legal framework for now work for establish ent tire and replactMt ofgroup themselves cipation in investment style WUAS and for of new. s aller. more SO equipment.to undertake part decisions or In water possible contractual flexible WAts. 2. Gradual divestiture of OWifof water management management and infra- relationship between 3. Introduction of incentives oF CLM of damitremactivities. structure maintenance. WUAS an OMYs. (water charge discount) for irrigatior.

3. Existing WAs are farners' groups to undertakelarge, adminis- part of 004 activities.trative bodies, 4. Establishlnt of newheavily controlled tUlLs to be aoe of Ofvs'by Gov't services. performance Indicators.

0. Rulatlon-

1. Lack of 1. Operating subsidies 1. Lack of incentives 1. Bank projects and super- 1. Setting-up cost accounting 1. OHVs to be cost effective.clarity and granted globally and for GOvs to be cost viston provtding the system within OCfs. 2. Adequate control by Goivtspecificity not by cost center. effective. mechanism for better 2. OHVs' operating budget to over OHHs' use of resources.in Govern- 2. Grey areas in the 2. Financing of OUL an Gov't control over be presented by cost/ 3. Maintenance of infrastruc-ment finan- definition and investment budget and participatins OPVs. activity centers. ture & equipment done on aing of OMVs' financing of vice versa. 3. Operating subsidies to be regular £ effective mamer.operations. investments/UN 3. Shortage of funds for activity-specific and not

activities. activities which are transferable between3. Lack of cost not considered to activities.iccounting system. require icmediate 4. Identification of a special

4. Lack of monitoring attention maintenance ite in OHWs'of OHVs' activities (maintenance). budget.and use of resourcesby Governrmnt.

005!

Table 3Page 4 oF 5

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTMENT LOAN (ASALI

MIIUM-TERH AGRICULTURAL SECTOR ADJUSTMENT PROGRAM IKTASAPI

Policy Recommendations and Action Proaram

1II. Irrigation Management

Main Problems IZnasons Effects Measures Already Taken Action Program Under Project Medium-Term Objectives

2. Lack of 1. Lack of planning 1. No medium-term deve- 1. Bank projects providing 1. Introduction on a pilot 1. OHVs to develop medium-termmediuLm-term capabilities in OMVs lopment strategy. the Framework for medium- basis of "contrats-plan for plans and strategies to meetdevelopment and Gov't services. 2. No basis to judge per- term planning of partici- selected OMVs; definition clearly identified develop-plans/objec- 2. OKVS operating more formance or to define pating 01Vs' activities. of medium-term development ment objectives set bytives for like administrative policies. plans for all OHVs to cover Goverment.OMVs. services than auto- the period of Tunisian new

nomous enterprises. Development Plan (1987-91).2. Definition of monitorable

targets and performanceindicators.

3. Strengthening of hinistryof Agriculture planningcapabilities.

3. Lack of l. Lack of planning/ 1. Lack of Gov't control 1. Strenthening of MOA's 1. Active Gov't involvementefFective monitoring capabili- over OHVs' use of planning and monitoring in setting objectives forGovt. con- ties in the suPer- resources and produc- capabilities. OMVs and monitoring theirtrol over visory ministries. tivity. 2. Setting-up of an effective performance.OHVs. 2. Absence of efficient HIS within OHVs.

MIS within OMVS.

E. OHms

1. Account- 1. Accounting/financial 1. Problem identified through 1. Definition of basic. stan- 1. Efficient MIS to senerateing princi- statements not reliable, independept audits of dard accounting principles reliable and timelyples and not produced on time ONVs participating in and procedures; procedure information as basis forprocedures and not presented in Bank projects. manual and staff training. decision-making by OHVsnot clearly standard format. 2. Establishment of reliable and Gov't.deFined. 2. Lack of sound basis opening financial statements

for decision-making. for each OMV.2. No Man- 3. Definition l setting-up ofagement In- efficient HIS: training offormation staff.System (MIS) 4. Management control/internal

audit established in theOHVs selected for centratsde plan' experiments.

3. Generallack of Cost 3conisc i us- nc%s. 'Ol

'0 C

Table 3Page 5 of 5

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTMENT LOAN tASAL1

MEDIUM-TERN AGRICULTURAL SECTOR ADJUSTMENT PRDGRAM (KTASAP1

Policy Recommendations and Action Program

III. Irrtaatton Nanraement

main Problems Reasons Effects Measures Already Taken Action Program Under Project Medium-Term Objectives

4. Staff in 1. Govt's decision to 1. InflatedJ cost of ONVS 1. Govt's comuitment (Policy 1. Increase productivity ofgeneral too provide employment; services. Letteri to limit recruitments ODVs' staff to reduce costntmerous A local pressure. 2. Quality of services to strict minim., necessary of services.underquali- 2. UeVs' lack of cost- nut satisfactory. for efficient operations.Fied; lack consciousness. 3. Difficulty to define 2. oefinlition by each OHV ofof critical 3. Salaries offered by and implement personnel a medium-term target fortechnical S OKVs cannot compete policy & to manage desired staff composition &ranagerial with private sector staff. structure and of strategyskills. for valuable tech- (non-replacement of departing

nical/managerial staff, training. etc.) toskills. reach target within specified

4. Inadequate financial timeframe; evolution towardincentives for target to be included asstafF to reward performance indicator.performance.

