VZCZCXRO7434
PP RUEHTRO
DE RUEHTU #0211/01 0661739
ZNR UUUUU ZZH
P 061739Z MAR 08
FM AMEMBASSY TUNIS
TO RUEHC/SECSTATE WASHDC PRIORITY 4547
INFO RUEHAS/AMEMBASSY ALGIERS PRIORITY 7634
RUEHEG/AMEMBASSY CAIRO PRIORITY 1573
RUEHLO/AMEMBASSY LONDON PRIORITY 1428
RUEHNK/AMEMBASSY NOUAKCHOTT PRIORITY 0966
RUEHFR/AMEMBASSY PARIS PRIORITY 1901
RUEHRB/AMEMBASSY RABAT PRIORITY 8516
RUEHTRO/AMEMBASSY TRIPOLI PRIORITY 0206
RUEHCL/AMCONSUL CASABLANCA PRIORITY 4196
RUEHBS/USEU BRUSSELS PRIORITY
RUEATRS/DEPT OF TREASURY WASHINGTON DC PRIORITY
RUCPDOC/USDOC WASHDC PRIORITY

UNCLAS SECTION 01 OF 04 TUNIS 000211 
 
SIPDIS 
 
SENSITIVE 
SIPDIS 
 
STATE FOR NEA/MAG (HARRIS) 
USEU BRUSSELS FOR AUSTR (DONNELLY) 
STATE PASS USTR (BURKHEAD) 
USDOC FOR ITA/MAC/ONE (NATHAN MASON), ADVOCACY CTR 
(REITZE), AND CLDP (TEJTEL AND MCMANUS) 
USDOC PASS USPTO (ADAMS, BROWN AND MARSHALL) 
CASABLANCA FOR FCS (ORTIZ) 
CAIRO FOR FINANCIAL ATTACHE (SEVERENS) 
LONDON AND PARIS FOR NEA WATCHER 
 
E.O. 12958: N/A 
TAGS: ECON EFIN ETRD EINV KIPR TS
SUBJECT: TUNISIA TIFA COUNCIL MEETING: A MOMENT OF 
OPPORTUNITY 
 
REF: A. TUNIS 172 
 
     ¶B. TUNIS 52 
     ¶C. TUNIS 17 
     ¶D. 07 TUNIS 1581 
     ¶E. 07 TUNIS 1528 
     ¶F. 07 TUNIS 1521 
     ¶G. 07 TUNIS 1443 
     ¶H. 07 TUNIS 1433 
 
------- 
Summary 
------- 
 
¶1. (SBU) Embassy Tunis warmly welcomes the US delegation to 
the TIFA Council, March 10 - 11.  The TIFA Council follows a 
series of recent bilateral economic events and represents an 
opportunity to translate GOT statements of interest into 
concrete action.  Despite the positive official GDP growth 
rates, significant real inflation, low domestic investment, 
and persistently high unemployment represent challenges for 
Tunisia's economic future.  As the GOT aims to double per 
capita income and reduce unemployment by 2016, we have an 
excellent opportunity to emphasize that economic reform will 
help attract the US trade and investment necessary to achieve 
these ambitious targets.  GOT interlocutors are clamoring for 
increased US trade and investment and have stated strong 
support for an eventual FTA.  They view the TIFA Council as 
an opportunity for frank discussions on how we can advance 
bilateral economic engagement in the near-term.  End Summary. 
 
 
----------------------- 
A Moment of Opportunity 
----------------------- 
 
¶2. (SBU) As the GOT embarks on its 11th Development Plan 
(2007 - 2016), the time is right to emphasize that economic 
reform will help attract the US trade and investment 
necessary to meet the ambitious 11th Plan targets.  Over the 
next decade, the GOT aims to double per capita income, reduce 
the unemployment rate by four points, and in 2007 alone raise 
FDI to 3 percent of GDP or 1.3 billion dinars (roughly US $1 
billion).  In meeting after 
meeting, GOT ministers have asked for greater US investment 
in agriculture, tourism, industry, information technology, 
and energy.  Following President Ben Ali's own statements in 
support of increased economic ties, GOT Ministers have now 
expressed strong interest in an eventual Free Trade 
Agreement.  GOT officials have been clear, however, that 
Tunisia is not ready for an FTA immediately, and they 
understand that the Administration no longer has "fast track" 
negotiating authority.  They view the TIFA Council as an 
opportunity for frank discussions on how we can advance and 
strengthen our economic ties with an FTA as an eventual goal. 
 The GOT working groups have been busy updating their 
respective papers from the 2005 TIFA Council, demonstrating 
the seriousness with which they approaching these 
discussions. 
 
----------------------------------- 
Challenges for the Tunisian Economy 
----------------------------------- 
 
¶3. (SBU) Even as Tunisia can trumpet its economic success, 
the slow pace of reform -- both economic and political -- is 
beginning to take a toll on the economy.  While the GOT 
undertook liberal economic reforms under an IMF structural 
adjustment program in the mid-eighties, rigid state control 
and the continued protection of key sectors have created an 
anemic private sector with low levels of investment. 
 
TUNIS 00000211  002 OF 004 
 
 
Although the GOT points to solid and steady official growth 
rates -- an average of five percent for the past 10 years -- 
Tunisians are increasingly skeptical of Tunisia's economic 
success.  The GOT boasted of 6.3 percent GDP growth for 2007, 
but many Embassy contacts distrust the numbers.  Official 
inflation for 2007 was a modest 3.1 percent, but many 
economists estimate real inflation is closer to 8 percent and 
Tunisians are complaining loudly about the rising cost of 
living (Ref E).  The persistently high unemployment rate of 
14 percent (Ref G) is a serious cause for concern for a 
government that touts its image as a development success 
story, particularly with estimates of unemployment of 
university graduates over 40 percent. 
 
