Report – Closed Seminar on Prospects and Proposals for Solving the Financial and Economic Crisis

Report – Closed Seminar on Prospects and Proposals for Solving the Financial and Economic Crisis
Fri, 11/03/2017 - 07:31
Report – Closed Seminar on Prospects and Proposals for Solving the Financial and Economic Crisis
held its seventh event in a series of economic dialogues bringing together economic experts, political parties and members of the Assembly of People’s Representatives to examine the economic situation in Tunisia. The seminar was attended by prominent figures in the economic sphere such as Mr. Zouheir Kadhi, Advisor to the Minister of Finance, Mr. Iskandar Sallemi, Chairman of the Professional Council of Fiscal Advisors, university professor Mr. Mohammed Saleh Ayari, Mr. Mahmoud Sami Nabi, Professor of Economics at the University of Carthage, Mr. Ridha Saidi, Economic Advisor to the Prime Minister, Mr. Ridha Bettaieb, former Minister of Investment and International Cooperation, and Mr. Sami Aouadi, Economic Adviser to the Tunisian General Labor Union (UGTT).


During the first session on the financial and fiscal crisis, Mr. Iskandar Rkik gave a welcome speech in which he stressed that it is not possible to establish democracy if the economic downturn continues.
Mr. Zouheir Kadhi presented important data on the problems within the tax system. While there are 2.5 million wage earners in the sector, 730,000 are active and only 50% make a tax declaration. As for companies, the number registered is 136,000, divided into three sectors – banking, telecommunications and hydrocarbons. Of these, 2000 companies alone contribute 30% of overall tax revenues. As for the 132,000 individuals registered as business owners, these are distributed among industry, commerce and liberal professions.
Among the key problems are the poor distribution of the tax base, the absence and inefficiency of fiscal control, and the plethora of legal texts. In terms of fiscal control, the sector suffers from a clear lack of human resources. There are 790 inspectors working on preliminary monitoring and 500 on in-depth monitoring, which means that each company will only be inspected once a decade. As for solutions, it is essential to improve the tax system in order to overcome widespread rejection by the public, provide the tax administration with greater human resources, ensure the administration checks that taxes have been paid whenever any administrative request is made, and reduce and review tax benefits since a small number of companies are benefiting from 900 million dinars at the expense of the rest.
Mr. Iskandar Sallemi also presented some of the problems within the tax system. First, the current tax system has not been able to achieve social justice despite the 14 January revolution in which Tunisians called for social justice. Members of previous governments put in place a plan to reform the tax system but it did not meet the demands of companies and of a new generation of entrepreneurs and investors in Tunisia due to the fact that the measures adopted deviated from the declared objectives of fiscal justice, distribution of the tax burden, legal stability and review of relations between companies and public administration. Instead, the measures contributed to further alienating investors and greater injustice within the tax system. For example, the increase in value-added tax and the expansion of the tax base have led to growing social injustice in terms of the balance between safeguards and the powers of the authorities to strengthen monitoring, resulting in the deterioration of the tax system.
Secondly, authorities have not effectively addressed the issue of trading on the black market and no mechanisms have been established to enforce the relevant laws. Thirdly, since 2011, the tax system has been characterized by instability and social injustice. The state has not yet set any objective criteria that enable the exercise of fiscal control in an objective and independent manner, the most evident example being the burdening of medium-sized and small enterprises with the vast majority of the tax burden. Fourthly, it is necessary to review the régime forfaitaire (under which companies give an approximate estimate of their revenues).
The final problem Mr. Sallemi highlighted was the absence of statistics and methods for assessing the economic and social impact of fiscal measures, such as the Government’s adoption of the volume of imports as an indicator for calculating value-added tax. This is not an objective indicator as it is impossible to measure it due to the lack of statistics and data. With regard to solutions, Mr. Sallemi stressed the need to look for an economic model that is suitable for the current context in Tunisia and its new economic path.

Mr. Mohamed Saleh Ayari spoke about the various tax reforms that have taken place in Tunisia since 1988, arguing that these reforms are incomprehensive and insufficient. He made a number of proposals to address this including increasing the amount of family social support, reducing corporate tax, encouraging demand for small and medium enterprises, and taxing profits distributed to legal persons in the same way as those of natural persons by taxing 5% at the source. Mr. Ayari explained that the régime forfaitaire is considered to be the weakest link in the tax system, since if it exceeds 10% it becomes part of the simplified regime, which is considered to be an efficient way of providing additional revenues for the state budget. Finally, in order to recover the surplus, it is necessary to exceed the legal limit of three years in order for the statute of limitations to apply.