S. Political/socialpower of NationalWorkers' Union.

6. Lack of trainingprograms.

5.Inadequate l. Low priority given 1. Rapid degradation of 1. Training programs ini- 1. Funds for maintenance to be 1. Adequate maintenance ofmaintenance to regular main- infrastructure and tiatad under Bank clearly earmarked In OMVs existing infrastructure andof irriga- tenance in compa- need for successive and projects. annual budget. equipment to avoid need fortion infra- rison with new costly rehabilitation 2. Quality of maintenance to be rehabilitation.structure B investnents/ of existing works monitored through perfor-electro- rehabilitation. and equipment. mance Indicator.mechanical 3. Training of OHVs' technicalequipment. staff.

4. Mediut-Term contracts to besigned by OHVs with special-ized firms for maintenanceof complex MEN equipment andtraining of ONws staff.

2574E/p6-10

inll

Page 1 of zREPuBLlC OF TUNIS5IA

AGRICULTURAL SECTOR ADJUSTMENT LOAN

MEDIUM-TERM AGRICULTURAL SECTOR ADJUSThENT PROGRAM INTASAPI

Sector Adlustmuent Proarar

IV. Agricultural Credit

Medium-Term Adjustment Short-Term MeasuresPolicy Government Measures Program - 1986-1991 1936-1937Area Objectives Already Taken Outstanding issues (Priorities) (Priorities)

Agric. Encouraging 1. Raising of interest l. Inadequate resource mobiliz- Implementation of an Action (a) Freezing FOSGA budget allocationsCredit the banking rates by 0.75S to 22 ation for agriculture (e.g. Plan aiming at: in 19B7 at the same level as In

sector to in 1985. Rates are rural savings) and inefficient 1. Improving the mobilization 1936 in nominal terms andincrease its now positive in real use of available resources of banks internal resources reducing tnem by ISt In 1938role in terms. (rural savings) and improvingmobilizing the Financial efficiency ofresources and 2. Enforcing collection 2. High cost to the Government agricultural credit operations (b) Preparing an action planIn providing of arrears, a improv- of subsidies provided through through increased Fungibility by source of funds on the fin-credit to ing recovery perform- FOSDA and other special funds of funds ancial viability of agriculturalfarmers ance. credit operations (1910-B5

3. Inadequate risk sharing 2. Phasing out Goverrnment budget performance and 1986-913. Restricting FOSOA/FOSEP allocations to FOSDA credit prospects) and implementing the

credits to small and 4. Low recovery rates functions and to other special reconmendations mademedlum farmers/fishermen credit funds while mobiliaing on margins (spreads) risk-

s. Need to revise spreads on other resources for institutional sharing and recovery systm4. Making operational the agricultural credit credit (06/87)

National Guarantee operations as an incentiveFund (FNGI for small for the banking sector to 3. Transferring part of the riskand medium farmers finance agriculture assumed by Government to GNT

and to the banking sector, and6. Need to define small and revising agriculture lending

medium farmers eligibility proceduresto institutional credit byaccording sufficient weight 4. Implementing the recoveryto their incone measures taken. rescheduling

certain debts when justified7. Proliferation of Agri- (natural disasters) and

cultural credit programs eliminating the tax onwith different requirements provisions for bad agri-and complex procedures cultural debts

IV00B

Table 4Page 2 oF 2

RIPUQLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTMENT LOAN

MEDIUM-TERM AGRICULTURAL SECTOR AOJUSTMENT PROGRAM (HTASAP)

Secter Adiustment Preoram

IV. Aericultural Credit

medium-Term Adjustment Short-Term HeasuresPolicy Government Measures Program - 1986-1991 1986-1987Area Objectives Already Taken Outstanding issues (Priorities) IPriorities)

AgH'e. S. Increasing banks marginsCredit (spreads) on aor. credit

operations and maintainingpositive interest rates Inreal terms by institutinga mechiism for yearlyadjustment

6. Defining the eligibilityoF small and nmdtuufarmers to institutionalcredit by according sufficientweight to their agriculturalnet revenues In order toreach a larger number ofsmall and wmdiumfarmers through Bank credit,and to provide special Govtfinancial assistance to low-income farmers.