-------------------------------------- 
EU Association Agreement Paves the Way 
-------------------------------------- 
 
¶4. (SBU) On January 1, 2008 the Association Agreement with 
the European Union went into effect, liberalizing trade on 
most industrial goods and paving the way toward eventual 
liberalization of services and agriculture.  The immediate 
impact of the Association Agreement has been limited, as 
tariffs have been gradually reduced since 1996, but the GOT 
and the Tunisian private sector are waiting to see what the 
long-term impact will be on Tunisian manufacturers.  Closures 
of Tunisian companies or negative public reaction to the 
agreement could influence the GOT's timeline for further 
liberalization.  The Association Agreement not only serves as 
a test case for free trade, but also suggests a path forward 
for US negotiations.  The GOT's elimination of tariffs on 
industrial goods should pave the way for US progress in this 
area, while the ongoing negotiations with the EU over 
services and agriculture indicate the continued sensitivity 
of these sectors.  Of particular note is that the EU 
Association Agreement has been implemented with substantial 
funding for technical assistance programs.  The GOT may 
expect significant technical assistance to support reforms 
suggested by the TIFA working groups. 
 
-------------------------------------- 
Missed Opportunities for US Investment 
-------------------------------------- 
 
¶5. (SBU) Paltry domestic investment rates -- 12.5 percent, 
only half the rate in Morocco -- reveal weaknesses in 
Tunisia's investment climate and illustrate that the economy 
faces significant challenges to future growth (Ref H).  Low 
levels of domestic investment, not only jeopardize continued 
economic success and efforts to reduce unemployment, but 
signal a broader lack of confidence in the Tunisian economy. 
American and Tunisian investors complain that currency 
exchange controls, customs procedures, limits on the number 
of expatriate employees, and real estate authorizations 
prevent companies from doing business and discourage further 
investment.  Even as Gulf companies have made sizeable 
investments, they have also been vocal in noting the need for 
financial and legal reforms (Ref B).  While red tape and 
unpredictability deter investors, ultimately these problems 
are rooted in the lack of transparency.  We can point to 
several cases of resulting missed opportunities for US 
investment: SemGroup is ready to invest in Tunisia, but it 
has encountered significant difficulty moving a potential 
project through the GOT bureaucracy.  Enerciel has been 
embroiled in a dispute with the state-owned utility over its 
investment of several million dollars in wind energy. 
Meanwhile, the Coca-Cola Company is poised to substantially 
upgrade its bottling and distribution operation in Tunisia, 
pending resolution of what it considers a discriminatory tax 
on its products. 
 
TUNIS 00000211  003 OF 004 
 
 
 
---------------------------- 
Limited Openings in Services 
---------------------------- 
 
¶6. (SBU) Liberalization of the service sector remains slow. 
GOT restrictions on franchising continue to act as a barrier 
to further US trade and investment.  At present, foreign 
investment in financial services and insurance is primarily 
limited to successful privatization bids.  However, there are 
indications that the GOT is ready to take steps to liberalize 
telecommunications and to permit franchising.  The GOT is 
currently drafting new services legislation which will 
address franchising and has expressed interest in USG 
technical assistance on the topic (Ref D).  The Minister of 
Communications Technology told the Ambassador that 
authorization for a second fixed-line carrier is before 
parliament and that there are plans to license a third mobile 
carrier (Ref C). 
 
--------------- 
Progress on IPR 
--------------- 
 
¶7. (SBU) Since the 2005 TIFA Council, the GOT has taken 
positive steps to address IPR protection -- ending the 
"correlation" system, removing most US pharmaceuticals from 
the list of correlated products, and removing pirated optical 
discs from the shelves of one major retailer (Ref A).  New 
legislation designed to improve enforcement and ensure 
compliance with international obligations is currently before 
the Parliament.  Although there has been progress, more work 
remains to be done to prevent the retail sale of pirated 
optical disks and protect US pharmaceutical products.  Eli 
Lilly and Abbot Labs continue to have pharmaceuticals on the 
list of correlated products (blocking their importation) and 
pharmaceutical companies have ongoing concerns that the GOT 
is not TRIPS-compliant on data exclusivity.  The GOT asserts 
it is TRIPS-compliant, and Minister Jouini has indicated that 
if, in fact, the GOT is not compliant it will take steps to 
address the problem. 
 
----------------------------- 
Market Access Barriers Remain 
----------------------------- 
 
¶8. (SBU) Tariff reductions will be critical for many American 
companies to remain competitive now that the EU Association 
Agreement has gone into effect.  High tariffs, in some cases 
as high as 125 percent, and quotas constitute a significant 
disadvantage for many American firms already doing business 
in Tunisia and keep American exports out of the market.  The 
Tunisian private sector is also likely to raise questions 
regarding access to the US market.  Tunisian businesses note 
confusion over regulations, high transportation costs, the 
large quantities demanded by American importers, and foreign 
competition (particularly from Chinese businesses) as 
problems that prevent increased exports to the United States. 
 
------------------------ 
Comment: The Bottom Line 
------------------------ 
 
¶9. (SBU) Liberalization of the Tunisian economy is in 
Tunisia's best interest and will help attract the trade and 
investment necessary for the economy's continued growth. 
Although the United States can encourage increased US trade 
and investment, it is ultimately US companies who will make 
their own decisions about the attractiveness of the Tunisian 
market.  By taking concrete steps to improve the business 
 
TUNIS 00000211  004 OF 004 
 
 
climate for US investors, the GOT will send an important 
signal that Tunisia is open for business. 
 
Please visit Embassy Tunis' Classified Website at: 
http://www.state.sgov.gov/p/nea/tunis/index.c fm 
GODEC