This report is the second in a series of World Bank Middle East Economic Studies. It describes the economic progress and prospects of the Republic of Tunisia, and proposes ways in which the Government can build on past successes to raise the standard of living of the Tunisian people. Tunisia's recent progress has made it one of the best performing economies in the Middle East and North Africa (MENA) region. Yet, much still remains to be done if Tunisia is to achieve further acceleration of economic growth and welfare for its citizens. The report identifies three key areas for priority attention: 1) deepening and speeding up of the ongoing economic reform program, especially in the area of trade and investment liberalization; 2) privatization and deregulation of publicly provided services in order to improve economic efficiency and promote domestic and foreign private investment; and 3) strong environmental policies to deal with natural resource degradation and scarcity, problems of solid and industrial waste disposal, and air pollution in some urban and industrial centers. Chapter 1 of the report covers monetary, balance of payments, exchange rate and fiscal policies. Chapter 2 deals with the role and size of public enterprises in the economy, the provision of infrastructure services, health and education policies, and environmental management. Chapter 3 discusses a range of policies designed to create a more competitive economy (trade, pricing, labor, industrial, financial and agriculture). Chapter 4 applies the findings of the more recent growth literature and comparative country analysis to the case of Tunisia. Finally, chapter 5 proposes a strategy to maximize the benefits to Tunisia of a closer integration with Europe and the rest of the world.