7. Harmonlzing terms and conditionsfor subloans supplied to farmersby a lead bank system

2574E/pl 1-i

.-

Page 1 of 2

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSThENT LOAN (ASALI

MEOIUJM-TERM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM INTASAPI

Policy Recommendations and Action Proaram

V. Acricultural Research

Policy Goverment Outstanding Medium-Term Adjustment Short-Term MeasuresArea Objectives Measures Already Taken Issues Program (1986-91) (1986/7)

AGRICULTURAL Allocation of finan- Preparation of Agricultural Near-absence of Restructuring of researCh Selection of researchRESEARCH cial and manpower Research masterplan. plannins and based on one of several priorities. (1986)

resources to researCh programming. alternatives proposed inpriorities in accord- the INSAR masterplan study.ance with national Duplicationand regional develop- between various Improve internal discip-ment objectives. institutes and line over research Coverruent to accept

agencies, workers, encourage and Implemnt propos-teasork. provide for als for improved

Lack of staff monitoring of progress salary and careerIncrease research motivation. high of research activities structure for aoric-productivity, turnover of and establish indepen- cultural research

experienced staff. dent periodic evaluation, staff. (1956)

Insuffitcent flow Improve internal technicalof up-to-date and financial mfnagemntresearch results and provide for greater Selection (19561.to farm coumjnity. flexibility In procurewent acceptance (1936)

and disbursement proc- and subsequent prOe-Inadequate Insti- edures. ImWrove research ressive iuplement-tutional contacts staff travel allowances. ation of restruct-with extension. uring proposal.

(1983-9I1 Lack of monitoring Establishient of regionaland evaluation. extension/research Determine size and

Ceui ttees. location of substationsExcessive size of roquired for researchfield stations Decide on use of excessive In next 10 years.and consequently. land of substations possiblyimalanced use rent to private farmers.of budgetaryresources.

Diproved fertilizer Estabitshment of 5 soil Strengthen and coordinateuse. chemistry laboratories with INNAT, OPVI Soils Depart-

USAIO Assistance. ant regional fertilizerand soil testing program. f

ow

Page 2 of 2

REPUILIC Of TUN1SIA

AGRICULTURAL SECTaR ADJUSTMENT LOAN AMSAL)

MEDIUM-TER4 AGRICULTURAL SECTOR ADJUSTMENT PROGRAM INTASAPI

Pol1ev Recomnhndations and Action Proarm

V. Aoricultural Research

Policy Goverment Outstanding MediuwTmeru Adjustment Short-tern MeasuresArea Objectives Measures Already Taken Issues Program (1986-91) (1916/7)

AGRICULTURAL Improved Detailed proposal on Farm Inadequate re- Establishment of Farm Decision on farm

RESEARCH machinery use. Machinery Research Centre search on animal Machinery Centre within machinery center.

animal production, in Agricultural Mecha- production. far. the framework Of Lhenizatian Hasterplan Study. machinery. farm Agricultural Research

management Institutions. Strengtheneconomics. Animal Production Research

by arranging researchcontracts.

Strengthen farm anarLagenteconomics research.

Improved dissemin- Insufficient use Preparation of Progress

ation of research of field stations reports by all researchresults. due to lack of institutes and regular

vehicles and too dissemination of researchlow indemnties sumaries to all agenciesfor staff travel. responsible for extenston.

with recwuumndati wson release of informationto farmers of priorlocal adaption testing.

Publication of ResearchJournal upcn to publicationsby staff and all Institutesand Agencies.

Improved manpower Insufficient part- Periodic consultations Increased research

mobilization for icipation of betwmn Research Agency or under contract withinresearch in Higher Academic Staff and Conc1il and Agricultural the proposed restruc-Agricultural Educa- students in coor- Education Institutes to turnd institutionaltion Institutes. dinated research reco--end research topics framework. £19171

activities. for teaching staff andstudents. Greater financialallocations for research byAgricultural EducationInstitutes (IHAT and ENSA's).

ZS74E/pl3-4 4!

agse 1 at 2

AGRICUELTURAL SECTO ADJUSTHENT LOAN IASALI

NfUiHl-TER1 AMUTCUS dPfOGa aITASAP

Policy UeesunaiogadAction Proarn

VI. Aericultural Extunclon

Poll cy Goverrent Outstanding Nei cs-Ters Adjustment Short-Ter. itasuresArea Objectives Measures Already TakEn Issues Prograg (19S691) (ffl)n

AGRICULTURAL Improve the flow of Preparation of Agricultural Iultiplicity of Restructuring of Extenston DOsigption of LeadEXlINSIOQ up to date lnformatton Extension MaSterplan Study. agencies Providing ServiCes with Central unit Ageacy aw Sfernfent

to farmers on tech- extension services for Policy. Training. ume decision an Extensitnnical economic. Establishtent of network wMich often of muss media. methodology. restructwing. phasing.institutional and of extension centers. overlap. selection a' priorityinrbeting aspects of areas. staffing. equip-tht far. unit. in Improved extension feth- Insufficient up- Separate field officers *nt reiir,ets andorder to increase odology In N.W Rural dating of technical tasks on Input distribution methodology. Special-agricultural produc- Development Project Information for statistical data collection. ised services totion with emphasis (Loan 1997 TUN. NhW. Asr- dissemination amon technical support to credit orovide subject _tteron priority cammod- icultural Production farmrs. lnstitutions and other speclalists for axee-ities and areas. Project (Loan 2502 Tis). administrative duties from ution of extenionand to Increase Gabes Irrig. Project the technical advisory progra at regionalfarm 1nc. (Loan 2605 TUN*. service to farmrs. level. with , pasis on