The next speaker, Mr. Mahmoud Sami Nabi, underlined the point that existing reforms to the tax system are partial and do not get to the heart of the problem. He set out a number of problems with the system, the first being the public administration’s failings in addressing corruption. Secondly, the rise in indebtedness, with public debt standing at 66.9% (excluding the debts of public companies) and external debt at 64%, a dangerous level due to its impact on growth. Thirdly, each year, two billion dinars leave the state budget without a specific economic objective or destination. Fourthly, national investment has declined from 25% in 2010 to 20% in 2014 and 15% in 2017.
As for solutions, Mr. Nabi made a number of proposals including the need to restore investor confidence and improve the state’s capacity to limit corruption. He highlighted the need to implement non-traditional funding mechanisms for the state budget and the Tunisian economy, as well as the importance of identifying a specialized structure for attracting financing through foundations and charities, since participatory funding is currently not dynamic. This could speed up the achievement of development objectives and achieve greater coordination between civil society, investors and government institutions to create more dynamism within the third sector (voluntary and community organizations). Finally, he advised that the social impact of banks should be strengthened through a transparent and legal framework.
During the discussion, Mr. Yassin Ismail, former Director General of the Central Bank, highlighted four points. First, taxation is an adjustment mechanism that enables the state to fund interventions, meaning that it is necessary to look for financing that is based on sound management, as well as looking for partnerships with neighbors. Secondly, taxation is one of the manifestations of state sovereignty and government institutions should not overlook this. Thirdly, the problem of the Tunisian economy is essentially one of finance. Fourthly, fiscal privileges are a feature of dictatorship so it is necessary to review and reduce them.
Mr. Hatem Khssaisi of the Court of Auditors raised a number of important questions for the audience. First, the question of whether there is a structural regulatory framework in Tunisia that establishes good governance units to ensure tax collection is rational and effective. Secondly, does current investment strengthen the economy or not? Thirdly, does the judiciary play a sufficient role in determining taxation-related cases? What is the outcome of the reports produced by oversight structures? Is it not necessary to write off debts and fines when a certain period of time has passed?
Mr. Habib Khedhr, member of the Assembly of People’s Representatives, stressed that the tax system imposed by the Constitution is fair and equitable. However, governments, or the executive, must take responsibility for enforcing the laws. He also noted the need for each side to respect timelines and fulfill their responsibilities when passing the Finance Act and addressing other difficulties.
Fellow Member of Parliament Farida Labidi stressed the need to transform the tax system from a punitive mechanism to a one based on citizenship, noting that Article 10 of the Constitution establishes a fair and equitable system. She also highlighted the need to restore the optional tax regime since it provides more sources of revenue for the state.
Mr. Rachid Barouni, former Director General of the National Social Security Fund (CNSS), called for a national policy to address systemic corruption that has spread through all economic sectors, impoverishing ordinary citizens and enriching certain groups. He pointed to the need to review the benefits for foreign investors under Law 72 at the expense of Tunisian investors in the textile sector.
Economist Mr. Sami Bouassida noted the high fiscal pressures that the Tunisian economy is experiencing, particularly when it comes to wage earners, stressing that the reason for this is the tax advantages enjoyed by large corporations.
Mr. Mohamed Bildhrif, a civil society activist, intervened to argue that Tunisian history shows that there has never been any mutual affection between the taxpayer and the state. What is important in the tax system is the set of principles stipulated in the Constitution and the Ministry of Finance’s Five-Year Plan. The success of tax reforms depends on the fundamental role of the executive branch in general and the tax administration in particular.
Economist Hisham Ben Fadl (Afek Party) noted that the Tunisian economy has, for a long time, been weighed down by high indebtedness and corruption, which has penetrated into all state institutions.He argued that the Government must move away from piecemeal reforms and look for radical reforms.
University professor Zouheir Bouchaddekh pointed out that the cause of the economic crisis is uncertainty, pointing out that effective reforms have to be radical, otherwise they will have no impact. He identified three factors that have led to the economic downturn – tax evasion, terrorism and smuggling. Concerning tax evasion, he noted that less than 50% of citizens pay taxes, which represent 0.22% of tax revenues.
