Offshore Banking: Tunisia’s New Economic Opportunity. by Daniel Bruno, CMT
Offshore Services: Tunisia’s New Economic Engine
By Daniel Bruno, Chartered Market Technician
The popular uprising that led to the exile of the Ben Ali/Leila Trebelsi Mafia and ultimately to the breathtaking and disgraceful exit of Hosni Mubarak in Egypt, has put Tunisia on the map of world affairs and given it a hitherto unattained significance. The Revolution offers a unique opportunity for a new democratic government to form and institute policy changes that exploit Tunisia’s new found importance and bring prosperity to a nation tired of empty promises of economic development. If the lessons of previous “people power” revolutions, e.g. the overthrow of Marcos in the Philippines, are to be remembered, the overthrow of a tyrant is just the beginning of a long process of political, economic and social rebirth. As of this writing in March 2011, demonstrations, deaths and resignations of high ministers continue to transpire in Tunis. GDP is probably in steep decline this quarter. Stagnation and depression loom on the horizon.
A casual familiarity with Tunisia reveals that its engines of economic growth depend on tourism and service sector exports. Now that the parasitic Mafia clan has been abolished and no longer acts as a brake on economic activity, it is essential that Tunisian leaders initiate structural reforms of outdated and obsolete banking and commerce regulations now, while the country is still “inhaling the Jasmine Revolution’s intoxicating scent of possibility” . Now is the time to retire ageing civil servants long past their prime and the laws and customs of the ancien’ regime; now is the time to do away with regulations, practices, habits and customs that will not serve a democratic and ambitious nation yearning for freedom and economic upward mobility.
This writer has identified the offshore banking and company formation industry as a potential new engine of growth for Tunisia that could transform the country into a wealthy Mediterranean creditor nation and a beacon of stability within five years. Other small nations with characteristics similar to Tunisia have succeeded in attracting capital and business know how via favorable tax and privacy legislation. Switzerland is the role model. So are the Cayman Islands and Belize.
Challenges Facing Tunisia
Under the Ben Ali regime, Tunisia was ranked first in economic competitiveness among African countries and members of its peer group countries in the Arab world in the Global Competitiveness Report prepared by the World Economic Forum. Though the Ben Ali regime made major strides toward good fiscal policies, issues that continue to hamper the country’s ability to do business efficiently must be addressed. Some of its top challenges include complex tax regulations and high tax rates, lack of access to financing and a cumbersome bureaucracy. It would be a shame if Tunisia’s economic ranking slipped in the wake of the dictator’s departure.
According to the Index of Economic Freedom prepared by The Wall Street Journal and The Heritage Foundation in 2008, Tunisia’s economy was ranked at 59.3 percent free, above the regional average of 58.7 percent but slightly below the world average of 60.3 percent. Its relatively low score is a result of Ben Ali protectionist economic policies and Mafia interference in the economy that scared off foreign investment. Now it is the Ben Ali legacy and grave uncertainty that keeps foreign investment away. The new government must take bold initiatives to restore confidence by rolling out the red carpet for foreign investment. The best way to do this is by creating a dynamic offshore sector and this writer can show the government what needs to be done.
Official unemployment in 2009 was at 14% and is probably rising. Data from the Central Bank of Tunisia shows that during fiscal 2007-08 and 2008-09 job creation dropped significantly by 12.3% and 38.1% respectively. This can be partially attributed to the world-wide financial crisis and fall in discretionary spending such as tourism. Soaring unemployment rates were a factor in the downfall of Ben Ali and will destabilize the new government unless economic growth is achieved soon.
Today, the economy needs political and economic reforms that will attract foreign direct investments (FDI). FDI is intimately linked to employment, wages and consumption. In addition, FDI imparts technology transfers that raise productivity in Tunisia, the key to higher wages. For the period 2005-2009, net foreign investment flows were 5.6% of GDP (Figure 1). FDI in Jordan was (15.0%), Lebanon (13.2%) and Egypt (6.7%). Is it a coincidence that political upheaval occurred in the countries with the least investment?
Figure 1: Foreign Direct Investment , net inflows (% of GDP)
In order to entice and effectively take advantage of investment flows, however, it is essential for Tunisia to have a well functioning and efficient banking sector. Tunisia has already recognized the importance of financial sector reform in promoting economic growth through the efficient mobilization of domestic savings. Tunisia was among the first to introduce financial reforms in the Middle East and North Africa (MENA) region. Tunisia’s financial sector was tightly controlled through the mid 1980s. Since then, it has undergone three decades of gradual but insufficient reforms.