priority areas depending onimrove the return Establishment of extension Insufficient Establishment of Regional economi and Financialflow of informot1on unit for irrigation regular contacts ExtensionlResearch Cimel- criteria. Improvedto agricultural res- methods in lower Nedjerda with Research and saons witn responsIbility _ethodology to incladeearch and to agricul- Valley. insufficient return to provide extension and T & V ele_nts.tural policy makers flow of informt ton research servtces opoor-on the constraints Training of extension starf to Research about tunity for periodic updatingfacing farmers, and provision of technical farmer's of relevant research infor-

assistance through USAID- constraints and etion n the one hand andassisted projects. West about reactions on with identified researchCermn. Belgian and Dutch new research requirernts on the other.technical assistance. findings.

Training of extension Often Insufficientstaff in comunication training of exten- Encourage private enterprise.methodology undertaken by s1on staff in such as dealers in plantvarious Projects receiw- cwRuw,ication protection cheicals. fruiting World Bank and IFAD techniques. tree and vegetable seedlingFinancing and by DPV. nurseries, farm achinery

importers and producers, toSeparation of extension Multiplicity of play a larger role inand input supply tasks taSkS to be furnishing technical andin iedjerda Project, provided by economic Information, and toILn. 2157 TUNI. extension staff. participate in training C

Page Z oF 2

REPULIC orF UNISIA

AGRICULTURAL SECTOR ADJUSTHENT LOAN EASAL)

MEDIUM-TEAM AGRICULTURAL SECTOR ADJUSTMENT PROGRAM IMTASAPI

Policy Reacmundations and Action Prooram

VI. Agricultural Extension

Outstanding Medium-Term PolicySub-Sector ObJectives Main Issues Measures Underway or Taken Recoffnndations ASAL Action

AGRICULTURAL activities such as safeEXTENSION handling of agricultural

chemicals, farm mchineryraintenance and operation.

lnrove extension Cooperative Control Technical staff of Controlsupport to agricul- Office to provide both Office of Cooperatives to betural cooperatives. managerial and tech- integrated in Extension

nical advice. Service.

2574C/p15-6 S

3e

Table 7REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSThENT LOAN IASALI

MEDrUM-TERM ArRICULTURAL SECTOR ADJUSTMENT PROGRAM I(TASAPI

Policy Recamuendations and Action Program

VII. Input Marketina

Policy Government Outstanding Medium-Term Adjustment Short-Term MeasuresArea Objectives Measures Already Taken Issues Program c19a6-91g (1996/7)

INPUT Increased economic use Establishment of 3 labs Relatively low levels While liberaliuing retailMARKETING of Fertilizers. for soil analpsis and of fertilizer use, margins, promote additional

initiation of systematic including K. licensing of privatesoil fertility monitoring. retailers.

Reduce waste in use Inadequate density Provide training in stockof Improved cereal Establishnent of 12 of retail outlets. management of inputs.seed. bufferstock warehouses

by STEC. Predominance of single Provide training in handling.Increase accessibility wholesale agenry. labeling and safety aspectsof cereal seed to all of plant protection chan-farmers. Establishment of 14 Insufficient availability ieals Promulgate legislation

distribution centers of CAP. Agricultural Credit Instit- on non-adherance to safetyby OC. utions to consider issuis; reconendations.

input credit for advancePremotional action by Concentration of fer- purchase of fertilizer prior Expand and intensify regionalSTEC to recruit private tilizer demand prior to harvest of current year's fertilizer experiments andretailers. to planting. crop to reduce delays in related soil fertility monitor-

delivery. Government to ing to provide farmrs withExcessive use of cereal allow differential retail more detailed fertilizerseed by large farmers pricing to encourage early recommendations.and insufficient use purchase.by small farmers. Include advice on economic

Study and implement improve- aspects in fertilizerInsufficient attention ments in the excnange system recommendations.to safety recomnen- of seed distribution and en-dations in storage large the role of retailer of Extension service to en-and handling of plant inputs to reach snell and courage use of seed andprotection chemicals. mediun farmers and eliminate fertilizer drills for more

excessive use of wheat seed. economic use of Inputs. andconstruction of low-cost

Achieve better balance between on faru storage facilities.availability of barley seed

Budwood collections being Insufficient quality vs. wheat seed. Completion of budwood collec-established by public and and quantity of dm- tions. Increase of m_rginsprivate sector. estic fruit tree Study possibility of exports in particular of grafted

seedling production. of seeds of vegetables and seedlings of apples. pears.other specialized seeds. apricots. pistachios from

adequately inspectednurseries.

Execute seed marketing agstudy.

