Although storm clouds of a deteriorating external economic environment loom ahead, the Tunisian economy preserves a sunny outlook, posting promising signs of sustained growth and continuing open market reforms. Foreign investment from Europe and Arab countries is energizing the financial sector, with GCC investors specifically targeting real estate, telecom and petrochemical industries. The agricultural, energy, manufacturing and services sectors performed well in 2007, leading to the highest level of economic growth the country has experienced in the past ten years: 6.3%. The International Monetary Fund predicts that real GDP will continue to grow at over 6% during the next five years.
However, the banking sector could prove the Achilles heel of the developing Tunisian economy. The state controlled the economy according to a socialist model for the first three decades after independence. In 1986, a balance of payments crisis coerced the government to realize economic liberalization programs sponsored by the World Bank and IMF. These measures succeeded in stabilizing economic growth and guarding low inflation. But the government has largely retained control over the banking sector, even in the face of continued IMF and World Bank pressure to liberalize and privatize.
Although privatization efforts have been swift and decisive in industries like tourism and cement, the state’s strategic interests in the telecommunications and banking industries are slowing their privatization. Acknowledging that privatization stimulates foreign investments and increases competition, Tunisia has been gradually privatizing the large quantity of state-owned enterprises that peaked in the socialist 1960s. President Zine El Abidine Ben Ali has implemented gradual free-market economic reforms since the early 1990s, including more caution in fiscal restraint, privatization of SOEs, and the simplification of the tax code. The country’s privatization program is implemented through the selling of shares, public tenders, concessions, and the transfer of assets.
Privatization priority
The government privatized the Union Internationale des Banques in 2003, following up with the privatization of Banque du Sud in 2005. The state remains the controlling shareholder, however, in four banks that together control more than 50 % of assets. Thus privatization remains a priority if Tunisia wishes to bring banking practices up to international standards within the near future. Entry by foreign investors would allow for more rapid and efficient infrastructural improvements in the banking sector. The country’s five major banks are either under exclusively Tunisian ownership or have European and Arab entities as only minority shareholders. While the IMF recommends consolidation, in the interest of increasing foreign entry and competition, concentration efforts are proceeding very slowly.
Recent reforms indicate that Tunisia may finally be willing to reconsider its position, especially in light of the upcoming transition to Basel II by 2010. These measures give commercial banks greater autonomy to conduct transactions by de-emphasizing the regulatory role of the central bank. For instance, banks are no longer required to transfer their end-of-day foreign exchange balances to the central bank. The interbank exchange market stands to benefit from the recent authorization of banks to manage 20% of residents’ foreign exchange holdings not subject to surrender requirements. Certain credit institutions have had the cap removed on their foreign borrowing, and banks will soon be authorized to quote and execute transactions involving exchange rate and interest rate hedging instruments.
As for developing the money market, the interest rate for special savings accounts will no longer be capped, to allow the rate of remuneration on savings with banks to be market determined. Capital transactions still face many controls and restrictions, although current and capital account liberalization made some progress in 2007, with a raise on the remaining ceilings on the allocation of foreign exchange for current account transactions. Also, nonresident investments in Tunisia are no longer subject to the requirement of an exchange authorization. However, the persistence of non-performing loans remains a problem. While NPLs declined from 24% to 19.2% as a ratio of total loans in the period 2003-2006, they remain very high and a drag on the economy.
Commercial banks, which provide short and mid-term credit, include Banque International Arabe de Tunisie (BIAT), Banque Nationale Agricole (BNA) and Amen Bank. Global banking markets are increasingly international as a result of financial liberalization and general economic integration. Whether the entry of foreign banks can make national banking markets more competitive, recent studies indicate that foreign banks tend to have greater profits, higher interest margins, and higher tax payments than local banks in developing countries. High state ownership of banks is generally associated with lower quality and more instability in financial systems. In Tunisia, foreign shareholders tend to be Arab, such as the Tunisian Qatari Bank, with the Qatar National Bank holding a 50% share. The Arab International Bank (BIAT) counts Moroccan and Italian investors among its minority shareholders.
Mortgages for homeowners
An area in which state presence in banking is proving useful to the national economy is financing housing opportunities. The Tunisian president has recently delivered on a 2004 campaign promise to increase housing possibilities for average-income citizens through new means of financing. Banque de l’Habitat has the dual structural objectives of increasing the Tunisian economy’s finance possibilities and of competing to promote, develop and finance housing. It is 56.7% public, 43.3% private and has a social capital of $77.4 million. In March of this year, the president authorized the Banque de l’Habitat to reduce interest rates on housing loans, while maintaining the same rate when the reimbursing period for direct loans exceeds 15 years. Taoufik Baccar, governor of the Central Bank of Tunisia, cited improved financial indicators as the reason for this reduction.
Due to low competitive levels and the relatively recent entry of foreign banks into the market, banking services remain inefficient and inadequate for customers needs. Customers face few options and high, irrational banking fees. Loan approvals are subject to excessive restriction, and only a limited range of banking services and products are currently available. One expatriate complained of yearly fees on a debit card that was advertised as free. Also, he is only allowed to conduct transactions at the branch where he opened his account. The government has chosen bureaucracy over liberalization to correct these inadequacies. In 2006, a Banking Services Watch was set up with the mandate of improving the quality of banking services and cutting down customer expenses. This year, the president inaugurated a measure designed to cut financing costs for customers. An index will be set up to monitor trends in banking service costs, requiring banks to inform customers, whenever they adopt a variable interest rate, about the impact of the money market increase on monthly installments. The government is also inducing banks to develop services geared towards financing small-and-medium-sized businesses.
With its engagement to adhere to international norms embodied in Basel II by 2010, Tunisia’s banking system will try to accelerate reforms and the modernization of the sector. The nationalistic approach to banking, while guarding capital and power in the hands of Tunisian bankers, could prove to be more of a weakness in coming years, as Arab banks, including those is nearby Morocco, achieve higher profits and greater stability with the help of international partners and investors.