In spite of Tunisia’s early implementation of financial market reform, the country’s banking sector is not well developed. Financial depth in Tunisia, as measured by the average ratio of domestic credit to GDP, for the period 1990–1999 and 2000–2001 does not fare better compared to other non-oil dependent countries in the region (Figure 2). Moreover, Tunisian banks have a relatively high nonperforming loan (NPL) to total loans ratio (Figure 3). This is yet another symptom of the distortion caused by the erstwhile Mafia. The average NPL to total loan ratio for the period 2005-2008 was 18.3%, slightly lower than Egypt’s 19.7% but significantly higher than that of Jordan (4.8%), Lebanon (11.9%), and Morocco (10.1%). The NPL problem of Tunisian banks limits their capability to function effectively as financial intermediaries, which is reflected in the low ratio of domestic credit to GDP.
Figure 2: Domestic credit ratio in terms of GDP (%)
Figure 3: Nonperforming loans to total loans (%)
The Tunisian banking sector has always been characterized as small and highly concentrated. It is comprised of 18 small domestic banks and three publicly controlled banks, which are the largest. State-owned commercial banks dominate the banking system and account for more than half of market share, which implies state control of the banking sector and is a negative for economic growth. It was Ben Ali’s view that the state must have direct and tight control of monetary policy and the financial system. Entry of firms into the financial markets is highly restricted, thereby limiting the provision of a wide range of financial services and a limiting market access to Tunisians and foreigners alike. This blocks consumption and economic development and is an inducement for highly educated Tunisians to leave the country.
Banking deregulation is urgently needed to stoke domestic credit and consumer demand, foment foreign investment and reduce unemployment. A modern offshore banking system and free trade zone will attract billions in capital and could be an essential ingredient in the country’s economic recovery.
Government can step in to fill the void when the private sector isn’t spending and boost economic growth in the process. Economists have been debating the pros and cons of fiscal stimulus since the 1930s, when John Maynard Keynes diagnosed the problem as one of inadequate private investment and prescribed public spending, financed by borrowing, as the cure. In Tunisia in 2011, fiscal stimulus can be achieved by authorizing a Tunisian offshore center and the expansion of private and public credit to stoke demand and production.
A good central bank stabilizes prices, encourages employment, tames volatility in the currency market and guards against asset bubbles like real estate. Policy vis-à-vis the money supply, reserve requirements, interest rates and the exchange rate is central to the conduct of monetary policy. In Tunisia’s case, the integration of local financial markets to the rest of the world is crucial. Facilitating the entry of foreign banks can speed up development of Tunisia’s financial system by improving efficiency and providing access to a wider range of financial services. While it could be that increase in foreign participation will expose the local financial market to risks outside the country’s own control, empirical investigations show that, in general, foreign bank entry has provided net benefits to host countries. ,
In the case of Tunisia, the best option to facilitate foreign participation in the financial sector is the development of offshore banking, that is, to develop and promote Tunisia as the new alternative offshore financial center (OFC) where it is easy, safe, and profitable for multi-national corporations and high net-worth individuals to park their money.
Offshore banking is usually associated with formations such as offshore trusts, offshore foundations and offshore companies, which provide benefits in the form of tax avoidance (not tax evasion) and asset protection to their beneficial owners.
Offshore financing businesses have become an integral part of the world economy. Thus, despite recent attacks by powerful and tax hungry governments, offshore financing will continue to exist as demand for international financial services is steadily increasing. It’s a global growth industry and Tunisia is poised to benefit from it—if it follows my advice. Offshore financial centers around the world provide wealth protection from frivolous lawsuits and rapacious tax collectors. OFCs mitigate risk and are efficient in facilitating foreign exchange transactions between banks and corporations. According to the February, 2011 issue of Africa Report, there are $18 trillion dollars held in tax havens worldwide and the top offshore centers are the U.S and the U.K (surprise), Switzerland, Luxembourg and the Cayman Islands. 83 of the top 100 American companies and 99 of the top European companies have offshore subsidiaries. Why isn’t Tunisia getting a piece of this action?
Hong Kong and former British colonies in the Caribbean have become a popular home to OFCs since the 1960s. These countries, albeit with a small domestic financial sector, have developed an impressive offshore financial sector to stimulate economic activity, generate employment and boost government revenue from licensing fees.
The Cayman Islands, which held over $1.7 trillion in assets in 2008, houses more than 80% of the world’s hedge funds and is a heavyweight in wholesale banking. This British Commonwealth relies heavily on offshore transactions as a major source of economic activity and government revenues. Company fees, including banks and trust company licensing fees, represented 21.1% of government revenues in 2003. In 2005, Cayman Island’s banking sector accounted for 25% of GDP and 8% of employment. Growth in the financial sector, as well as the closely linked tourism sector, resulted in positive spillover effects. As the financial sector developed in the Cayman Islands, it triggered expansion in the construction industry and generated substantial investments in infrastructure and in social welfare, such as healthcare and education. The attraction of offshore banking is secrecy, privacy, low taxation, confidentiality of transactions, flexibility and convenience for business owners and expatriates requiring global access to their funds.