2574E/pl7

Fage 1 of 2

REPUBLIC OF TUNISIA

AGRICULTURAL SECTOR ADJUSTMEXT LOAN EASALI

MEOIIM-TER AGRICULTURAL SECTOR ADJUSTnENT PROGRW NTiASAPl

PolicY Recamendations and Action Proaram

VIII. FarM Mechanization

Hediim-Term Policy

Sub-Sector Objectives Main Issues Measures Underway or Taken Reeomendatlons ASAL Action

FARM Improve efficiency Inadequate research Agricultural Mechanization Assignrnt of Agricultural Training and appoint ent

MECHANI- of existing farm and extension on Masterolan Study completed Machinery Subject Matter of first 4 AMK's 11957).

ZATION machinery. Reduce optimal methods of In 1985. Specialists (AKSs) toproduction Cost and tillage, seeding assist and direct extension

improve output and other cultural work on agriculture. inCh-through introduc- practices. anization, training oftion of Improved AMSi's abroad.technology.

Preparations for agricultural StrenLthening of Research Decision to be taken bymechanisation experiments and Experimentation. notably Snverlment on Institut-in 3.W. aEricultural Produc- on land preparation. seeding ional frawersk of FarmProject (Loan 2SO2 TtUl. fertilizer application. iaehinery Research Centre.

Consultant under recruitment and the timing of ItsTrials on sall-scale mechan establishiint. I1936)isation In 1.W. Rural Devel-opment Project (toan 1997 TUN).

Improved farm Insufficient after Satisfactory and effective Lifting of import

machinery after sales service and contractual arrangeents with ban of tractors

sales service. lack of competition local dealers to provide produced by CtTfor tractors of after sales service and spare and issuing of Impnrt45-110 HP range. parts supplies to be made permits for limtsedUncertainty over conditional for extension of number of ekes.responsibility for CIT construCtion concession annual review of eakesafter sales service Improved availability and other firm's import to be allowed for

between tCT factory of spare parts. pe'rits. Government to imports tobe sated onand dealers. encourage CIT and other objective criteria.

agents to conAterize 11917)spare parts inventuries.

Improved availab- Delays in permits for Liberalizatton of spare Adequate definition of spec- aonoint ad-hoc

ility of spare spare parts imports be- parts not eanufactured in ifications of spare parts ca ittee to stuy

Parts. cause of insufficient Tunisia. Decefler. 1985. anufactured in Tunisia in spare parts issua.details describing periodic list of prohibited (1986)

locally manufactured imports to avoid delay ofParts which can not imports of not locally pro-

be 1iported. duced parts.

Temporary disappearance Allow differential pricing f oof parts in peak demnd spare parts throu~gut the 3e

period. No differentiation year. Eventual elimination of °

in eargins between fast Goverrnint control of ergins. -

and slow moving parts. i

b: .<

Page 2 of 2

P£PUIr OF TISISIA

AdRICULTURAL SECTOR ADJUSTMENT LOA (ASALI

MEOIU(-TEU4M AGRICULTURtAL SECTOR ADJUSThIV ums3AMi INIASAPI

Polter RecoCWendations and Action Proirm

VIII. Farm Mechaninatin

Policy Gowerrnent Outstanding medium-Ter Ad;iatment Short-Term easuresArea Objectives Measures Already Taken Issues Progra fll9 -91J (19UGfm

FARM Increase effictency Private Farm Machin- Review of credit and fiscal Indentification bjHECHAN- of contracting and ery Renting enly facilities for ron-farwing APIS of potentialIZATION promte contracting done on part-time enterpreneurs. AMewd fiscal private entrbrwen-

services by special- basis by farars and credit policy, If needed, eurs %to are willingised private having u%cess caoacity to prwcte rno-farming to imnest in fareentrupeneurs or As a result of part- entrepeneurs or contractors. mcainrry contrfwtingassociations. t1i renting, onl, and sumfssion of in-

farmers in the vicinity vustbwr proposals toare servted; generally agricultural creditno full range of imp- institutiors vid bws.loeants is acquiredand machinery is not Review of geogruahical areas Revie of areas ads-used at full capacity and types of machinery for mutely serne byduring optimal period which public sector contract- private contracto-sof work. ing can be redched 1n order and retreat of ptlic

to encourag expanmim of far. machinery serwicesPublic Sector Farm private sector contracting. fro those areas.bachinery Renting Avoid subsidized contracting C=ntrcting fees by

Charges do not cover for remote and sall farmers Om's to reflectfull cost of invest- by publie sector agencies, full cost Includingments and oxerations. Establish differential fees overheads an atespecially hen serv- which take into consid- least an ali- Inting remote farmers or eration distane of machirn to SfA levels.scattered far. parcels displacement. scattering of (IS9)which cauSe far. customers. and allress andmchinery to be less dispersion of parcels. inefficient. Private order to reflect real Cost ofrenters often charge service and to avoid under-lo"er fees as equip- cutting of potential privatewent is often close to contractors which my providebeing fully depreciated the required services.