Mr. Mohamed Kamal Gharbi, a senior member of the Democratic Progressive Party, called for implementation of the following proposals. First: Adherence to a genuine plan to achieve fiscal justice in Tunisia. Secondly: The establishment of good governance. Thirdly: Addressing the issue of the informal economy and breaking the protection given to it by individuals in positions of power. Fourthly: Strengthening the tax administration system and its mechanisms.
Mr. Hedi Ben Brahem MP noted that taxation is an essential pillar of state resources and argued that the authorities have succeeded in addressing tax evasion since 2012 and that citizens now see the tangible results of paying their taxes, which has developed respect for tax obligations.
Mohamed Mahjoub MP pointed out that tax reforms should be implemented on the ground through real political consensus and will. In his view, the absence of consensus has hindered reforms and led to the expansion of the legal arsenal and discontinuity in measures due to frequent changes of government.
At the end of the debate, Mr. Mohamed Habib Hajjaji, a senior leader in Hizb ut-Tahrir, called for abandoning capitalist ideology and adopting an Islamic approach.
During the discussion, Mr. Zouheir Kadhi asked the members of parliament present about the meaning of the term « fiscal justice » as currently used, considering that the current tax system established by the Constitution is just and equitable since it establishes progressive taxation. However, the system becomes unfair when it is applied in reality.
Mr. Iskandar Sallemi highlighted that many actors in different state institutions do not respect taxation rules yet remain within the executive or legislative branch. He called for the tax administration to be more cautious given that they are collecting taxes from individuals who have not been notified that these taxes apply.
Mr. Mohammed Saleh Ayari also called for setting a time limit within which the tax administration must take concrete measures to implement fiscal rules. He also called for reviewing measures within the investment law relating to tax incentives and for further reducing the upper limit for eligibility for such incentives for young investors and heads of small and medium enterprises from 40 to 30 years of age.
Finally, Mr. Mahmoud Sami Nabi presented a preliminary estimate of the fiscal revenues that could be mobilized by the state, which he estimated at two billion dinars. As for the social impact of banks, this could generate 500 million dinars. As for imports, additional revenues could reach 500 million dinars. Remittances by Tunisians abroad for 2016 amounted to 4 billion dinars, equivalent to 4.6% of GDP. Some of this is invested in bank deposits, which could amount to 300 million dinars. He also highlighted the need to invest in sukuk (Islamic bonds). Between 2002 and 2012, around 370 billion dollars were mobilized globally through sukuk, 61% of which was in Malaysia alone with a further 7% in the United Arab Emirates. He pointed to the need to look for unconventional funding mechanisms given that the fundamental problem today is the high rate of external indebtedness, which must be reduced quickly so that the state can be in a position to implement real and radical reforms, given that relying on tax collection results in a shortage of investment.
The second session, moderated by Dr. Radwan Masmoudi, focused on economic reforms.
Mr. Ridha Saidi began with a diagnosis of the overall economic situation, identifying the main drivers of economic growth, the immense pressures on public finances and how this impacts on the general economic situation. He also noted that since the revolution, the passage of the Finance Law has involved a series of in-depth discussions, which indicates a qualitative evolution in the political scene. In the context of his paper, Mr. Saidi set out the difficulties facing the economy including the instability of the political landscape, the high turnover of governments and the repercussions of the regional and global context, in particular the Libyan crisis, which has negatively affected Tunisia’s economy.
Mr. Saidi proposed a number of possible solutions to these challenges. First, the establishment of a fair tax system by reaching a consensus between legislative and executive authorities on reforms to the régime forfaitaire, access to the régime réel (direct tax scheme), expansion of the tax base and the enactment of special procedures, especially with regards to the liberal professions. Second, the need to diversify sources of funding in order to reduce the economy’s dependence on debt, balance internal and external debt, and achieve an economic equilibrium. Third, draw on Tunisians living abroad as a source of expertise and to increase foreign currency reserves. Fourth, try to further reduce the budget deficit and trade deficit.
