Description

Tunisia is a developing country with embryonic bank regulations and a central bank that succeeded in achieving and keeping a low inflation rate using mainly controls on credit, interest rates and capital floss and the exchange rate. Removing controls and moving to a full fledged inflation control monetary policy requires market determined interest rates and withdrawing the current policy of implicit deposit insurance. This shift in the use of instruments might destabilize economic activity. I argue in this paper that this need not be the case. I show that Tunisia does not have appropriate institutions for appropriate banking regulations and transparent monetary policy but it has some well performing banks in terms of profit rates and most banks are profitable. Using panel data on Tunisian and Turkish banks, I show that banks that have low profit rates are those that have poorer management. Thus, the creation of appropriate institutions and laws would force delinquent banks to improve their governance and probably enable the central bank of Tunisia to adopt an open inflation control policy.