Increased efficiency Insufficient repair 6overnumnt to cicawrae Pronse tecimncal assist-of repair facilities facilities In rural develomet banks and credit ance credit vi trainingIn rural areas. towns. instituttons to lenwtify to im rove farm rac-

credit projects to improve in*err twir servcetechnical standards of repair of pravat* uwtshops.workshops. Goverrwnt to Tprovide technical advice mdtraining.

25141/plu-'

age lof 4

hEPUWIC OF TISISIA

AGRICULTURAL SECTOR A4NTS1ET LOAN EASALi

ltEDItH-TER AGRICULTURAL SECTOR AODTJJST P10AMm IMTASAIu

Policy REccomndations and Action Proc

IX Outcut rketina

Policy Govermnemt Out.tanding Mediu_-Ter. Adjustiunt 9wt-Ter. Pa5swesArea Objectives Measures Already Taken Issues Program (1J6-91) £ uS7)

OUTPUT Export Establssnt of Conittee High Taxes and social Agricultual exporte to AGpliation d lawMARKETING Promotion of on Export Monitoring security charges reducing benfit frm expor cpy W4-26 to existins

Agricultural (Ministry of National competltiveness of Tunisian benefits or tO chose legal caopfies 419671.Cmanodities by Econawy). Agricultural Export Products. changes bases an law 34-20-Government Int-roae swt costMeasures. Agricultural Marketing Insufficlent incentives for Reduce or eliminate whole- rtbates of MMt ewpt-

Study. OPSAE 195SM6S). potential exporters. sale maret Ulzes for ed pruate 4hulg-Dec- SIexport prodcts. Is rebates in 197.

Fiscal encourageTntfor new export cm- Reduce taxes on urocessifu 6raAl re ttion andpanies (Law 84-201. of citrus and otter export total elisinattiw in S

products. yr's of uvloeer sElimination of need for s5bre In htalth insawuxreexport license of certain Rtvise b3se of CuStinS ard social securityperishable products, charges for citrus. coWtrtibAitU

(Mit -n 1967. totalExport servtce for out Give exclusive imWpt lic- egitnation In 19913.of season vegetables ences for horticulturalat SOCOTO. products to horticultural Ehwination of the at

e>porters. 'mie amts tax lIPS)£Jmlr-Eec. 16).

El va'ste cttsts ctargaam Wariceltsral p-oducts(July-Ca. 86).

Euiparters to &loly foruricuItural eewt WwtiIsh19flh fellome by vtiaIngof 'wM licercas for SSSof ,3h:e at eits (1hI7ultimtelY eetars shmlibe allam to import fruits

"t wegetables avthrtrestrictions 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 measuresArea Objectives Measures Already Taken Issues Progra (191-91) (1984/7)

OUTPUT Reduce cost of High cost of transport Study uaritime and air Execute trasbortMARKETING 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 *flqppingTunisian parts by shipping Cnference to servecompanies. Tunisia cn basis of

identified reeds (19875.

Lack of preferential air- Gove.rm.a to regotiatefreight rates for perish- preferw,tial air freightable products. rates for perisiable

prDducts. (1987)

Expa pruftwutial airfreight rates for perish-able prodScts. (19171

To stimulate agro- Authorization for High cost of production. Analysis and restructuring Preparation of balanceindustries by their producers to determine protection by irort tariffs, of hey industries In lire sheets anO details ofsubjection 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 factoriesto strengthen their tic products reduction some processing plants. - the olive oil agency low)their competitive- of subsidies: salary - MLness. and eliminate adjusteents linked to - TUILSIELAITtheir dependence on financial perforaunce of - EL LOLWJDMprotection and each enterprise. - iTECsubsidies. (196)

Authori2ation of Importsof those products of Preparation of restruct-which domestic produc- u-ing plans for the keytion Is Inefficient. if11ustries ani their

sequst iEpl lati n.Protection m*y reainagaist Foreign duingpractices. (19871IUlementatiwn of restruc- -uturing. (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 MeasuresArea 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 materialimports. with poSSIblya tartff to offsetforeign exportsubsidies (19S8-91).

Eliminate the principle Preparation of a list ofof guaranteed profits. agro-Industrtes thiCh have

operated on the basis ofguaranteed profits. and thebudgetary cpnsequences

Replace the ban on imports for the State sinceof processed food item 1975 (1986)which are locally producedby a system of Imoort Study for each concernedtariffs. industry the impact of the

lifting of guaranteedprofits. (July-Dec- 86)

Preparation and subsequentimplmentation of elimin-ation of guaranteed profitsystem. (1987)

Publication of custostariffs for importedagricultural comodi-ties. (1987)

*0

o C

e c

Table9Page 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 MeasuresArea 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 informationotion and monitoring sibility in a single manual for prospectiveof exports. agency and provide this Investors and business-

with appropriate staff men: preparation ofand budgetary resources. a small number of

viable inlvestmentprojects (1986).