Fifth, increase coherence between public policies. Sixth, reach a consensus between the technical and political engineering of reforms. Seventh, seek a balance between social welfare funds (especially after 500 million dinars were pumped into them from the state budget), raise contribution rates and increase the retirement age. Eighth, search for sources of income for the state budget while respecting the principle of solidarity between generations. Ninth, identify a public body to oversee all public institutions and entities that are competitive and search for a strategic partner for some institutions in order to help revive them. Tenth, the need to develop the Bank for Regional Development and the National Solidarity Fund, as well as reforming subsidies through a policy of directing support to beneficiaries by reforming the whole system and introducing a unique identifier in order to better identify users.
Mr. Saidi also pointed to the importance of improving the business climate and strengthening partnerships between the public and private sectors through a participatory approach that creates a strong dynamic in order to revive the economy. Finally, Mr. Saidi stressed the need to overcome the bottlenecks that hold up public funds by improving public investment procedures in order to be able to deliver projects that achieve the objectives of the revolution.
Mr. Riadh Bettaieb presented an overview of essential reforms in the investment sector. He highlighted a number of problems, the first being that 50% of the Tunisian economy is governed by competition laws and antitrust laws. Second, during the two decades preceding the revolution, exports declined from 38% of GDP in 1990 to 35% of GDP in 2010. Third, there is a structural imbalance between the levels of public and private investment between 1990 and 2010 in comparison to similar countries. Fourth, nearly 34% of small and medium-sized enterprises (SMEs) out of a total of 600 consider lack of financing to be the main obstacle to their growth, with only 0.4%of SMEs in Tunisia employing more than 100 people. These SMEs account for one-third of the total labor force. He pointed out that the number of institutions employing a bigger workforce is very low, indicating a lack of medium-sized enterprises and a weakness in the creation of new medium-sized enterprises.
Mr. Bettaieb set out a number of solutions, first being the need to render the economy more dynamic. Second, rescheduling the debts of SMEs. Third, streamlining administrative procedures, which currently cost companies 13% of their revenues. Fourth, reviewing tax incentives and exemptions currently enjoyed by large companies. Fifth, developing the capacities of customs authorities and introducing reforms within public administration, especially within the framework of our relations with North African countries and the European Union. Sixth, the need to review our partnerships with Italy and France through offshore companies owned by citizens of these two countries. Seventh, review the tendency by banks to exclude SMEs in terms of access to finance and the failure to discriminate positively in favor of institutions located in interior regions. Eighth, the need to develop a clear economic and industrial strategy based on real encouragement of competitive sectors that are in a state of growth, as well as the search for an industrial and agricultural policy focused on sectors with competitive advantages. Ninth, focus on improving Tunisia’s competitiveness as a services country. Several studies with the World Bank and other institutions have proven that Tunisia’s services sector is one of the most protected and least competitive in the world. Tenth, the establishment of a single contact point for providing administrative services to investors in order to reduce the time involved and encourage investment. Finally, the adoption of a policy of expanding infrastructure and developing public-private partnership projects in line with the national economic strategy.
In the same context, Mr. Mohamed Sadiq Jabnoun pointed out that policies are needed to bring the economy out of its current state of crisis, particularly in light of the fact that only 20 months remain in the current parliamentary term and that public finances will experience great pressure in 2018 due to upcoming deadlines for debt repayments and failure to achieve the desired growth objectives or at least a growth rate of 3%. In addition, there is a double deficit, with a trade deficit of more than 10 billion dinars and a deficit in the balance of payments, as well as a budget deficit gradually increasing to around 6%. All of these figures show the declining competitiveness of the Tunisian economy as well as declining productivity, which is the most important pillar of economic growth.
One of the most important reasons for this decline is the weakness of existing institutions and the failure to embark on substantive reforms that achieve the four following aims. First, strengthening the national economy. Second, establishing social and political stability given recent developments, namely adoption of the reconciliation law and the postponement of the municipal elections. Third, limiting the trade deficit. Fourth, improving tax revenues.
In order to strengthen the national economy, it is essential to reduce the budget deficit, avoid fiscal inequalities, rationalize the public administration budget, establish genuine governance and effectively combat corruption. These points have all been noted by the International Monetary Fund in its recent reports and represent a major challenge for the 2018 budget law. There is no supplementary budget law for 2017 to date, which is a serious weak point for Tunisia’s public finances.
Mr. Jabnoun also called for restoring investor confidence by activating investment as the main driver and source of finance for the Tunisian economy instead of relying on borrowing. This should take the form of a clear framework of simplified administrative procedures and the elimination of excessive bureaucracy, which has caused Tunisia to drop 60 places in the Davos competitiveness rankings.
Mr. Jabnoun also pointed to the need to help Tunisian farmers overcome the structural weaknesses of the agricultural sector by adopting a strategic plan for the sector in the light of climate change. It is also necessary to support export policy and remove obstacles to exports such as logistical and financial burdens. CONECT, a Tunisian business federation, has conducted a number of studies on this subject and on directing financing provided by banks towards investment and activating venture capital, which has developed in Tunisia but is still below the required level, especially if we compare it to other African countries and even Southern Europe, which competes with Tunisia industrially.
It is also necessary to reform the public sector to achieve greater productivity and competitiveness and improve the quality of service, while not excluding the possibility of privatizing non-strategic sectors within the framework of a comprehensive dialogue with social partners. Investment should also be encouraged through the completion of relevant legislative and regulatory processes. Preliminary results in this area are encouraging but the main challenge remains economic diplomacy and attracting investors beyond the conventional partner countries, mainly China and Asia. This highlights the need for Tunisia to be involved in the Silk Road initiative, which is being supported with a trillion dinars of funding from China.
It is also important to develop value within the tourism sector and Tunisian products in general and raise the quality of products. The trade deficit must also be reduced by activating protective measures and internal laws and regulations, and establishing a precise inventory of imports to limit luxury or non-essential items, including cosmetics, special foodstuffs, which limit agricultural exports, imported textiles and cars without compensation the following year. Finally, with regard to fiscal policy, tax collection must be improved through customs and both the tax and customs systems must be reformed. This would enable Tunisia to avoid total reliance on debt to finance the public budget and avoid falling into a negative cycle of excessive taxation, which would make it more difficult to achieve revenue targets and establish a clear fiscal policy in an economy that is already in crisis, and would further weaken trust in the state on the part of both citizens and investors.
The following speaker, Mr. Sami Aouadi, began his presentation by pointing out that reforms are a matter of choices, tools and leadership. He argued that the Tunisian economic crisis was caused by incorrect choices, inappropriate tools and unstable leadership as a result of a high turnover of governments.
Mr. Aouadi argued that the Tunisian economy suffers from a development model imposed by foreign actors, which has made Tunisia abandon its strategic development policy. This is compounded by the absence of a national vision for the future, for example a vision for 2030. As for concrete solutions, Mr. Aouadi mentioned the following points. First, the development of GDP and review of value-added tax. Second, the establishment of a diversified agricultural policy. Third, revitalizing the tourism sector in desert and forest regions. Fourth, developing a strategy for communications services. Fifth, developing the public sector to make it strategic and the private sector to make it more competitive. Sixth, reforming the public sector. Seventh, the need to reform budgetary policies by expanding the tax base and raising tax recovery rates. Eighth, developing a strategy to support important enterprises that produce in highly strategic industries such as cement. Ninth, the establishment of governance practices that are reflected in the competitive restructuring of enterprises based on high-quality training.
Mr. Aouadi also mentioned the need to review distribution within industry and the need for the state to tackle private monopolies. He stressed the need to diversify export destinations, especially since four EU countries alone receive 85% of Tunisia’s exports. Thus, there is a need to review international trade agreements and look for other partnerships. Finally, it is imperative to review the investment law as a critical means of achieving real economic goals and priorities.
During the discussion, Sami Fattnasi stressed the need to focus on the management of public expenditure to resolve the economic crisis, especially as the budget for security and military institutions has been doubled to $5 billion in the context of the fight against terrorism. This cannot continue given the very high costs involved.
Mr. Yassine Ismail, former Governor of the Iraqi Central Bank, pointed out that global economic crises are caused by imbalances between financial flows and real flows. The Central Bank bears a large part of the responsibility for the economic situation in Tunisia and should focus on stabilizing the dinar exchange rate and monetary inflation, which has reached terrible proportions, and on directing investment to absorb additional workers in order to drive growth and overcome the economic crisis.
Another member of the audience also made a number of proposals including the need to establish sound economic governance, focus on administrative reform with the aim of simplifying procedures, review public leasing arrangements and tackle the parallel economy and the black market.