Identifier
Created
Classification
Origin
05TUNIS1257
2005-06-06 13:40:00
CONFIDENTIAL
Embassy Tunis
Cable title:  

EVE OF TIFA COUNCIL: WHERE DOES TUNISIA STAND ON

Tags:  ECON EFIN ETRD TS EFTA 
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C O N F I D E N T I A L SECTION 01 OF 04 TUNIS 001257 

SIPDIS

STATE FOR EB AND NEA/MAG
STATE (DESKOFF LAWRENCE) PLEASE PASS TO COMMERCE FOR
ITA/MAC/ONE (DAVID ROTH) AND ADVOCACY CENTER (CHRIS JAMES)
AND TO USTR (DOUG BELL)
CASABLANCA FOR FCS (GAIL DEL ROSAL)

E.O. 12958: DECL: 06/10/2015
TAGS: ECON EFIN ETRD TS EFTA
SUBJECT: EVE OF TIFA COUNCIL: WHERE DOES TUNISIA STAND ON
ECONOMIC REFORMS?

REF: 04 TUNIS 2422

Classified By: Charge d'Affaires a.i. David Ballard; Reasons: 1.4(b),(d
)

C O N F I D E N T I A L SECTION 01 OF 04 TUNIS 001257

SIPDIS

STATE FOR EB AND NEA/MAG
STATE (DESKOFF LAWRENCE) PLEASE PASS TO COMMERCE FOR
ITA/MAC/ONE (DAVID ROTH) AND ADVOCACY CENTER (CHRIS JAMES)
AND TO USTR (DOUG BELL)
CASABLANCA FOR FCS (GAIL DEL ROSAL)

E.O. 12958: DECL: 06/10/2015
TAGS: ECON EFIN ETRD TS EFTA
SUBJECT: EVE OF TIFA COUNCIL: WHERE DOES TUNISIA STAND ON
ECONOMIC REFORMS?

REF: 04 TUNIS 2422

Classified By: Charge d'Affaires a.i. David Ballard; Reasons: 1.4(b),(d
)


1. (C) Summary. Tunisia has taken the fundamental decision
to liberalize its economy after decades of state-control, but
progress has been deliberate and mostly limited to sectors
that do not threaten the GOT's prerogative or ultimate
"sovereignty". The GOT justifies its approach in terms of
minimizing near-term unemployment that increased foreign
competition will likely create, and managing the threat of
Islamic fundamentalism which could feed on economic
instability. Nonetheless, the GOT knows that it must reform
the economy (privatization, removal of trade barriers, and
increased foreign investment) to satisfy internal demographic
trends and demands and compete globally. An important
element of future reform hinges on a further privatization
and modernization of banks; the banking sector suffers from
excessive non-performing loans tied to weaknesses in an
over-built hotel (vice tourism) industry. Additionally,
Tunisia's non-convertible currency, the dinar, limits foreign
investment and movement of capital.


2. (C) Tunisia's gradualist approach to economic reform is
also linked to generous European Union assistance programs
and an Association agreement that have permitted the
Tunisians to defer reforms in the sensitive agricultural and
services sectors, reinforcing at the same time the EU's
historical presence as main trade and investment partner.
That said, we believe the GOT leadership has made the
political decision to pursue an FTA with the U.S. and is
willing to take steps in that direction; what remains is
working with the ministers and technocrats who are charged
with making sure the process maximizes the benefits to
Tunisia, minimizes or eliminates negative side effects, and
does not exceed the usual deliberate pace of Tunisian
reforms. In that regard, the upcoming Council meeting could

be an opportunity to demonstrate how decisive reform in the
short term can result in an FTA which will effectively serve
Tunisia's interests. End Summary.

Economic Liberalization: Stability and Social Cohesion
-------------- --------------

3. (C) Tunisia has decided to liberalize its economy to
sustain economic growth and job creation, which in turn
support maintenance of the political status quo. The GOT's
liberalization efforts, however, have been slow and
deliberate. The most common concern is job loss, a
legitimate issue since up the numbers of university graduates
will rise steadily over the next five years from about
300,000 a year to 500,000. The unemployment rate is
officially about 14 percent but is probably somewhat higher.
The GOT links its focus on job growth to staunch policy on
containing Islamic extremism (which posed a threat to the
government 15 years ago and surfaced again in 2002 with a
terrorist attack on a synagogue in southern Tunisia) and
maintaining social cohesion. In 1984, for example, Tunisia
suffered several days of widespread rioting, violence
resulting in 25 deaths, and property destruction due to
increases in bread prices. The memory of these "bread riots"
is still fresh in the Tunisian collective consciousness.


4. (C) Because, in their words, Tunisia is a "small country
in a tough neighborhood," officials sometimes appear overly
concerned with issues of "sovereignty"; in the economic
sphere this means a tendency to retain control over
significantly under-valued assets, rather than freeing
resources to develop more profitable and gains-multiplying
industries that could be subject to foreign whims.
Consequently, Tunisia's economic growth has relied
principally on public spending and less on private
investment. Tunisia views itself as largely self-sufficient
and ready to absorb foreign influences, but determined to do
so on its on terms.


5. (C) Minister of Development and International Cooperation
Jouini, who will lead the Tunisian delegation, recently
reiterated to A/S Lash the GOT,s strong desire to improve
the business climate and open more sectors of the economy to
foreign participation. He also claimed he wants to increase
U.S. companies, participation for Tunisia's public tenders.
Jouini's has recently been more forward-leaning on reform,
stating that he hopes that Tunisia could eventually be seen
as a &leader8 in the region through its economic reform
efforts--in cooperation with the U.S.--and he has expressed
dismay that the level of bilateral trade and commercial
relations is far below its potential. Jouini seems to accept
the positive impact of increased trade and investment can
have on job creation and living standards in Tunisia, but has
cautioned that there are some in both the public and private
sector who are unconvinced of the value of an FTA. We have
welcomed the fact that Jouini and other key Tunisian
officials are now more willing to discuss openly structural
and policy shortcomings; however they so far continue to
maintain that these issues must be addressed only after
careful study and discussion. Jouini told the Ambassador
that he is coordinating an impact study to determine the
effects of an FTA on the Tunisian economy.

Privatization
--------------

6. (C) As part of the GOT's trend away from macroeconomic
control, it encouraged privatizations since the mid-1990s in
limited, non-sensitive sectors; it has clearly decided to
move more slowly in key industries such as energy and
financial services. One successful private sector entrant in
2003 was mobile phone operator Tunisiana, which now claims
approximately slightly more than 40 percent of all Tunisia's
mobile subscribers; state-owned Tunisie Telecom holds the
remainder. Additionally, since 1988, 11 agricultural, 76
industrial, and 98 services companies (mostly in the tourism
sector) have been privatized in Tunisia, generating
approximately 2.3 billion dinar (USD 1.9 Billion) for the
GOT. In the industrial sector, the four largest
privatizations have been cement factories. In the services
sectors, trade, transportation, financial services have
witnessed only limited private sector entries.


7. (C) Among the notable privatizations due in the near term:
Socit Nationale de Distribution Petroliere, Socit
Tunisienne des Industries Pneumatiques, and Banque de Sud.
(The GOT offered Banque de Sud for privatization in 2004, but
the offer did not attract sufficient interest, probably
because a prior bank privatization disclosed massive
structural problems (Ref A)). Efforts are now underway to
re-launch a number of privatizations, including another shot
at Banque de Sud, and a 35 percent share of Tunisie Telecom.

Other Services: Financial and E-Commerce
--------------

8. (C) GOT fears of capital flight and lack of
competitiveness are behind the limits on foreign
participation in the financial services sector. Were foreign
competition allowed for banking services, insurance and
credit offerings, a substantial amount of currency would
likely transfer quickly to better providers and significantly
damage the current financial establishment. Likewise
E-commerce is under-developed in Tunisia; Tunisians are not
allowed to make credit card purchases over the Internet in
currencies other than in the Tunisian dinar and ATM systems
are limited and not linked. Internet penetration is limited
estimated at between six and seven percent of the population,
many of whom access the Internet only infrequently at public
internet establishments.

Foreign Investment
--------------

9. (C) U.S. foreign investment, while not facing explicit
discrimination, is often excluded from greater participation
because of cultural barriers, business practices, and
language. It is true that a number of U.S. companies have
successfully entered into joint venture partnerships,
including onshore manufacturing operations in metal casting
for aerospace parts, snack food processing, heavy equipment
refurbishing and sales, and electrical components. But
Tunisia's system of international tenders, for example,
offers only two months notification to bidders, requires that
documentation must be in French, and rejects bids that do not
conform exactly to the detailed requirements. For certain
tenders, transparency is a concern, and this has not been
addressed by the GOT. Finally, Tunisia's small market
(population 10 million and a GDP per capita of about USD
2,800) has meant a traditionally limited U.S. company
presence here and word of mouth experience is hard to come by
for a potential investor. However, since 1972, Tunisia has
encouraged export-oriented, off shore investments,
particularly in the manufacturing industry, and this
continues to pose good opportunities for U.S. business.

10. (C) Tunisian law regulates foreign investment and denies
"national treatment" in the agricultural sector, which
employs an estimated 22 percent of the population. Onshore
companies outside the tourism sector require governmental
authorization where foreign capital exceeds 49 percent.
Additional foreign investment is likely in the near term, but
it will be heavily weighted toward European interests. The
GOT has announced intentions to offer concessions for the
following major infrastructure projects: a
build-own-transfer project for the construction of an
international airport at Enfidah, a desalination plant in
Djerba, a deep water port at Hergla, a waste water plant, and
a sports complex - the latter four of which are limited to
European Union (EU) companies due to EU financing.

Intellectual Property Rights: Pharmaceuticals and Software
-------------- --------------

11. (C) The well-developed pharmaceutical industry in Tunisia
is a significant source of complaints from multinational
pharmaceutical producers who claim Tunisia operates outside
WTO rules and principles. Tunisia discriminates against and
bans foreign pharmaceutical products upon request by a local
manufacturer. The GOT has agreed to abolish this practice by
the end of 2006, as well as to step up adherence to WTO
intellectual property rights principles (TRIPs),but we
remain cautious in our assessment of these promises until
they are realized.


12. (C) Software piracy in Tunisia is significant and appears
to be a growing problem. A recent Business Software Alliance
report estimates that in 2004, 84 percent of software used is
pirated, an increase from 82 percent in 2003. Pirated CDs
and DVDs are also ubiquitous in Tunisia, even at major retail
establishments. The GOT is well aware of the problem and has
expressed the desire to increase enforcement, but blames lack
of resources and a "cultural mentality" that does not respect
IPR concepts. In this regard, there is also an unstated
justification that sales of counterfeit, pirated, and other
black-market goods serves to support a significant
underground economy that offers employment to many who would
otherwise have none.

Market Access and the Removal of Trade Barriers
-------------- --

13. (C) GOT officials have stated that free trade discussions
with the U.S. should offer Tunisia at least as good a deal as
the Moroccan FTA. Tunisia feels especially vulnerable to
opening its agricultural sector, due again to high levels of
employment and a popular, cultural connection to farming.
Tunisia still maintains high tariffs protecting domestic
product markets, especially on agricultural products. U.S.
companies also note that exporting to Tunisia is complicated
and difficult for a number of reasons, including language,
lack of local agent, customs delays and/or rejection of
goods, and complicated regulations. Tunisia signed a
trade-liberalizing Association Agreement with the EU in 1995
that will eliminate tariffs with the EU by 2008. The
discrepancy, however, between the EU's preferred tariff rates
structure and most favored nation rates significantly deters
non-EU trade with Tunisia.

Transparency
--------------

14. (C) Tunisian trade-related laws and regulations are
receiving better marks on some fronts; Transparency
International recently upgraded Tunisia to a "country without
a significant corruption problem." Public comment on pending
legislation is not a practice in Tunisia, although a system
of "national consultation" on important issues does serve to
bring stakeholders into the process and all newly-enacted
legislation is eventually published in the Official Gazette.
Once again, however, in key sectors tenders are closed for
unexplained reasons and the arbitrary application of laws is
a common complaint. Certain voices within the business
community bemoan the growing influence of and requirements
for "political connections" to the President's family in
order to effectively transact business. In almost every
sphere of important economic activity in Tunisia, one can
point to if not prove a strong connection or involvement of
President Ben Ali's extended family's interests.

Comment
--------------

15. (C) Despite these challenges, we view our current trade
and investment dialogue with the Tunisians as entering a new
and positive phase. The Tunisians have begun discussing
obstacles and problems more openly, and are more disposed to
working with us to address them. The Tunisians who will
participate at the upcoming Council meeting are a pragmatic,
realistic group who will be interested in determining next
steps. The strong impact of a four-year drought and a
tourism dip after the 2002 Djerba attack illustrated the
structural weaknesses in the economy and in economic
policies. There is now a good recognition of the necessity
of competing globally and adapting to changes such as the
expiration of the WTO's multi-fiber agreement. We view the
coming TIFA Council as an excellent opportunity to echo our
messages and to engage in exploring where our assistance
programs might most positively be advanced.
BALLARD