Initiate promotion ofspecific agro-indust-rial projects bynational and foreigninvestors (1987).

Prepare coherentexport Strategy forall agriculturalexports (19871.

Amalgasate functionsof monitoring andevaluations of agric-ultural exports nowcarried out by differ-ent agencies (1986).

2574E/p20-3

pait

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 independentPROOUCTION uction on cooperative private companies. production at cooperatve management and decision eaking by

farms (UCPS). farms (UCPsJ in the North rusaining LUCPs. Provide technical1nsufficiently used. and managerial advice through

restructured extension service.Integrate staff of present controloffice in restructured extensionservice.

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 rateprivate) 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 MeasuresArea 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 besmaller and disper5ed December 19S5 maintain the farm holding of preceded by legis-parcels in order to a mininmn farm sire as a lation on ruralpreserve farm holdings single unit through contract- rents and by studyas economically viable ual rental or ranagement of minijLm viableunits. arrangements without affecting size of holding.

inheritance or property rights.

Encourage intensif- Preparation of draft Insecurity of Land tenancyication of land use land tenure land tenancy legislation toand long-term imorov- legislation. be submitted toements of productive Council ofpotential of land Ministers.resources of rentedagricultural holdings.

Increase registration Incomplete land Reduction oF Amount to beof agricultural registration agricultural determined by theproperty transfers. property transfer Ministry of

tax. Amount to Finance. Ministrycover at least of Justice, andthe legal fees to Ministry of Publiccover tosts. Ubrks.

Promote economic land Absence of land Preparation ofuse through taxation taxation draft land taxof 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 underArea 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 theCriservatiCn 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 3,000wood and wood products which causes destruction degraded forests and ha/year oF forest andintroduced. qadgjorestiegr of forest and reduces increasing forest production, to increase funding ofunder 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 operationstion to tntir contribu- plantations and pasture according to prior-tion to agricultural Improvement. ities established byproduction. the 1985 forest

development strategy -Liberalizing pricesof cork in the medium-term. Code Forestierto be enacted early1987.

25 74E/p26

M

C'U

Table 13Page 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 MeasuresArea Objectives Measures Already Taken Issues Program (1986-91) (1986/7)

FISHERIES Establish a Fisheries General orientation Unbalanced development policy Prepare masterplan for Preparation of TermsDevelopment Strategy. For public enterprises in the subsector. fishing development and of Reference for Haster-

in 7th Plan period. management. plan Study. includingresource evaluation. inparticular dersal.(19863Approval and executionof Kasterplan Study. (1987)

Analyse study and prepareinvestment program. (1990)

Increase contribution Increase of retail Insufficient incentives Initiate pilot retail Prepare pilot marketingof 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 withmain cities and the interior. Assure supply by SDPH CNP press and mass mediaInterior. and CRP. Ensure iprww- publicity (July-Dec. 86).

tional credit for retail-ers. Lift restrictions Assess results andon profit taking. If provide financing fornecessary. provide temp- distribution networkorary compensation to along penetrationsuppliers to enable them axis in the interiorto sell at cost price. (1987L

Low consumption of Promote consumPtion of Introduce large canscanned fish. canned fish. (1 and S kg.). (1987)

Lack of variety in pro- Encourage private bus- Preparation of pilotcessing and consumption iness to produce new project for trialof 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 andlarge scale ples- entation 11988-913.

2574EIpZ7 a

Table 13Page 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 MeasuresArea 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 byespecially 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 andfresh and processed sampling by SOP1 withfisheries products. FOPREIEX support (July-

December 86).Reduction of export tax Insufficient export6 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 seasonalmarketing study by CEPEX sp3ce reservation for(1985). air freight (July-December S6)

SOS subsidy of freightcosts (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 coastalboats and direct processing ontrawlers. Imsroewent ofpacking. (July-Dece ber 1986)

2574E/p28

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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 MeasuresSubject 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 policiftapalsnitsf Ministry of Agri- farm level. policy in the light of the5sLtoral culture (OPSAE) to results of a review ofDol] ^;ires. monitor sector agricultural price policies.

performance andpropose appropriatepolicies.

2574E/pZ9

CI

of

ANNEX VIPage 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 12B. Past Price Policies 14C. Price Policy Constraints 17D. Recommendations 19E. Expected Effects 20

Chapter II PUBLIC INVESTMENTS AND EXPENDITURES 22

A. Introduction 22B. Review of VIth Plan Period, 1982-86 23C. Investment Strategy for the Upcoming VIIth

Plan Period, 1987-91 37D. Actions to Increase Budgetary Efficiency 44E. The Project List and Core Program 53

Chapter III IRRIGATION MANAGEMENT 56

A. The Irrigation Sub-Sector 56B. Irrigation Development Agencies (OMVs) 59

Chapter IV AGRICULTURAL CREDIT 68

A. Introduction 68B. Evaluation of the Current Situation 69C. Future Prospects for Agricultural Credit 76D. Policy Reforms in Agricultural Credit 82

ANNEX VIPage 2 of 3

Page No.