Offshore banking is a great way for developing countries to enhance economic growth since offshore banking allows the redistribution of finance from the developed economies to the developing economies, bringing in billions of dollars in funds that have a spillover impact on the rest of the economy, including infrastructure (such as transportation, telecommunications, and utilities) and services (such as hotels and restaurants). Job opportunities expand across different sectors of the economy thereby improving social welfare.
Setting up an offshore financial center is a viable development strategy for Tunisia. The economy directly benefits from the influx of offshore business via registration fees and taxes, employment generation and foreign exchange earnings.
Tourism is already a significant contributor to the Tunisian economy. Tourism, 85% of which is from EU member states, accounted for more than 6% of GDP in 2008.
One of the benefits of the offshore industry is the boost in tourism. Offshore banking attracts high net worth tourists who combine business with pleasure trips.
Tunisia is well suited for offshore banking. Geographically, it is a small Mediterranean country with important historical, economic and cultural links to Europe. Tunisia, like Switzerland, can exploit this as an advantage while it is outside the European Union. Switzerland remains Europe’s preferred repository for wealth despite being an EU outsider. Remaining outside the jurisdiction of the EU is crucial to maintain Swiss banking privacy laws. The proximity of Tunisia to the European market could make it a very attractive alternative as recent EU and US pressure have forced Switzerland and Luxembourg to partially retreat from banking secrecy.
Tunisia’s economic and political stability augur well for the establishment of offshore banking. Tunisia is known for its highly educated workforce and Islamic radicalism is weak. Tunisia does not have the blessing/curse of oil or mineral deposits that fan the flames of intrigue and instability. From 2000 to 2009, Tunisia grew at an annual rate of 5.2% and its per capita income of about $8,300 (in PPP terms) in 2009 was second only to Lebanon among the oil-importing MENA countries (Figure 4).
Figure 4: GDP per capita (PPP, 2009)
The stability of the Tunisian Dinar and historically low inflation bode well for the development of financial services. Inflation was 4.9% in FY 2007-08 and 3.5% in FY 2008-09. Looking at price pressures in other non OPEC countries in the MENA region, Morocco was also successful in keeping inflation at bay. (Figure 5). The Tunisian Dinar was less volatile in 2000-2010 than the currencies of its oil-importing neighbors, Egypt and Morocco (Figure 6).
Figure 5: Inflation
Figure 6: Foreign exchange (local currency relative to the US dollar, 2000=100)
The new Tunisian government must seize the opportunities presented by the Revolution and overhaul the financial system to promote economic growth. The development of a Tunisian offshore sector may be the most promising and fastest route to prosperity available to the country. Bold steps and experimentation are required but Tunisia is no stranger to bold initiatives. In 1848 Tunisia was the first Arab country to abolish slavery, seventeen years before the United States. In 1861 Tunisia was the first Arab country to establish a constitution. In 1956 Tunisia was the first Arab country to abolish polygamy and in 1973 it legalised abortion along with the United States.
The consequences of sticking with familiar and comfortable solutions will be economic stagnation and disillusionment with the new government. Daniel Bruno, the author of this paper, is well suited to advise the new government on the course of action required to launch the Tunisian offshore industry. Moreover, he has devised a plan to sell Tunisian government debt and greatly increase funds available to government coffers.
I have argued that deregulation of domestic banking and the development of an offshore banking sector is the best option for Tunisia to achieve capitalization of the financial system and create consumer credit, which will in turn spur demand and employment in a virtuous cycle. A more vibrant financial sector will increase government revenue and expand the sale of government debt at lower interest rates on world bond markets. Keynesian government policies may then become an option to buttress Tunisia’s infrastructure and stimulate local industry. The net result is a higher standard of living in Tunisia.
Daniel Bruno, Chartered Market Technician
Nationality: United States of America
• SAID BUSINESS SCHOOL, OXFORD UNIVERSITY, ENGLAND. 2010 POST GRADUATE DIPLOMA IN FINANCIAL STRATEGY (Doreen.Hirons@sbs.ox.ac.uk)
• NEW YORK INSTITUTE OF FINANCE. HIGH-YIELD DEBT ASSESMENT, BOND TRADING AND FUSION ANALYSIS OF FINANCIAL MARKETS, 2004 – 2006. (Marcia.Currie@NYIF.com)
• Widely published on FX Street, Bloomberg, CNBC and MarketOracle.com. Top forecaster of gold and FX:
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