| Summary: | Context. Tunisia's economy has been resilient throughout a protracted political transition and a difficult international economic environment. The country is now facing headwinds from increasing security threats and social tensions, which are offsetting the benefits from the successful conclusion of the political transition, lower international oil prices, and a recovering Europe. High unemployment, large external imbalances, weak budget composition, and incomplete banking and business climate reforms remain the key challenges. A challenging policy and reform agenda. A return to growth-supporting fiscal consolidation, a prudent monetary policy, and a more flexible exchange rate need to be pursued to contain high external and fiscal imbalances, and anchor inflationary expectations. Moving toward stronger and more inclusive growth requires a stronger push on structural reforms, which can no longer be postponed. Priorities include: (i) improving financial sector intermediation by completing the restructuring of public banks and strengthening banking regulations; (ii) improving budget composition through wage bill containment, tax and energy subsidy reform, and increased public investment; and (iii) generating a business climate more conducive to private sector development and investment by revamping the regulatory framework. Program implementation has been mixed. All quantitative performance criteria for end-December 2014 and end-March 2015 have been met; one indicative target on social spending was not met. Progress on structural reforms continues to be slow, with three out of seventeen structural benchmarks expected to be met by end-September. The next and final review will focus on the completion of the unfinished agenda in banking and tax reform. Risks continue to be high. Main risks relate to increasing regional and domestic security tensions, and weaker economic activity in major trading partners. A difficult social environment and opposition from vested interests could undermine support for the reform efforts.
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