Chapter V AGRICULTURAL RESEARCH 83

A. Background 83B. Major Issues 91C. Proposed Policy Reforms 91D. Research Institutes and Agencies 93

Chapter VI AGRICULTURAL EXTENSION 103

A. Background 103B. Major Issues 110C. Proposed Policy Reforms 111D. Major Agencies Responsible

for Agricultural Extension 112

Chapter VII INPUT DISTRIBUTION 125

A. Fertilizers 125B. Other Agricultural Chemicals 127C. Seeds and Seedlings 128D. Prices and Subsidies 132E. Major Issues 133F. Proposed Policy Reforms 135

Chapter VIII AGRICULTURAL MECHANIZATION 151

A. Current Situation 151B. Major Issues 158C. Proposed Policy Reforms 159

Cha?ter IX AGRO-INDUSTRY AND EXPORTS 169

A. Summary 169B. Background 174C. Domestic Market 183D. The Export Market 207E. Export Situation and Outlook 237

Chapter X LIVESTOCK 243

A. Principal Characteristics 243B. Services Furnished by the Administration 244C. Government Policies 248D. Livestock Sub-Sector Production 251E. Medium-Term Reform Program 257F. Livestock Development Strategy 264

ANNEX VIPage 3 of 3

PaRe No.

Chapter XI LAND TENURE 3L6

A. Current Situation 316B. Major Issues 322C. Proposed Policy Reform 323

Chapter XII FORESTRY AND SOIL CONSERVATION 331

A. The Forestry Sub-sector 331B. The Proposed Forestry Strategy 337C. The ASAL Action Program 339

Chapter XIII MARINE FISHERIES 351

A. Fisheries Development During VIth Plan 351B. Analysis of Results of VIth Plan 352C. Chief Constraints Obstructing Development 357D. Proposed Medium-Term Priorities 364E. Proposed Policy Reform Actions 365

Chapter XIV SECTOR PERFORMANCE MONITORING AND POLICY ANALYSIS 372

A. Background 372B. 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 1.4Bread wheat 151.4 (9.4) 111.6 8.0 182.0 9.7 148.3 0.7Barley 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 1.4Citrus L19.2 13.3 188.6 3.8 193.8 2.3 167.2 5.8Almonds 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 4.1Tomatoes 228.8 9.7 304.0 5.2 379.6 6.5 304.1 5.8Peppers 96.8 3.7 124.8 (0.3) 127.6 7.3 116.4 2.9Melons/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 1.0Sheep 60.9 4.4 57.4 (2.0) 66.8 6.7 61.7 1.3Poultry 21.4 14.1 50.7 15.8 57.2 0.2 41.3 10.8Milk 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 6.5Deepsea 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 12.0DsOh,% 3.1 l.5 2.2 b.2 4.5 13.9 6.0 9.6 12.2 12.7 16.2Citru -2.6 2.6 8.1 3.1 3.U 4.4 2.9 3.9 3.8 6.5 6.2wine 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 10.3Milk 12.8 14.5 10.6 19.5 16.0 25.1 16.0 16.6 15.5 17.2 3.4c.attlo 3.9 4.6 2.9 4.4 5.6 15.1 13.1 16.1 19.5 8.2 lb.1Me.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 LOANRAINFALL AND IRRIGATED AREAS

r Tab b' dCAP BON

6' Mm;An 7/>jr JYrgrba

;~ ~~~~~~~~~~r Anjol Ai r|Doo.8

'a-~~~~~~~~~~~~~~~~~~~~~~e

| I=lero<Eb~~ ~ ~~~~Be& Ar / '0ol

Faks ~ ~ ~ a

,5o~~~~ T Conhi 1'M ,

3g60

,elil Af;real / O \

35{i6/ , - t \ | ; .

KEKKEINA IS.

.4,.~~~~~~~~.

.i a / o w_Maia

f-i~ ~ ~ ~~~~~~~~~~~~~~~~w

-34' ) \fLgache \ 94

Tozeuur Houmi S;zA

JEUA L

Irrigated Area ..C%rc t'C'taYwrEJrbr rrn rrJ Crs isUr sre botpt7w rs t.a. isy 0C

^. '"-;Srl^s#;>^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 . jMain 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 LOANSOIL SUITABILITY FOR CROPS

0 20 40 60 80 100 7 Z EKILOMETE 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 LOANLOCATION OF MAIN CROPS

I .- , , -~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~2

- 7 ~~~BARLEY -'- RA3o, |,}'\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 , (LIYj~. .2

17 --.' .,

Tunisto .-.. Province boundaries\ -~~~~~International boundaries

'as o.r ^ds r.fw r7. ~~~~e is it a.@P. . ilS Kiometers 0A20 40R60 C0b10cs t / ~~~~~~~~~~~~~~ ~~ ~~~~~~~~Miles 0 20 40 0

_ _ . . _ si~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~~: