TUNISIA ECONOMIC HIGHLIGHTS

UNCLAS SECTION 01 OF 02 TUNIS 000199

SIPDIS

SENSITIVE
SIPDIS

STATE FOR NEA/MAG (HARRIS)
STATE PASS USTR (BURKHEAD) AND USAID (MCCLOUD)
USDOC FOR ITA/MAC/ONE (NATHAN MASON),ADVOCACY CTR (REITZE),AND
CLDP (TEJTEL)
USDOC PASS USPTO (ADAMS, BROWN AND MARSHALL)
CASABLANCA FOR FCS (ORTIZ)
LONDON AND PARIS FOR NEA WATCHER

E.O. 12958: N/A
TAGS: ECON ETRD SENV EFIN BEXP ENRG TS
SUBJECT: TUNISIA ECONOMIC HIGHLIGHTS

REF: TUNIS 52


1. (U) This cable contains highlights of recent economic
developments in Tunisia on the following topics:


A. Growing Inflationary Pressures on Tunisia's Economy

B. Tunisia Posts Record US $1.6 billion FDI

C. GOT Allocates US $802.94 million for Subsidies

D. Tunisia, Morocco Strengthen Economic Cooperation



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Growing Inflationary Pressures on Tunisia's Economy
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2. (U) According to the latest Tunisian National Institute of
Statistics (INS),Tunisia's consumer price inflation, for January,
rose to 5.7 percent year-on-year compared to 5.3 percent in December

2007. The January increase was due mainly to 9 percent growth in
food costs because of higher prices of imported commodities.
Sizable flows of foreign direct investment (FDI, see para 4),and
the depreciation of the dinar relative to the Euro may also have
contributed to inflation, according to the IMF.


3. (U) The IMF January's Article IV report predicted that
inflationary pressures, particularly imported inflation, would be
likely to continue in 2008. However, the Tunisian Central Bank's
cautious monetary policy, and increase of required reserves ratios,
is expected to keep inflation down to 4 percent on average in 2008.
This forecast takes into account likely increases in the price of
"administered products" (e.g., oil) if world commodity prices remain
high.

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Tunisia Posts Record US $1.6 billion FDI
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4. (U) During a February 9 press conference, Noureddine Zekri,
Director General of Foreign Investment at the Ministry of
Development and International Cooperation, said that Tunisia's
foreign direct investment (FDI) jumped to a record 2.0 billion
dinars (US $1.6 billion) in 2007, thanks to higher inflows in the
tourism and energy sectors. FDI in tourism and real estate more
than doubled to 72 million dinars (US $57 million) in 2007 compared
to 2006. The energy sector drew 1.35 billion dinars (US $1.07
billion) versus 940.3 million dinars (US $714.63 million) in 2006,
while services attracted 146.4 million dinars (US $115.66 million),
up 32.1 percent in 2007. The services sector represents 45 percent
of the country gross domestic product (GDP) and is seen rising to 50
percent in 2011. FDI in the labor-intensive manufacturing sector
stood at 485.7 million dinars (US $383.7 million) compared to 347.4
million dinars (US $264.02 million) in 2006, and created 17,356 new
jobs. According to Zekri, the GOT hopes FDI will account for 26.1
percent of gross domestic product (GDP) by 2016 from an expected
22.7 percent this year.


5. (SBU) Comment: Rising FDI has been generated by the
implementation of the Tunisian-EU Association Agreement, GOT
investment policy in telecommunications and privatizations and
concessions, which helped attract European companies and branches of
foreign companies established in Europe to invest in Tunisia.
Additionally, Tunisia is witnessing significant growth in Gulf FDI
(reftel). End Comment.

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GOT Allocates US $802.94 million for Subsidies
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6. (U) Tunisia's 2008 state budget has allocated US $802.94 million
for the General Subsidy Fund (CGC),which primarily subsidizes basic
food and energy products. Record prices of oil and other world
commodities prompted authorities to adopt a budget supplemental in
December 2007, which effectively doubled subsidies to 1.3 percent of

TUNIS 00000199 002 OF 002


GDP. However, the May and October 2007 increases in retail gas
prices kept oil subsidies at the budgeted 1 percent of GDP.


7. (SBU) Comment: In its January's Article IV report, the IMF
recommended Tunisia consider less costly alternatives for protecting
the purchasing power of low-income households. One contact has
estimated that 18,000 jobs are lost every year as a result of waste
associated with the GOT subsidies. Ironically, many subsidies
benefit for the middle and upper classes just as much as if not more
than low-income earners. For example, the flour that is subsidized
is used not only in bread but in pastries; the cement that is
subsidized is used for new construction that the poor cannot afford;
neither do the poor benefit as directly from subsidized fuel as do
those who can afford to own their own vehicles. The GOT is caught
between its reluctance to risk social unrest and its efforts to keep
the state budget deficit at 3 percent of GDP. End Comment.

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Tunisia, Morocco Strengthen Economic Co-operation
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8. (U) On February 23, the prime ministers of Morocco and Tunisia
concluded the 14th High Joint Moroccan-Tunisian Committee meetings
in Tunis with the signing of eight new cooperation agreements.
Among the agreements, the two sides agreed to facilitate the
operation of a direct sea line between Tunisia and Morocco, which
will further facilitate bilateral trade, following the signature of
an open skies agreement in 2007. The ministers also announced a
goal of increasing bilateral trade from US $304.15 million in 2007
to US $500 million per annum.


9. (SBU) Comment: Tunisia and Morocco are expected to finalize
details of a free trade agreement by May 2008. Despite competition
in the tourism sector, the two countries seek to improve economic
relations within North Africa and with the European Union. End
Comment.
GODEC